<PAGE>
FILED PURSUANT TO RULE NO. 424(b)(3)
REGISTRATION NO. 333-52793
PROSPECTUS
$300,000,000
[LOGO OF MCLEOD USA APPEARS HERE]
MCLEODUSA INCORPORATED
OFFER TO EXCHANGE ALL OUTSTANDING 8 3/8% SENIOR NOTES DUE MARCH 15, 2008
FOR 8 3/8% SENIOR NOTES DUE MARCH 15, 2008 OF MCLEODUSA INCORPORATED
INTEREST PAYABLE MARCH 15 AND SEPTEMBER 15, COMMENCING SEPTEMBER 15, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME, ON JUNE 25, 1998, UNLESS EXTENDED.
McLeodUSA Incorporated (the "Company") hereby offers, upon the terms and
subject to the conditions set forth in this Prospectus (as the same may be
amended or supplemented from time to time) and in the accompanying Letter of
Transmittal (the "Letter of Transmittal") (which together constitute the
"Exchange Offer"), to exchange $1,000 principal amount of its 8 3/8% Senior
Notes due March 15, 2008 (the "1998 Exchange Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for each $1,000 principal amount of its outstanding unregistered 8 3/8% Senior
Notes due March 15, 2008, of which $300 million in principal amount is
outstanding as of the date hereof (the "1998 Senior Notes" and, together with
the 1998 Exchange Notes, the "1998 Notes").
The form and terms of the 1998 Exchange Notes are identical in all material
respects to the form and terms of the 1998 Senior Notes, except that (i) the
1998 Exchange Notes have been registered under the Securities Act and therefore
will not be subject to certain restrictions on transfer applicable to the 1998
Senior Notes and (ii) holders of the 1998 Exchange Notes will not be entitled
to certain rights of holders of the 1998 Senior Notes under a Registration
Agreement dated March 16, 1998 (the "Registration Agreement") among the Company
and Salomon Brothers Inc, Bear, Stearns & Co. Inc., Morgan Stanley & Co.
Incorporated and Chase Securities Inc. (the "Initial Purchasers"). The 1998
Exchange Notes evidence the same indebtedness as the 1998 Senior Notes (which
they replace) and will be issued pursuant to, and entitled to the benefits of,
an indenture dated as of March 16, 1998 between the Company and the United
States Trust Company of New York, as trustee, governing the 1998 Senior Notes
and the 1998 Exchange Notes (the "1998 Senior Note Indenture").
The 1998 Exchange Notes will mature on March 15, 2008. Interest on the 1998
Exchange Notes will be payable semi-annually in arrears on March 15 and
September 15 of each year at a rate of 8 3/8% per annum, commencing September
15, 1998. See "Description of the 1998 Exchange Notes." The 1998 Exchange Notes
will be redeemable, at the option of the Company, in whole or in part, at any
time on or after March 15, 2003, at the redemption prices set forth herein,
plus accrued and unpaid interest thereon, if any, to but excluding the date of
redemption. In the event of a Strategic Equity Investment (as defined herein)
on or before March 15, 2001, the Company may, at its option, use all or a
portion of the net proceeds therefrom to redeem up to a maximum of
(Continued on next page.)
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH HOLDERS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE 1998 EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is May 26, 1998.
<PAGE>
33 1/3% of the original principal amount of the 1998 Exchange Notes at a
redemption price of 108.375% of the principal amount thereof, plus accrued and
unpaid interest thereon, if any, to but excluding the date of redemption. In
the event of a Change of Control (as defined herein), holders of the 1998
Exchange Notes will have the right to require the Company to repurchase all or
any part of the 1998 Exchange Notes at a repurchase price equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of repurchase. See "Description of the 1998 Exchange Notes--Repurchase at the
Option of Holders upon a Change of Control." There can be no assurance that
the Company will have the financial resources necessary to repurchase the 1998
Exchange Notes in such circumstances.
The 1998 Exchange Notes are senior unsecured obligations of the Company
ranking pari passu in right of payment with all existing and future senior
unsecured indebtedness of the Company and rank senior to all existing and
future subordinated indebtedness of the Company. The 1998 Exchange 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 1998 Exchange Notes are effectively
subordinated to all existing and future third-party indebtedness and other
liabilities of the Company's subsidiaries.
The 1998 Senior Notes were originally issued and sold on March 16, 1998 in a
transaction not registered under the Securities Act (the "Offering").
Accordingly, the 1998 Senior Notes may not be offered for resale, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties
unrelated to the Company, the Company believes that the 1998 Exchange Notes
issued pursuant to the Exchange Offer may be offered for resale, resold or
otherwise transferred by holders thereof (other than any holder that is (i) a
broker-dealer that acquired 1998 Senior Notes as a result of market-making or
other trading activities, or (ii) a broker-dealer that acquired 1998 Senior
Notes directly from the Company for resale pursuant to Rule 144A under the
Securities Act ("Rule 144A") or another available exemption under the
Securities Act) without compliance with the registration or prospectus
delivery provisions of the Securities Act, provided that such 1998 Exchange
Notes are acquired in the ordinary course of such holders' business, such
holders have no arrangement or understanding with any person to participate in
the distribution of such 1998 Exchange Notes and such holders are not
"affiliates" of the Company (within the meaning of Rule 405 under the
Securities Act). However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter, and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances.
By tendering 1998 Senior Notes in exchange for 1998 Exchange Notes, each
holder will represent to the Company, among other things, that: (i) any 1998
Exchange Notes to be received by such holder will be acquired in the ordinary
course of such holder's business; (ii) at the time of the commencement of the
Exchange Offer, such holder has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the
Securities Act) of the 1998 Exchange Notes; and (iii) such holder is not an
"affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act). Each broker-dealer that receives 1998 Exchange Notes for its
own account in exchange for 1998 Senior Notes pursuant to the Exchange Offer,
where such 1998 Senior Notes were acquired by such broker-dealer as a result
of market-making or other trading activities, must acknowledge that it will
deliver a prospectus in connection with any resale of such 1998 Exchange
Notes. 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 1998 Exchange Notes received in
exchange for 1998 Senior Notes where such 1998 Senior Notes were acquired by
such broker-dealer as a result of market-making 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."
ii
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The Company does not intend to apply for listing of the 1998 Exchange Notes
for trading on any securities exchange or for inclusion of the 1998 Exchange
Notes in any automated quotation system. The 1998 Senior Notes, however, have
been designated for trading in the Private Offerings, Resales and Trading
through Automatic Linkages ("PORTAL") Market of the National Association of
Securities Dealers, Inc. Any 1998 Senior Notes not tendered and accepted in
the Exchange Offer will remain outstanding. To the extent that 1998 Senior
Notes remain outstanding, a holder's ability to sell such 1998 Senior Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of 1998 Senior Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the 1998 Senior Notes, except under limited circumstances.
See "Description of the 1998 Exchange Notes--Exchange Offer; Registration
Rights." No assurance can be given as to the liquidity of either the 1998
Senior Notes or the 1998 Exchange Notes.
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF 1998 SENIOR NOTES ARE URGED TO READ THIS PROSPECTUS
AND THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO
TENDER THEIR 1998 SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER.
1998 Senior Notes may be tendered for exchange prior to 5:00 p.m., New York
City time, on June 25, 1998 (such time on such date being hereinafter called
the "Expiration Date"), unless the Exchange Offer is extended by the Company
(in which case the term "Expiration Date" shall mean the latest date and time
to which the Exchange Offer is extended). Tenders of 1998 Senior Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum principal amount of 1998 Senior Notes being
tendered for exchange. The Exchange Offer is, however, subject to certain
events and conditions and to the terms of the Registration Agreement. 1998
Senior Notes may be tendered only in integral multiples of principal amount of
$1,000. The Company has agreed to pay all expenses of the Exchange Offer. This
Prospectus, together with the Letter of Transmittal, is being sent to all
registered holders of 1998 Senior Notes as of May 26, 1998.
The Company will not receive any cash proceeds from the issuance of the 1998
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
iii
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company (File No. 0-20763) with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), hereby are incorporated by reference:
1. The Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1997, filed with the Commission on March 9, 1998;
2. The Company's Current Report on Form 8-K, filed with the Commission on
March 20, 1998;
3. The Company's Proxy Statement, filed with the Commission on April 17,
1998;
4. The Company's Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 1998, filed with the Commission on May 13, 1998; and
5. The consolidated financial statements of Consolidated Communications Inc.
and subsidiaries appearing on pages F-45 through F-60 of the Company's
definitive prospectus dated December 1, 1997 and filed with the
Commission on December 2, 1997 pursuant to Rule 424(b) under the
Securities Act as part of the Company's Registration Statement on Form
S-4 (Registration No. 333-34227).
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act, subsequent to the date of this Prospectus and prior
to the termination of any offering made by this Prospectus shall be deemed to
be incorporated by reference in this Prospectus and to be a part hereof from
the date of filing of such documents (each such document, together with the
documents identified in the preceding sentence, being hereinafter referred to
as an "Incorporated Document"). Any statement contained in this Prospectus
shall be deemed to be modified or superseded to the extent that a statement
contained in any subsequently filed Incorporated Document modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST.
SUCH REQUESTS SHOULD BE DIRECTED TO MCLEODUSA INCORPORATED, MCLEODUSA
TECHNOLOGY PARK, 6400 C STREET, SW, P.O. BOX 3177, CEDAR RAPIDS, IA 52406-
3177, TELEPHONE NUMBER: (319) 364-0000, ATTENTION: GENERAL COUNSEL. IN ORDER
TO ENSURE TIMELY DELIVERY OF THESE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY
JUNE 18, 1998.
iv
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements of the Company, the notes
thereto and the other financial data contained elsewhere, or incorporated by
reference, in this Prospectus. Potential participants in the Exchange Offer
should carefully consider the factors set forth herein under the caption "Risk
Factors" and are urged to read this Prospectus and the Letter of Transmittal in
their entirety. Unless otherwise indicated, references herein to the "Company"
include the Company's predecessor, the Company and the Company's wholly owned
subsidiaries. Unless otherwise indicated, dollar amounts over $1 million have
been rounded to one decimal place and dollar amounts less than $1 million have
been rounded to the nearest thousand. This Prospectus includes product names
and trademarks of the Company and of other organizations.
THE COMPANY
The Company is a provider of integrated telecommunications services to small
and medium-sized businesses in Iowa, Illinois, North Dakota, South Dakota,
Minnesota, Wisconsin, Indiana, Colorado and Wyoming and to residential
customers in Iowa, Illinois, North Dakota, South Dakota, Wisconsin and
Colorado. 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 and telephone
equipment sales, service and installation, (iii) special access, private line
and data services, (iv) the sale of advertising space in telephone directories,
(v) local exchange services through the operation of an independent local
exchange company, Illinois Consolidated Telephone Company ("ICTC"), acquired as
part of the CCI Acquisition (as defined herein), (vi) telemarketing services
and (vii) other telecommunications services, including cellular, operator,
payphone and paging services. As of March 31, 1998, the Company served
approximately 182,800 telecommunications customers in 259 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 competitive long distance pricing
and enhanced calling features, that might not otherwise be directly available
to such customers on a cost-effective basis. For residential customers, this
approach provides integrated local, long distance and other telecommunications
services, flat-rate long distance pricing and enhanced calling features as part
of the Company's basic PrimeLine(R) residential service. The Company offers a
variety of private line and data services to large businesses, institutional
customers and interexchange carriers. The Company also sells, installs and
services telephone equipment, primarily to business customers in Iowa, Illinois
and Minnesota, and provides network maintenance services for the State of
Iowa's fiber optic network. In addition, the Company annually publishes over 13
million competitive "white page" and "yellow page" telephone directories in 20
states.
The Company believes it is the first telecommunications provider in most of
its current markets to offer "bundled" local, long distance and other
telecommunications services. As a result, the Company believes that it is well-
positioned to take advantage of fundamental changes occurring in the
telecommunications industry resulting from the Telecommunications Act of 1996
(the "Telecommunications Act") and to challenge incumbent local exchange
carriers. In areas other than those served by ICTC (which operates its own
lines and switches), the Company provides local service using existing
telephone lines and switches or unbundled network elements (lines only)
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 long distance carriers or by using its inter-city fiber
optic network. Using the Company's customer focused software, most business
customers subscribing to the Company's integrated telecommunications services
receive the lowest long distance rate available each
1
<PAGE>
month from among pricing plans of AT&T Corp. ("AT&T"), MCI Communications
Corporation ("MCI") and Sprint Corporation ("Sprint") that generally are
believed to be among the most popular with the Company's business customers,
and, in certain cases, rates specifically identified by a business customer and
agreed to by the Company. The Company also provides voice mail, paging and
Internet access services. In ICTC's service area, which includes 37 central
office exchanges in east central Illinois, the Company offers local and long
distance service using ICTC's facilities. The Company is currently constructing
fiber optic networks in Iowa, Illinois, Wisconsin, South Dakota and North
Dakota to carry additional telecommunications services traffic on its own
network.
The Company completed its initial public offering of Class A Common Stock,
$.01 par value per share (the "Class A Common Stock"), in June 1996 and
completed an additional public offering of Class A Common Stock in November
1996. In addition, the Company completed an offering of $500 million aggregate
principal amount at maturity of 10 1/2% Senior Discount Notes due March 1, 2007
(the "1997 Senior Discount Notes") yielding net proceeds of approximately
$288.9 million in March 1997 (the "1997 Senior Discount Note Offering"), and
completed an additional offering of $225 million principal amount of 9 1/4%
Senior Notes due July 15, 2007 (the "1997 Senior Notes") yielding net proceeds
of approximately $217.6 million in July 1997 (the "1997 Senior Note Offering").
Since its initial public offering of Class A Common Stock, the Company has
actively pursued its strategy of increasing market penetration and expanding
into new markets in the following ways: (i) the Company now offers to
residential customers in Iowa, Illinois, North Dakota, South Dakota, Wisconsin
and Colorado an integrated package of telecommunications services, marketed
under the name PrimeLine(R), that includes local and long distance service,
voice mail, paging, Internet access and travel card services; PrimeLine(R)
services are expected to be available in other residential markets in the near
future; (ii) in July 1996, the Company acquired Ruffalo, Cody & Associates,
Inc. ("Ruffalo Cody"), which specializes in direct marketing and telemarketing
services, to enhance the Company's marketing of its telecommunications
services; (iii) in September 1996, the Company acquired Telecom*USA Publishing
Group, Inc. (now known as McLeodUSA Media Group, Inc. ("McLeodUSA
Publishing")), which publishes and distributes competitive "white page" and
"yellow page" telephone directories in nineteen states in the midwestern and
Rocky Mountain regions of the United States, to increase the Company's
penetration of its current markets and to accelerate its entry into new
markets; (iv) the Company has constructed approximately 3,500 new route miles
of fiber optic network at a cost of approximately $95 million; (v) in May, July
and September 1997, the Company acquired a total of 27 personal communications
services ("PCS") licenses as part of its strategy to increase the range of
integrated telecommunications services provided to customers in its target
markets; and (vi) in September 1997, the Company acquired Consolidated
Communications Inc. ("CCI"), which offers a variety of communications products
and services, including local exchange and long distance services and "white
page" and "yellow page" telephone directory publishing (the "CCI Acquisition").
The Company was incorporated as an Iowa corporation on June 6, 1991 and was
reincorporated in the State of Delaware on August 1, 1993. The Company's
principal executive offices are located at McLeodUSA Technology Park, 6400 C
Street, SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and its phone number
is (319) 364-0000.
2
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THE EXCHANGE OFFER
The Exchange Offer.......... Up to $300 million principal amount of 1998
Exchange Notes are being offered in exchange for
a like aggregate principal amount of 1998 Senior
Notes. 1998 Senior Notes may be tendered for
exchange in whole or in part in integral
multiples of $1,000 principal amount. The Company
is making the Exchange Offer in order to satisfy
its obligations under the Registration Agreement
relating to the 1998 Senior Notes. For a
description of the procedures for tendering 1998
Senior Notes, see "The Exchange Offer--Procedures
for Tendering 1998 Senior Notes."
Expiration Date............. 5:00 p.m., New York City time, on June 25, 1998
unless the Exchange Offer is extended by the
Company (in which case the term "Expiration Date"
shall mean the latest date and time to which the
Exchange Offer is extended). See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions to the Exchange
Offer....................... The Exchange Offer is subject to certain
conditions, which may be waived by the Company in
its sole discretion. The Exchange Offer is not
conditioned upon any minimum principal amount of
1998 Senior Notes being tendered. See "The
Exchange Offer--Conditions to the Exchange
Offer."
The Company reserves the right in its sole and
absolute discretion, subject to applicable law,
at any time and from time to time, (i) to delay
the acceptance of the 1998 Senior Notes, (ii) to
terminate the Exchange Offer if certain specified
conditions have not been satisfied, (iii) to
extend the Expiration Date of the Exchange Offer
and retain all 1998 Senior Notes tendered
pursuant to the Exchange Offer, subject, however,
to the right of holders of 1998 Senior Notes to
withdraw their tendered 1998 Senior Notes and
(iv) to waive any condition or otherwise amend
the terms of the Exchange Offer in any respect.
See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Withdrawal Rights........... Tenders of 1998 Senior Notes may be withdrawn at
any time prior to the Expiration Date by
delivering a written notice of such withdrawal to
the Exchange Agent (as defined herein) in
conformity with certain procedures as set forth
below under "The Exchange Offer--Withdrawal
Rights."
Procedures for Tendering
1998 Senior Notes........... Tendering holders of 1998 Senior Notes must
complete and sign a Letter of Transmittal in
accordance with the instructions contained
therein and forward the same by mail, facsimile
transmission or hand delivery, together with any
other required documents, to the Exchange Agent,
either with the 1998 Senior Notes to be tendered
or in compliance with the specified procedures
for guaranteed delivery of 1998 Senior Notes.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders
3
<PAGE>
by book-entry transfer. Holders of 1998 Senior
Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
are urged to contact such person promptly if they
wish to tender 1998 Senior Notes pursuant to the
Exchange Offer. See "The Exchange Offer--
Procedures for Tendering 1998 Senior Notes."
Letters of Transmittal and certificates
representing 1998 Senior Notes should not be sent
to the Company. Such documents should only be
sent to the Exchange Agent. Questions regarding
how to tender and requests for information should
be directed to the Exchange Agent. See "The
Exchange Offer--Exchange Agent."
Resales of 1998 Exchange
Notes....................... Based on interpretations by the staff of the
Commission, as set forth in no-action letters
issued to third parties unrelated to the Company,
the Company believes that holders of 1998 Senior
Notes (other than any holder that is (i) a
broker-dealer that acquired 1998 Senior Notes as
a result of market-making or other trading
activities or (ii) a broker-dealer that acquired
1998 Senior Notes directly from the Company for
resale pursuant to Rule 144A or another available
exemption under the Securities Act) who exchange
their 1998 Senior Notes for 1998 Exchange Notes
pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such 1998
Exchange Notes without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that such 1998
Exchange Notes are acquired in the ordinary
course of such holders' business, such holders
have no arrangement or understanding with any
person to participate in the distribution of such
1998 Exchange Notes and such holders are not
"affiliates" of the Company (within the meaning
of Rule 405 under the Securities Act). However,
the staff of the Commission has not considered
the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the
staff of the Commission would make a similar
determination with respect to the Exchange Offer.
Each broker-dealer that receives 1998 Exchange
Notes for its own account in exchange for 1998
Senior Notes pursuant to the Exchange Offer,
where such 1998 Senior Notes were acquired by
such broker-dealer as a result of market-making
or other trading activities, must acknowledge
that it will deliver a prospectus in connection
with any resale of such 1998 Exchange Notes. See
"Plan of Distribution."
Exchange Agent.............. The exchange agent with respect to the Exchange
Offer is United States Trust Company of New York
(the "Exchange Agent"). The address, telephone
number and facsimile number of the Exchange Agent
are set forth in "The Exchange Offer--Exchange
Agent" and in the Letter of Transmittal.
Use of Proceeds............. The Company will not receive any cash proceeds
from the issuance of the 1998 Exchange Notes
offered hereby. See "Use of Proceeds."
4
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Certain United States
Federal Income Tax
Consequences................ The exchange of the 1998 Exchange Notes for the
1998 Senior Notes will not be a taxable exchange
for federal income tax purposes, and holders of
1998 Senior Notes should not recognize any
taxable gain or loss or any interest income as a
result of such exchange. See "The Exchange
Offer--Certain United States Federal Income Tax
Consequences."
THE 1998 EXCHANGE NOTES
Securities Offered.......... $300 million principal amount of 8 3/8% Senior
Notes due March 15, 2008. The terms of the 1998
Exchange Notes are identical in all material
respects to the terms of the 1998 Senior Notes,
except that (i) the 1998 Exchange Notes have been
registered under the Securities Act and therefore
will not be subject to certain restrictions on
transfer applicable to the 1998 Senior Notes and
(ii) holders of the 1998 Exchange Notes will not
be entitled to certain rights of holders of the
1998 Senior Notes under the Registration
Agreement. The 1998 Exchange Notes evidence the
same debt as the 1998 Senior Notes and will be
issued pursuant to and entitled to the benefits
of the 1998 Senior Note Indenture.
Interest.................... Interest on the 1998 Exchange Notes will accrue
at the rate of 8 3/8% per annum and will be
payable in cash semi-annually in arrears on
March 15 and September 15, commencing September
15, 1998.
Ranking..................... The 1998 Exchange Notes will rank pari passu in
right of payment with the 1997 Senior Discount
Notes, the 1997 Senior Notes, the 1998 Senior
Notes and all other existing and future senior
unsecured indebtedness of the Company and will
rank senior in right of payment to all existing
and future subordinated indebtedness of the
Company. As of March 31, 1998, the Company had no
outstanding subordinated indebtedness and, other
than the 1997 Senior Discount Notes, the 1997
Senior Notes and the 1998 Senior Notes, had no
outstanding indebtedness that would rank pari
passu with the 1998 Exchange Notes. The 1998
Exchange Notes will not be secured by any assets
and will be effectively subordinated to any
existing and future secured indebtedness of the
Company and its subsidiaries, including any
Senior Credit Facility (as defined herein) or
Qualified Receivable Facility (as defined
herein), to the extent of the value of the assets
securing such indebtedness. The 1998 Exchange
Notes also will be effectively subordinated to
all existing and future third-party indebtedness
(including any Senior Credit Facility or any
applicable Qualified Receivable Facility) and
other liabilities of the Company's subsidiaries
(including trade payables). See "Description of
the 1998 Exchange Notes--General."
Optional Redemption......... The 1998 Exchange Notes will be subject to
redemption at the option of the Company, in whole
or in part, at any time on or after
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<PAGE>
March 15, 2003 at the redemption prices set forth
herein, plus accrued and unpaid interest thereon
(if any) to the date of redemption. In addition,
in the event of a sale by the Company of its
Common Stock (as defined herein) in a Strategic
Equity Investment on or before March 15, 2001,
the Company may, at its option, use all or a
portion of the net proceeds from such sale to
redeem up to 33 1/3% of the originally issued
principal amount of the 1998 Notes at a
redemption price equal to 108.375% of the
principal amount of the 1998 Notes plus accrued
and unpaid interest thereon (if any) to but
excluding the redemption date; provided that at
least 66 2/3% of the originally issued principal
amount of the 1998 Notes would remain outstanding
immediately after giving effect to such
redemption. See "Description of the 1998 Exchange
Notes--Optional Redemption."
Change of Control........... Upon the occurrence of a Change of Control, each
holder of 1998 Exchange Notes shall have the
right to require the Company to repurchase all or
any part of such holder's 1998 Exchange Notes at
a purchase price equal to 101% of the principal
amount of the 1998 Exchange Notes tendered by
such holder plus accrued and unpaid interest, if
any, to any Change of Control Payment Date (as
defined herein). There can be no assurance that
the Company will have the financial resources
necessary to repurchase the 1998 Exchange Notes
upon a Change of Control. See "Description of the
1998 Exchange Notes--Repurchase at the Option of
Holders upon a Change of Control."
Certain Covenants........... The 1998 Senior Note Indenture contains certain
covenants which, among other things, restrict the
ability of the Company and certain of 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,
enter into transactions with affiliates or
related persons, sell assets, or consolidate,
merge or sell all or substantially all of their
assets. These covenants are subject to important
exceptions and qualifications. See "Description
of the 1998 Exchange Notes--Certain Covenants."
RISK FACTORS
HOLDERS OF THE 1998 SENIOR NOTES SHOULD CONSIDER CAREFULLY CERTAIN FACTORS
SET FORTH UNDER THE CAPTION "RISK FACTORS" BEFORE TENDERING 1998 SENIOR NOTES
FOR 1998 EXCHANGE NOTES. SEE "RISK FACTORS."
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial and operating
data of the Company and should be read in conjunction with and is qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the Consolidated Financial Statements of the Company,
the notes thereto and the other financial data contained elsewhere, or
incorporated by reference, in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- -----------------------------------
PRO FORMA PRO FORMA
1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7) 1997(1)(8) 1998(9) 1998(7)(10)
---------- ---------- ------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT
DATA:
Revenue................ $ 28,998 $ 81,323 $267,886 $ 462,191 $ 35,747 $134,331 $134,331
-------- -------- -------- --------- -------- -------- --------
Operating expenses:
Cost of service........ 19,667 52,624 155,430 255,794 20,238 75,045 75,045
Selling, general and
administrative........ 18,054 46,044 143,918 208,981 24,947 58,768 58,768
Depreciation and
amortization.......... 1,835 8,485 33,275 61,916 4,122 19,431 19,431
Other.................. -- 2,380 4,632 10,191 1,608 1,900 1,900
-------- -------- -------- --------- -------- -------- --------
Total operating
expenses.............. 39,556 109,533 337,255 536,882 50,915 155,144 155,144
-------- -------- -------- --------- -------- -------- --------
Operating loss......... (10,558) (28,210) (69,369) (74,691) (15,168) (20,813) (20,813)
Interest income
(expense), net........ (771) 5,369 (11,967) (34,265) 1,806 (10,141) (12,476)
Other income........... -- 495 1,426 2,508 7 687 687
Income taxes........... -- -- -- -- -- -- --
-------- -------- -------- --------- -------- -------- --------
Net loss............... $(11,329) $(22,346) $(79,910) $(106,448) $(13,355) $(30,267) $(32,602)
======== ======== ======== ========= ======== ======== ========
Loss per common share.. $ (.40) $ (.55) $ (1.45) $ (1.74) $ (0.26) $ (0.49) $ (0.52)
======== ======== ======== ========= ======== ======== ========
Weighted average common
shares outstanding.... 28,004 40,506 54,974 61,184 52,327 62,227 62,227
======== ======== ======== ========= ======== ======== ========
Ratio of earnings to
fixed charges(11)..... -- -- -- -- -- -- --
======== ======== ======== ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1998
----------------------------------- -----------
ACTUAL
1995(1) 1996(1)(12) 1997(1)(5)(13) ACTUAL(9)
------- ----------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................. $ 8,507 $224,401 $ 517,869 $ 762,714
Working capital (deficit)...... $(1,208) $185,968 $ 378,617 $ 624,631
Property and equipment, net.... $16,119 $ 92,123 $ 373,804 $ 406,168
Total assets................... $28,986 $452,994 $1,345,652 $1,634,216
Long-term debt................. $ 3,600 $ 2,573 $ 613,384 $ 922,449
Stockholders' equity........... $14,958 $403,429 $ 559,379 $ 537,722
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
----------------------------------------------- -----------------------------------
PRO FORMA PRO FORMA
1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7) 1997(1) 1998(9) 1998(7)
---------- ---------- ------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures,
including business
acquisitions.......... $14,697 $173,782 $601,137 $617,463 $42,876 $47,184 $47,184
EBITDA(14)............. $(8,723) $(17,345) $(31,462) $ (2,584) $(9,438) $ 518 $ 518
</TABLE>
(Footnotes on next page)
7
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1995 1996 1997 1998
------ ------ ------- ---------
<S> <C> <C> <C> <C>
OTHER OPERATING DATA:
Local lines.................................... 35,800 65,400 282,600 313,900
Number of telecommunications customers......... 8,800 17,900 173,200 182,800
Cities and towns served........................ 77 120 227 259
Route miles.................................... 218 2,352 4,908 5,086
Employees...................................... 419 2,077 4,941 4,682
</TABLE>
- --------
(1) The acquisitions of MWR Telecom, Inc. ("MWR") (now part of McLeodUSA
Network Services, Inc. ("McLeodUSA Network Services")), Ruffalo Cody,
McLeodUSA Publishing and CCI in April 1995, July 1996, September 1996 and
September 1997, respectively, affect the comparability of the historical
data presented to the historical data for prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) 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.
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997
and the 1997 Senior Notes on July 21, 1997.
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997 and
certain adjustments attributable to the acquisition of CCI by the Company.
Also reflects certain adjustments attributable to the 1997 Senior Discount
Notes, the 1997 Senior Notes and the 1998 Senior Notes computed as if the
1997 Senior Discount Notes, the 1997 Senior Notes and the 1998 Senior
Notes had been issued on January 1, 1997.
(7) The issuance of the 1997 Senior Discount Notes in March 1997, the issuance
of the 1997 Senior Notes in July 1997, the acquisition of CCI in September
1997 and the Offering affect the comparability of the pro forma data
presented to the data for prior periods shown.
(8) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997.
(9) Reflects the issuance of the 1998 Senior Notes on March 16, 1998.
(10) Reflects certain adjustments attributable to the 1998 Senior Notes
computed as if the 1998 Senior Notes had been issued on January 1, 1998.
(11) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net loss before income taxes plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest on all
debt (including capitalized interest), amortization of debt discount and
deferred loan costs and the portion of rental expense that is
representative of the interest component of rental expense (deemed to be
one-third of rental expense which management believes is a reasonable
approximation of the interest component). For each of the years ended
December 31, 1995, 1996 and 1997, earnings were insufficient to cover
fixed charges by $11.4 million, $22.6 million and $84.4 million,
respectively. For the three months ended March 31, 1997 and 1998, earnings
were insufficient to cover fixed charges by $13.6 million and $32 million,
respectively. On a pro forma basis computed as if the CCI Acquisition, the
1997 Senior Discount Notes Offering, the 1997 Senior Notes Offering and
the Offering were consummated at the beginning of the period presented,
earnings would not have been sufficient to cover fixed charges by $111.7
million and $34.3 million for the year ended December 31, 1997 and the
three months ended March 31, 1998, respectively.
(12) Includes Ruffalo Cody and McLeodUSA Publishing, which were acquired by the
Company on July 15, 1996 and September 20, 1996, respectively.
(13) Includes CCI, which was acquired by the Company on September 24, 1997.
(14) 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.
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, holders
of 1998 Senior Notes should consider carefully the following factors before
tendering their 1998 Senior Notes for 1998 Exchange Notes.
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 1995, 1996 and
1997 and for the three months ended March 31, 1998 were approximately $11.3
million, $22.3 million, $79.9 million and $30.3 million, respectively. At
March 31, 1998, the Company had an accumulated deficit of $158 million.
Although its revenue has increased substantially in each of the last three
years, the Company also has experienced significant increases in expenses
associated with the development and expansion of its fiber optic network and
its customer base. The Company expects to incur significant operating losses
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 from operating activities in the future. If the Company cannot
achieve operating profitability from operating activities, it may not be able
to meet its debt service or working capital requirements, which could have a
material adverse effect on the Company. See "--Significant Capital
Requirements," "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS.
Continued expansion of the Company's operations, facilities, network and
services will require significant capital expenditures. As of March 31, 1998,
the Company estimates that its aggregate capital requirements for the
remainder of 1998, 1999 and 2000 will be approximately $850 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) developing, constructing and operating a PCS system and (iv)
completing construction of its new corporate headquarters and associated
buildings. These capital requirements are expected to be funded, in large
part, out of the approximately $292.6 million in net proceeds from the
Offering, the approximately $308 million in net proceeds remaining from the
1997 Senior Discount Note Offering and the 1997 Senior Note Offering,
additional debt or equity issuances 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.
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. As of the date hereof, the Company is negotiating with a major bank
to obtain one or more syndicated credit facilities. There can be no assurance,
however, that the Company will be successful in obtaining such credit
facilities on terms acceptable to the Company or at all, or that the Company
will otherwise 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
9
<PAGE>
material adverse effect on the Company. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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 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.
RISKS ASSOCIATED WITH ACQUISITIONS.
As part of its business strategy, the Company acquired CCI during 1997 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. The Company may
also encounter additional risks in connection with the CCI Acquisition as a
result of the size and complexity of CCI's operations. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered in connection with the CCI Acquisition or any
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.
FAILURE OF U S WEST TO FURNISH CALL DETAIL RECORDS.
The Company depends on certain call detail records provided by U S WEST
Communications, Inc. ("U S WEST") with respect to long distance services, and
Ameritech Corporation ("Ameritech") with respect to local and long distance
services, in order to verify most of 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 1997 through December 1997, U S WEST failed to furnish, on
average, monthly call detail records for approximately 1% of the long distance
calls placed by the Company's customers. Thus, the Company was unable to
verify with certainty that a given long distance call placed by a customer and
known by the Company to have been terminated by the Company's wholesale long
distance supplier was, in fact, placed by the customer. Absent such
verification, the Company does not bill its customers for the call. These call
detail omissions typically occur in connection with new customers of the
Company.
10
<PAGE>
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.
On July 7, 1997, U S WEST and the Company entered into an agreement which
requires U S WEST to set "flags" to capture call detail records on 95% of the
Company's converted lines within 36 hours of the time the line is converted to
the Company's service. In the event that U S WEST fails to meet that standard,
U S WEST is required to provide certain credits to the Company. 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.
DEPENDENCE ON REGIONAL BELL OPERATING COMPANIES; U S WEST CENTREX ACTION.
The Company is dependent on the Regional Bell Operating Companies for the
provision of most 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 or, in the case of customers served in
central Illinois, to local lines. The Company uses such access to partition
the local switch or transmit traffic over unbundled local line segments
("loops") and thereby provide local service to its customers.
The Company purchases access to local switches 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 to most
of its customers, 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's challenges to the U S WEST Centrex Action have as of the date hereof
been successful in Iowa, Minnesota, South Dakota, North Dakota and Colorado.
In Wyoming, state regulators rejected U S WEST's action, but the matter
remains pending on appeal. The Company has, however, been unsuccessful in its
challenges to the U S WEST Centrex Action in Nebraska and Idaho. In Nebraska,
the Company and other parties have appealed the order of the Nebraska Public
Service Commission rejecting complaints objecting to the U S WEST Centrex
Action. The appeal remains pending before the Nebraska Supreme Court. In Utah,
the Company has requested that the Utah Public Utilities Commission reconsider
its order imposing temporary restrictions on Centrex resale. As of the date
hereof, the Company's request remains pending before the Utah Public Utilities
Commission.
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. For example, in January 1997,
U S WEST proposed to implement certain interconnection surcharges in several
of the states in its
11
<PAGE>
service region. On February 20, 1997, the Company and several other parties
filed a petition with the Federal Communications Commission (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 U S 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. The matter
remains pending before the FCC and various state public utilities commissions.
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.
The Company also anticipates that U S WEST will pursue 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 significant use of the Centrex product to serve its
customers in U S WEST's service territories, 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. The Company has had substantial difficulty in
obtaining timely and accurate processing of its orders by U S WEST. On July
12, 1996, the Company filed a complaint with the Iowa Utilities Board against
U S WEST in connection with such actions. 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 February 14, 1997, the Iowa
Utilities Board further clarified that U S WEST must eliminate numerical
limitations on the Company's residential and business orders. U S WEST has
subsequently agreed to process the Company's service orders within a standard
five-day period. 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.
SUBORDINATION OF 1998 NOTES; HOLDING COMPANY STRUCTURE.
The Company is a holding company that derives all of its operating income
from its subsidiaries. The holders of the 1998 Exchange Notes will have no
direct claim against the subsidiaries for payment under the 1998 Exchange
Notes. The Company must rely on dividends and other payments from its
subsidiaries or must raise funds in a public or private equity or debt
offering or sell assets to generate the funds necessary to meet its
obligations, including the payment of principal and interest on the 1998
Senior Notes and the 1998 Exchange Notes. There can be no assurance that the
Company would be able to obtain such funds on acceptable terms or at all. The
1998 Senior Note Indenture contains covenants that restrict the ability of the
Company's subsidiaries to enter into any agreement limiting certain
distributions and transfers, including dividends, to the Company.
The 1998 Exchange Notes are effectively subordinated in right of payment to
all existing and future indebtedness and liabilities of the Company's
subsidiaries. As of March 31, 1998, the total liabilities of the Company's
subsidiaries (after the elimination of loans and advances by the Company to
its subsidiaries) were approximately $223 million. In addition, the indenture
governing the 1997 Senior Discount Notes (the "1997 Senior Discount Note
Indenture"), the indenture governing the 1997 Senior Notes (the "1997 Senior
Note Indenture") and the 1998 Senior Note Indenture (collectively, the
"Indentures") permit the Company and its subsidiaries to incur additional
indebtedness. Consequently, in the event of a bankruptcy, liquidation,
dissolution,
12
<PAGE>
reorganization or similar proceeding with respect to the Company's
subsidiaries, the holders of any indebtedness of the Company's subsidiaries
will be entitled to payment thereof from the assets of such subsidiaries prior
to the holders of any general unsecured obligation of the Company, including
the 1998 Senior Notes and the 1998 Exchange Notes. See "Description of the
1998 Exchange Notes--Certain Covenants--Limitation on Consolidated
Indebtedness" and "Other Indebtedness."
The 1998 Exchange Notes also are unsecured and will be effectively
subordinated to any secured indebtedness of the Company to the extent of the
value of the assets securing such indebtedness. As of March 31, 1998, the
total secured indebtedness of the Company and its subsidiaries was
approximately $26 million. The Indentures permit the Company and its
subsidiaries to incur additional secured indebtedness, including purchase
money indebtedness in unlimited amounts, and indebtedness of up to $250
million pursuant to one or more credit facilities. Consequently, in the event
of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding with respect to the Company, the holders of any secured
indebtedness will be entitled to proceed against the collateral that secures
such indebtedness and such collateral will not be available for satisfaction
of any amounts owed under the 1998 Exchange Notes. See "Description of the
1998 Exchange Notes--Certain Covenants--Limitation on Consolidated
Indebtedness" and "Other Indebtedness."
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.
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. The Company believes that the successful
implementation of a PCS system will also require that the Company enter into
"roaming" arrangements with PCS operators in other markets to enable future
subscribers to the Company's proposed PCS services to receive seamless call
transmission and reception throughout the United States. While the Company
continues to explore possible roaming arrangements, the Company cannot predict
when, or whether, it will be able to enter into any such arrangement with
other PCS operators. Each stage of implementing PCS service involves various
risks and contingencies, many of which are not within 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, state or local
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
13
<PAGE>
than the Company anticipates. See "--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.
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. 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 the Company's PCS licenses, 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.
RELOCATION OF FIXED MICROWAVE LICENSEES.
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. There can be no assurance that the Company will
be successful in reaching timely agreements with the existing microwave
licensees or that any such agreements will be on terms favorable to the
Company. Any delay in the relocation of such licensees may adversely affect
the Company's ability to commence timely commercial operation of a PCS system.
Furthermore, depending on the terms of such agreements, if any, the Company's
ability to operate a PCS system profitably may be adversely affected. 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.
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 employees. 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.
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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.
NEED TO OBTAIN AND MAINTAIN PERMITS AND RIGHTS-OF-WAY.
In order to develop and construct its network, the Company must obtain
authorization to install facilities in the public rights-of-way from state
highway authorities, local governments and transit authorities, and in certain
instances must also obtain easements from private parties. The Company also
enters into agreements to utilize underground conduit and aerial pole space
and other rights-of-way and easements from entities such as local exchange
carriers, other utilities, railroads, and interexchange carriers. The Company
has entered into long-term agreements with its two principal electric utility
stockholders, IES Industries, Inc. (collectively with its subsidiaries, "IES")
and MidAmerican Energy Holdings Company (collectively with its predecessors
and subsidiaries "MidAmerican"), pursuant to which the Company generally has
access to the electric utilities' rights-of-way and poles, primarily located
in Iowa and Illinois, for so long as the utilities maintain their franchises
to provide electrical services in a given locality. The Company has entered
into similar long-term agreements with Wisconsin Power and Light Company for
access to rights-of-way and poles primarily located in Wisconsin and with
Illinois Power Company ("Illinois Power") and Illinois Central Railroad
Corporation ("Illinois Central Railroad") for access to rights-of-way and
poles located in Illinois. In April 1998, IES completed a merger with WPL
Holdings, Inc., the parent of Wisconsin Power and Light Company, and with
Interstate Power Company. There can be no assurance that Wisconsin Power and
Light Company, IES (or their successor company), MidAmerican, Illinois Power,
Illinois Central Railroad 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 any 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.
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, such as changes relating to emerging wireline
(including fiber optic) and wireless (including broadband) transmission
technologies, and use of the Internet for traditional voice data or broadband
communications, 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 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; CONFLICTS OF INTEREST.
As of March 31, 1998, IES, MidAmerican, Richard A. Lumpkin, certain members
of his family and various trusts for the benefit thereof, and Clark and Mary
McLeod owned, directly or indirectly, in the aggregate approximately 55% of
the outstanding Class A Common Stock and voting power of the Company.
Accordingly,
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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 of
Directors of the Company (the "Board"). IES, MidAmerican, Richard A. Lumpkin,
certain members of his family and various trusts for the benefit thereof, and
Mr. and Mrs. McLeod have entered into a voting agreement with respect to the
election of directors and other matters. The Amended and Restated Certificate
of Incorporation of the Company contains provisions that may make it more
difficult to effect a hostile takeover of the Company or to remove members of
the Board.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company's stockholders
and the holders of the 1998 Exchange Notes. For example, if the Company
encounters financial difficulties or is unable to pay its debts as they
mature, the interests of the Company's stockholders might conflict with those
of the holders of the 1998 Exchange Notes. In addition, the Company's
stockholders may have an interest in pursuing acquisitions, divestitures,
financings or other transactions that, in their judgment, could enhance their
equity investment, even though such transactions might involve risk to the
holders of the 1998 Exchange Notes. Because certain significant stockholders
of the Company are able to control the management policy of the Company and
all fundamental corporate actions, any such conflict of interest may be
resolved in favor of the Company's stockholders to the detriment of the
holders of the 1998 Exchange Notes.
INCREASED LEVERAGE; RESTRICTIVE COVENANTS.
As of March 31, 1998, the Company's total amount of indebtedness outstanding
was $931.4 million and the Company had stockholder's equity of $537.7 million.
The level of the Company's indebtedness could adversely affect the Company in
a number of ways, including the following: (i) the ability of the Company to
obtain any necessary financing in the future for working capital, capital
expenditures, debt service requirements or other purposes may be limited; (ii)
the Company's level of indebtedness could limit its flexibility in planning
for, or reacting to, changes in its business; (iii) the Company may be more
highly leveraged than some of its competitors, which may place it at a
competitive disadvantage; and (iv) the Company's degree of indebtedness may
make it more vulnerable to a downturn in its business or in the economy
generally.
The Indentures impose 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. See "Description of the 1998 Exchange
Notes." 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.
ABSENCE OF PUBLIC MARKET.
The 1998 Senior Notes have been designated for trading by qualified buyers
in the PORTAL Market. The 1998 Senior Notes have not been registered under the
Securities Act, however, and will continue to be subject to restrictions on
transferability to the extent that they are not exchanged for 1998 Exchange
Notes. Furthermore, the Exchange Offer will not be conditioned upon any
minimum or maximum principal amount of 1998 Senior Notes being tendered for
exchange. No assurance can be given as to the liquidity of the trading market
of the 1998 Senior Notes following the Exchange Offer.
Although the 1998 Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act, (ii) a broker-dealer that acquired 1998 Senior Notes as a
result of market-making or other trading activities, or (iii) a broker-dealer
that acquired 1998 Senior Notes directly from the Company for resale pursuant
to Rule 144A or another available exemption under the Securities Act) without
compliance with the registration requirements under the Securities Act, they
will constitute a new issue of securities for which
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there is currently no established trading market. If the 1998 Exchange Notes
are traded after their initial issuance, they may trade at a discount,
depending upon prevailing interest rates, the market for similar securities,
the financial condition of the Company and other factors beyond the control of
the Company, including general economic conditions. The Company does not
intend to apply for a listing or quotation of the 1998 Exchange Notes. The
Initial Purchasers have informed the Company that they currently intend to
make a market in the 1998 Exchange Notes. However, the Initial Purchasers are
not obligated to do so, and any such market-making may be discontinued at any
time without notice. No assurance can be given as to the development or
liquidity of any trading market for the 1998 Exchange Notes following the
Exchange Offer.
Notwithstanding the registration of the 1998 Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the 1998
Exchange Notes only in compliance with the provisions of Rule 144 under the
Securities Act or any other available exemptions under the Securities Act.
Each broker-dealer that receives 1998 Exchange Notes for its own account in
exchange for 1998 Senior Notes pursuant to the Exchange Offer, where such 1998
Senior Notes 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 1998 Exchange Notes. See
"Plan of Distribution."
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 currently dominate their respective 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 four major competitors, AT&T, MCI, Sprint and WorldCom, Inc.
("WorldCom"). 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.
In addition, a continuing trend toward business combinations and strategic
alliances in the telecommunications industry may strengthen competitors. For
example, WorldCom acquired MFS Communications Company, Inc., a competitive
access provider, in December 1996 and Brooks Fiber Properties, Inc. in January
1998. In late 1997, MCI and WorldCom announced an agreement to merge. In
January 1998, AT&T announced an agreement to acquire Teleport Communications
Group Inc. and, in May 1998, SBC Communications Inc. and Ameritech, two
Regional Bell Operating Companies, announced an agreement to merge. Also in
May 1998, each of U S WEST and Ameritech announced that it had entered into a
marketing arrangement with Qwest Communications International Inc. ("Qwest").
The Company believes that each of these arrangements constitutes the provision
of long distance services by U S WEST or Ameritech, respectively, in
contravention of the Telecommunications Act. As of the date hereof, the
Company, along with other competitive local service providers and
interexchange carriers, is a party to federal court proceedings challenging
the arrangement between U S WEST and Qwest. The Company anticipates there may
also be regulatory proceedings regarding these arrangements. The ability of
these or other competitors of the Company to enter into strategic alliances
could put the Company at a significant disadvantage.
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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, a number of companies, including MCI and AT&T, currently hold
certificates of public convenience and necessity to offer local and long
distance service in Iowa, Illinois and certain other states within the
Company's 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.
The Company is largely dependent on incumbent local exchange carriers to
provide access service for the origination and termination of its toll long
distance traffic and interexchange private lines. Historically, charges for
such access service have made up a significant percentage of the overall cost
of providing long distance service. On May 7, 1997, the FCC adopted changes to
its interstate access rules that, among other things, will reduce per-minute
access charges and substitute new per-line flat rate monthly charges. The FCC
also approved reductions in overall access rates, and established new rules to
recover subsidies to support universal service and other public policies. The
impact of these changes on the Company or its competitors is not yet clear.
The Company could be adversely affected if it does not experience access cost
reductions proportionally equivalent to those of its competitors. Insofar as
new Internet-based competitors continue to be exempt from these charges, they
could enjoy a significant cost advantage in this area.
The Company also generally will be dependent on incumbent local exchange
carriers for provision of local telephone service through access to local
loops, termination service and, in some markets, central office switches of
such carriers. In addition, the Company intends to obtain the local telephone
services of the incumbent local exchange carriers on a wholesale basis and
resell that service to end users. Any successful effort by the incumbent local
exchange carriers to deny or substantially limit the Company's access to the
incumbent local exchange carrier's network elements or wholesale services
would impair the Company's ability to provide local telephone services, which
could have a material adverse effect on the Company. Although the
Telecommunications Act imposes interconnection obligations on incumbent local
exchange carriers, there can be no assurance that the Company will be able to
obtain access to such network elements or services at rates, and on terms and
conditions, that permit the Company to offer local services at rates that are
both profitable and competitive.
The Company's plans to provide additional local switched services are
dependent upon obtaining favorable interconnection agreements with local
exchange carriers. 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 vacated by July and October 1997 decisions of the U.S.
Eighth Circuit Court of Appeals (the "Eighth Circuit"), which may limit or
delay the development of competition in the local exchange switched services
market. The U.S. Supreme Court has granted certiorari on this matter and is
scheduled to review the decisions of the Eighth Circuit during the 1998 term.
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. For example, under the Telecommunications
Act, the Regional Bell Operating Companies will, upon the satisfaction of
certain conditions, be able to offer interLATA long distance services to local
telephone services customers in their respective regions. The Regional Bell
Operating Companies are actively engaged in a process at the FCC by which they
are seeking to satisfy those conditions. Although the FCC has rejected the
first applications from Regional Bell Operating Companies for interLATA
authority, additional applications are expected to be filed and other matters
are on review in the courts. Separately, on December 31, 1997, the U.S.
District Court for the Northern District of Texas (the "District Court") ruled
that certain of these conditions to the offering of long distance service by
the Regional Bell Operating Companies under the Telecommunications Act were
unconstitutional. The District Court stayed its own decision pending an appeal
to the U.S. Fifth Circuit Court of Appeals. The District Court's decision, if
upheld on appeal, would permit the Regional Bell Operating
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Companies to offer long distance service within the regions in which they also
provide local exchange service without first having to demonstrate that they
have opened their local market to competitors. Such premature Regional Bell
Operating Company entry into the interLATA long distance market could have a
material adverse effect on 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 this increased competition will not
have a material adverse effect on the Company.
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. Long distance rates for a
majority of business customers are determined each month by using the
Company's sophisticated customer focused software to calculate the lowest long
distance rate available from among pricing plans of AT&T, MCI and Sprint that
are generally believed to be most popular with the Company's business
customers, and in certain cases, comparable rates specifically identified by a
customer and agreed to by the Company. The Company offers other long distance
rates to certain business customers based on the customer's particular needs.
Residential customers currently subscribing to the Company's integrated
telecommunications services generally receive local service prices that are
substantially similar to the published retail local exchange rates for basic
service provided by the incumbent local exchange carrier. Residential
customers generally 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. However, 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."
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 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 (as defined herein) provider. There are over ten
principal cellular providers and over 20 principal PCS licensees in the
Company's proposed PCS markets. In addition, the Company could face additional
competition from mobile satellite services targeting business customers which
are under development.
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
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than the Company in testing new or improved wireless telecommunications
products and services. Some competitors, particularly wireless communications
service ("WCS") carriers, are expected to market other services, such as
wireless cable television access, with their wireless telecommunications
service offerings. The Company does not currently offer wireless 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.
REGULATION.
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 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 certain of its wholly owned subsidiaries, is also
subject to certain federal and state regulatory requirements due to its direct
marketing, telemarketing and fund-raising activities, including, in certain
states, bonding requirements. There can be no assurance that any failure on
the part of these subsidiaries to abide by applicable direct marketing,
telemarketing and fund-raising rules would not have a material adverse effect
on the Company.
YEAR 2000 DATE CONVERSION.
The Company is currently working to verify system readiness for the
processing of date-sensitive information by the Company's computerized
information systems. The Year 2000 problem impacts computer programs and
hardware timers using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive functions may
recognize a date using "00" as the year 1900 rather than 2000, which could
result in miscalculations or system failures. The Company is conducting a
review of its computer systems and programs to determine which, if any,
systems and programs are not capable of recognizing the year 2000 and to
verify system readiness for the millennium date change. The Company is in the
process of confirming with its key vendors that they will be Year 2000 ready.
The total cost of addressing potential problems, which will be expensed as
incurred, is not known as of the date hereof. Based on preliminary
information, however, such costs are not currently expected to have a material
adverse effect on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could have a material adverse effect on future operations. Accordingly, the
Company plans to devote the necessary resources to resolve all significant
Year 2000 issues in a timely manner. While the Company's efforts are designed
to be successful, because of the complexity of the Year 2000 issues and the
interdependence of organizations using computer systems, there can be no
assurance that the Company's efforts, or those of a third party with whom the
Company interacts, will be satisfactorily completed in a timely fashion.
CONSEQUENCES OF A FAILURE TO EXCHANGE 1998 SENIOR NOTES
The 1998 Senior Notes have not been registered under the Securities Act or
any state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption
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therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. 1998 Senior Notes
which remain outstanding after consummation of the Exchange Offer will
continue to bear a legend reflecting such restrictions on transfer. In
addition, upon consummation of the Exchange Offer, holders of 1998 Senior
Notes which remain outstanding will not be entitled to certain rights to have
such 1998 Senior Notes registered under the Securities Act. The Company does
not intend to register under the Securities Act any 1998 Senior Notes which
remain outstanding after consummation of the Exchange Offer. See "The Exchange
Offer."
To the extent that 1998 Senior Notes are tendered and accepted in the
Exchange Offer, the principal amount of outstanding 1998 Senior Notes will
decrease, which will result in a decrease in the liquidity of the 1998 Senior
Notes. Any trading market for 1998 Senior Notes which remain outstanding after
the Exchange Offer could be adversely affected.
EXCHANGE OFFER PROCEDURES
Issuance of the 1998 Exchange Notes in exchange for 1998 Senior Notes
pursuant to the Exchange Offer will be made only after a timely receipt by the
Exchange Agent of (i) such 1998 Senior Notes or a book-entry confirmation of a
book-entry transfer of the 1998 Senior Notes into the Exchange Agent's account
at the Depository Trust Company ("DTC"), (ii) the Letter of Transmittal (or a
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and (iii) any other documents required by the Letter of
Transmittal. Holders of the 1998 Senior Notes desiring to tender such 1998
Senior Notes in exchange for 1998 Exchange Notes should allow sufficient time
to ensure timely delivery. The Company and the Exchange Agent are under no
duty to give notification of defects or irregularities with respect to the
tenders of 1998 Senior Notes for exchange. See "The Exchange Offer."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the sale of the 1998 Senior Notes, the Company entered
into the Registration Agreement with the Initial Purchasers, pursuant to which
the Company agreed to file and to use its best efforts to cause to become
effective with the Commission a registration statement with respect to the
exchange of the 1998 Senior Notes for 1998 Exchange Notes with terms identical
in all material respects to the terms of the 1998 Senior Notes. A copy of the
Registration Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Exchange Offer is being made
to satisfy the contractual obligations of the Company under the Registration
Agreement.
By tendering 1998 Senior Notes in exchange for 1998 Exchange Notes, each
holder will represent to the Company that: (i) any 1998 Exchange Notes to be
received by such holder are being acquired in the ordinary course of such
holder's business; (ii) such holder has no arrangement or understanding with
any person to participate in a distribution (within the meaning of the
Securities Act) of 1998 Exchange Notes; (iii) such holder is not an
"affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act), or if such holder is an affiliate, that such holder will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable; (iv) such holder has full power and
authority to tender, exchange, sell, assign and transfer the tendered 1998
Senior Notes, (v) the Company will acquire good, marketable and unencumbered
title to the tendered 1998 Senior Notes, free and clear of all liens,
restrictions, charges and encumbrances; and (vi) the 1998 Senior Notes
tendered for exchange are not subject to any adverse claims or proxies. Each
tendering holder also will warrant and agree that such holder will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange,
sale, assignment, and transfer of the 1998 Senior Notes tendered pursuant to
the Exchange Offer. Each broker-dealer that receives 1998 Exchange Notes for
its own account in exchange for 1998 Senior Notes pursuant to the Exchange
Offer, where such 1998 Senior Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such 1998 Exchange
Notes. See "Plan of Distribution."
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of 1998 Senior Notes in any jurisdiction in which
the Exchange Offer or the acceptance thereof would not be in compliance with
the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the 1998 Senior Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any participant
in DTC whose name appears on a security position listing as a holder of 1998
Senior Notes (which, for purposes of the Exchange Offer, include beneficial
interests in the 1998 Senior Notes held by direct or indirect participants in
DTC and 1998 Senior Notes held in definitive form).
TERMS OF THE EXCHANGE OFFER
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 principal amount of 1998 Exchange Notes for each $1,000
principal amount of 1998 Senior Notes properly tendered prior to the
Expiration Date and not properly withdrawn in accordance with the procedures
described below. Holders may tender their 1998 Senior Notes in whole or in
part in integral multiples of $1,000 principal amount.
The form and terms of the 1998 Exchange Notes are the same as the form and
terms of the 1998 Senior Notes except that (i) the 1998 Exchange Notes have
been registered under the Securities Act and therefore are not subject to
certain restrictions on transfer applicable to the 1998 Senior Notes and
(ii) holders of the 1998 Exchange Notes will not be entitled to certain rights
of holders of the 1998 Senior Notes under the Registration
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Agreement. The 1998 Exchange Notes evidence the same indebtedness as the 1998
Senior Notes (which they replace) and will be issued pursuant to, and entitled
to the benefits of, the 1998 Senior Note Indenture.
The Exchange Offer is not conditioned upon any minimum principal amount of
1998 Senior Notes being tendered for exchange. The Company reserves the right
in its sole discretion to purchase or make offers for any 1998 Senior Notes
that remain outstanding after the Expiration Date or, as set forth under "--
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase 1998 Senior Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any
such purchases or offers could differ from the terms of the Exchange Offer. As
of the date of this Prospectus, $300 million principal amount of 1998 Senior
Notes is outstanding.
Holders of 1998 Senior Notes do not have any appraisal or dissenters' rights
in connection with the Exchange Offer. 1998 Senior Notes which are not
tendered for, or are tendered but not accepted in connection with, the
Exchange Offer will remain outstanding. See "Risk Factors--Consequences of a
Failure to Exchange 1998 Senior Notes."
If any tendered 1998 Senior Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted 1998 Senior Notes will be
returned, without expense, to the tendering holder thereof promptly after the
Expiration Date.
Holders who tender 1998 Senior Notes in connection with the Exchange Offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of 1998 Senior Notes in connection with the Exchange Offer. The
Company will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
1998 SENIOR NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR 1998 SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER. IN
ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF 1998 SENIOR NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT
TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF 1998 SENIOR NOTES TO
TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND
CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND
REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means 5:00 p.m., New York City time, on June 25,
1998 unless the Exchange Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i)
to delay the acceptance of the 1998 Senior Notes for exchange, (ii) to
terminate the Exchange Offer (whether or not any 1998 Senior Notes have
theretofore been accepted for exchange) if the Company determines, in its sole
and absolute discretion, that any of the events or conditions referred to
under "--Conditions to the Exchange Offer" has occurred or exists or has not
been satisfied, (iii) to extend the Expiration Date of the Exchange Offer and
retain all 1998 Senior Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of 1998 Senior Notes to withdraw their
tendered 1998 Senior Notes as described under "--Withdrawal Rights," and (iv)
to waive any condition or otherwise amend the terms of the Exchange Offer in
any respect. If the Exchange Offer is amended in a manner determined by the
Company to constitute a material change, or if the Company waives a material
condition of the Exchange Offer, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be
23
<PAGE>
distributed to the registered holders of the 1998 Senior Notes, and the
Company will extend the Exchange Offer to the extent required by Rule 14e-1
under the Exchange Act.
Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by making a public
announcement thereof, and such announcement in the case of an extension will
be made no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Without limiting the manner in
which the Company may choose to make any public announcement, and subject to
applicable laws, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by issuing a
release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF 1998 EXCHANGE NOTES
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, 1998 Exchange
Notes for 1998 Senior Notes validly tendered and not withdrawn (pursuant to
the withdrawal rights described under "--Withdrawal Rights") promptly after
the Expiration Date.
In all cases, delivery of 1998 Exchange Notes in exchange for 1998 Senior
Notes tendered and accepted for exchange pursuant to the Exchange Offer will
be made only after timely receipt by the Exchange Agent of (i) 1998 Senior
Notes or a book-entry confirmation of a book-entry transfer of 1998 Senior
Notes into the Exchange Agent's account at DTC, (ii) the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any
required signature guarantees, and (iii) any other documents required by the
Letter of Transmittal. Accordingly, the delivery of 1998 Exchange Notes might
not be made to all tendering holders at the same time, and will depend upon
when 1998 Senior Notes, book-entry confirmations with respect to 1998 Senior
Notes and other required documents are received by the Exchange Agent.
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of 1998 Senior Notes into the Exchange Agent's account at DTC.
Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, 1998 Senior
Notes validly tendered and not withdrawn as, if and when the Company gives
oral or written notice to the Exchange Agent (any such oral notice to be
promptly confirmed in writing) of the Company's acceptance of such 1998 Senior
Notes for exchange pursuant to the Exchange Offer. The Company's acceptance
for exchange of 1998 Senior Notes tendered pursuant to any of the procedures
described above will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions of the
Exchange Offer. The Exchange Agent will act as agent for the Company for the
purpose of receiving tenders of 1998 Senior Notes, Letters of Transmittal and
related documents, and as agent for tendering holders for the purpose of
receiving 1998 Senior Notes, Letters of Transmittal and related documents and
transmitting 1998 Exchange Notes to holders who validly tendered 1998 Senior
Notes. Such exchange will be made promptly after the Expiration Date. If for
any reason whatsoever the acceptance for exchange or the exchange of any 1998
Senior Notes tendered pursuant to the Exchange Offer is delayed (whether
before or after the Company's acceptance for exchange of 1998 Senior Notes),
or the Company extends the Exchange Offer or is unable to accept for exchange
or exchange 1998 Senior Notes tendered pursuant to the Exchange Offer, then,
without prejudice to the Company's rights set forth herein, the Exchange Agent
may, nevertheless, on behalf of the Company and subject to Rule 14e-1(c) under
the Exchange Act, retain tendered 1998 Senior Notes and such 1998 Senior Notes
may not be withdrawn except to the extent tendering holders are entitled to
withdrawal rights as described under "--Withdrawal Rights."
PROCEDURES FOR TENDERING 1998 SENIOR NOTES
VALID TENDER. Except as set forth below, in order for 1998 Senior Notes to
be validly tendered pursuant to the Exchange Offer, either (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the
24
<PAGE>
Exchange Agent at the address set forth under "--Exchange Agent" prior to the
Expiration Date and (b) tendered 1998 Senior Notes must be received by the
Exchange Agent, or such 1998 Senior Notes must be tendered pursuant to the
procedures for book-entry transfer set forth below and a book-entry
confirmation must be received by the Exchange Agent, in each case prior to the
Expiration Date, or (ii) the guaranteed delivery procedures set forth below
must be complied with.
If less than all of the 1998 Senior Notes are tendered, a tendering holder
should fill in the amount of 1998 Senior Notes being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of 1998 Senior
Notes delivered to the Exchange Agent will be deemed to have been tendered
unless otherwise indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
Any beneficial owner of 1998 Senior Notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
or custodian is urged to contact such entity promptly if such beneficial
holder wishes to participate in the Exchange Offer.
THE METHOD OF DELIVERY OF 1998 SENIOR NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR 1998 SENIOR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR THEM.
BOOK-ENTRY TRANSFER. The Exchange Agent will make a request to establish an
account with respect to the 1998 Senior Notes at DTC for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the 1998 Senior Notes by
causing DTC to transfer such 1998 Senior Notes into the Exchange Agent's
account at DTC in accordance with DTC's procedures for transfers. However,
although delivery of 1998 Senior Notes may be effected through book-entry
transfer into the Exchange Agent's account at DTC, the Letter of Transmittal
(or facsimile thereof), properly completed and duly executed, with any
required signature guarantees and any other required documents, must in any
case be delivered to and received by the Exchange Agent at its address set
forth under "--Exchange Agent" prior to the Expiration Date, or the guaranteed
delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
SIGNATURE GUARANTEES. Certificates for 1998 Senior Notes need not be
endorsed and signature guarantees on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are unnecessary unless (a) a certificate for
1998 Senior Notes is registered in a name other than that of the person
surrendering the certificate or (b) a registered holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for 1998 Senior Notes must be duly endorsed or accompanied by a properly
executed bond power, with the endorsement or signature on the bond power and
on the Letter of Transmittal or the notice of withdrawal, as the case may be,
guaranteed by a firm or other entity identified in Rule 17Ad-15 under the
Exchange Act as an "eligible guarantor institution," including (as such terms
are defined therein) (i) a bank, (ii) a broker, dealer, municipal securities
broker or dealer or
25
<PAGE>
government securities broker or dealer, (iii) a credit union, (iv) a national
securities exchange, registered securities association or clearing agency, or
(v) a savings association that is a participant in a Securities Transfer
Association (each an "Eligible Institution"), unless surrendered on behalf of
such Eligible Institution. See Instruction 1 to the Letter of Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender 1998 Senior Notes
pursuant to the Exchange Offer and the certificates for such 1998 Senior Notes
are not immediately available or time will not permit all required documents
to reach the Exchange Agent before the Expiration Date, or the procedures for
book-entry transfer cannot be completed on a timely basis, such 1998 Senior
Notes may nevertheless be tendered, provided that all of the following
guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, setting forth the name and address of the holder of 1998
Senior Notes and the amount of 1998 Senior Notes tendered, stating that the
tender is being made thereby and guaranteeing that within three New York
Stock Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery, the certificates for all physically tendered 1998
Senior Notes, in proper form for transfer, or a book-entry confirmation, as
the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent. The Notice of Guaranteed Delivery may be delivered by hand, or
transmitted by facsimile or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in the Notice of
Guaranteed Delivery; and
(iii) the certificates (or book-entry confirmation) representing all
tendered 1998 Senior Notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery.
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered 1998 Senior Notes will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. The Company reserves the absolute right, in its sole and absolute
discretion, to reject any and all tenders determined by it not to be in proper
form or the acceptance for exchange of which may, in the view of counsel to
the Company, be unlawful. The Company also reserves the absolute right,
subject to applicable law, to waive any of the conditions of the Exchange
Offer as set forth under "--Conditions to the Exchange Offer" or any defect or
irregularity in any tender of 1998 Senior Notes of any particular holder
whether or not similar defects or irregularities are waived in the case of
other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding on all parties. No tender of 1998 Senior Notes will be
deemed to have been validly made until all defects or irregularities with
respect to such tender have been cured or waived. Neither the Company, any
affiliates of the Company, the Exchange Agent or any other person shall be
under any duty to give any notification of any defects or irregularities in
tenders or incur any liability for failure to give any such notification.
RESALES OF 1998 EXCHANGE NOTES
Based on interpretations by the staff of the Commission, as set forth in no-
action letters issued to third parties unrelated to the Company, the Company
believes that holders of 1998 Senior Notes (other than any holder that is (i)
a broker-dealer that acquired 1998 Senior Notes as a result of market-making
activities or other trading activities, or (ii) a broker-dealer that acquired
1998 Senior Notes directly from the Company for resale pursuant to Rule 144A
or another available exemption under the Securities Act) who exchange their
1998 Senior Notes for 1998 Exchange Notes pursuant to the Exchange Offer may
offer for resale, resell and otherwise transfer such
26
<PAGE>
1998 Exchange Notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such 1998 Exchange
Notes are acquired in the ordinary course of such holders' business, such
holders have no arrangement or understanding with any person to participate in
the distribution of such 1998 Exchange Notes and such holders are not
"affiliates" of the Company (within the meaning of Rule 405 of the Securities
Act). However, the staff of the Commission has not considered the Exchange
Offer in the context of a no-action letter, and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer. Each broker-dealer that receives 1998 Exchange Notes for
its own account in exchange for 1998 Senior Notes pursuant to the Exchange
Offer, where such 1998 Senior Notes were acquired by such broker-dealer as a
result of market-making or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such 1998 Exchange
Notes. See "Plan of Distribution."
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of 1998 Senior Notes may be
withdrawn at any time prior to the Expiration Date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "--Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the 1998 Senior Notes to be withdrawn, the principal
amount of 1998 Senior Notes to be withdrawn, and (if certificates for such
1998 Senior Notes have been tendered) the name of the registered holder of the
1998 Senior Notes as set forth on the 1998 Senior Notes, if different from
that of the person who tendered such 1998 Senior Notes. If certificates for
1998 Senior Notes have been delivered or otherwise identified to the Exchange
Agent, the notice of withdrawal must specify the serial numbers on the
particular certificates for the 1998 Senior Notes to be withdrawn and the
signature on the notice of withdrawal must be guaranteed by an Eligible
Institution, except in the case of 1998 Senior Notes tendered for the account
of an Eligible Institution. If 1998 Senior Notes have been tendered pursuant
to the procedures for book-entry transfer set forth in "--Procedures for
Tendering 1998 Senior Notes," the notice of withdrawal must specify the name
and number of the account at DTC to be credited with the withdrawal of 1998
Senior Notes and must otherwise comply with the procedures of DTC. Withdrawals
of tenders of 1998 Senior Notes may not be rescinded. 1998 Senior Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time prior to the
Expiration Date by following any of the procedures described above under "--
Procedures for Tendering 1998 Senior Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any defects or irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any 1998 Senior Notes
which have been tendered but which are withdrawn will be returned to the
holder thereof promptly after withdrawal.
INTEREST ON THE 1998 EXCHANGE NOTES
Interest on the 1998 Senior Notes and the 1998 Exchange Notes will be
payable semi-annually in arrears on March 15 and September 15 of each year at
a rate of 8 3/8% per annum, commencing September 15, 1998.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any 1998 Senior Notes for any 1998 Exchange Notes
and will not be required to issue 1998 Exchange Notes in exchange for any 1998
Senior Notes, and as described below may, at any time and from time to time,
terminate or amend the Exchange
27
<PAGE>
Offer (whether or not any 1998 Senior Notes have theretofore been accepted for
exchange) or may waive any conditions to or amend the Exchange Offer, if any
of the following conditions have occurred or exists or have not been satisfied
prior to the Expiration Date:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the 1998 Exchange Notes issued in exchange
for 1998 Senior Notes pursuant to the Exchange Offer to be offered for
resale, resold and otherwise transferred by holders thereof (other than (i)
broker-dealers that acquired 1998 Senior Notes as a result of market-making
or other trading activities or (ii) broker-dealers that acquired 1998
Senior Notes directly from the Company for resale pursuant to Rule 144A or
another available exemption under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such 1998 Exchange Notes are acquired in the ordinary
course of such holders' business, such holders have no arrangement or
understanding with any person to participate in the distribution of such
1998 Exchange Notes and such holders are not "affiliates" of the Company
(within the meaning of Rule 405 under the Securities Act);
(b) any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect to
the Exchange Offer which, in the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
(d) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose;
(e) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby; or
(f) any change, or any development involving a prospective change, in the
business or financial affairs of the Company has occurred which, in the
sole judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer.
If the Company determines in its sole and absolute discretion that any of
the foregoing events or conditions has occurred or exists or has not been
satisfied at any time prior to the Expiration Date, the Company may, subject
to applicable law, terminate the Exchange Offer (whether or not any 1998
Senior Notes have theretofore been accepted for exchange) or may waive any
such condition or otherwise amend the terms of the Exchange Offer in any
respect. If such waiver or amendment constitutes a material change to the
Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered holders of
the 1998 Senior Notes, and the Company will extend the Exchange Offer to the
extent required by Rule 14e-1 under the Exchange Act.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The exchange of the 1998 Senior Notes for the 1998 Exchange Notes will not
be a taxable exchange for federal income tax purposes, and holders of 1998
Senior Notes should not recognize any taxable gain or loss or any interest
income as a result of such exchange.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and
28
<PAGE>
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent as follows:
By Mail
United States Trust Company of New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
By Hand before 4:30 p.m.
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level Corporate Trust Window
By Overnight Courier and By Hand after 4:30 p.m.
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
By Facsimile
(212) 780-0592
Attention: Customer Service
Confirm by telephone: (800) 548-6565
DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company
has agreed to pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of 1998 Senior Notes, and in handling or tendering
for their customers.
Holders who tender their 1998 Senior Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that if
1998 Exchange Notes are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the 1998 Senior Notes
tendered, or if a transfer tax is imposed for any reason other than the
exchange of 1998 Senior Notes in connection with the Exchange Offer, then the
amount of any such transfer tax (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such transfer tax or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer tax will
be billed directly to such tendering holder.
29
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the Company
under the Registration Agreement. The Company will not receive any cash
proceeds from the issuance of the 1998 Exchange Notes offered hereby. In
consideration for issuing the 1998 Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, an equal number of 1998
Senior Notes in like principal amount. The form and terms of the 1998 Exchange
Notes are identical in all material respects to the form and terms of the 1998
Senior Notes, except as otherwise described herein under "The Exchange Offer--
Terms of the Exchange Offer." The 1998 Senior Notes surrendered in exchange
for 1998 Exchange Notes will be retired and cancelled and cannot be reissued.
30
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1998, the capitalization of
the Company, including the application of the net proceeds to the Company from
the Offering. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Consolidated Financial Statements of the
Company, the notes thereto and the other financial data contained elsewhere or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------
ACTUAL
--------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C>
Short-term debt............................................. $ 8,979
----------
Long-term debt.............................................. 922,449
----------
Stockholders' equity:
Class A Common Stock, $.01 par value, 250,000,000 shares
authorized;
62,505,542 shares issued and outstanding................. 625
Class B Common Stock, convertible, $.01 par value,
22,000,000 shares
authorized; none issued or outstanding................... --
Additional paid-in capital................................ 691,492
Accumulated deficit....................................... (158,002)
Accumulated other comprehensive income ................... 3,607
----------
Total stockholders' equity.............................. 537,722
----------
Total capitalization.................................... $1,469,150
==========
</TABLE>
31
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated financial data of the
Company and should be read in conjunction with and is qualified by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company, the notes
thereto and the other financial data contained elsewhere or incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------ -----------------------------------
PRO FORMA PRO FORMA
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7) 1997(1)(8) 1998(9) 1998(7)(10)
------- -------- ---------- ---------- ------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
STATEMENT DATA:
Revenue......... $ 1,550 $ 8,014 $ 28,998 $ 81,323 $267,886 $ 462,191 $ 35,747 $134,331 $134,331
------- -------- -------- -------- -------- --------- -------- -------- --------
Operating
expenses:
Cost of
service........ 1,528 6,212 19,667 52,624 155,430 255,794 20,238 75,045 75,045
Selling, general
and
administrative.. 2,390 12,373 18,054 46,044 143,918 208,981 24,947 58,768 58,768
Depreciation and
amortization... 235 772 1,835 8,485 33,275 61,916 4,122 19,431 19,431
Other........... -- -- -- 2,380 4,632 10,191 1,608 1,900 1,900
------- -------- -------- -------- -------- --------- -------- -------- --------
Total operating
expenses....... 4,153 19,357 39,556 109,533 337,255 536,882 50,915 155,144 155,144
------- -------- -------- -------- -------- --------- -------- -------- --------
Operating loss.. (2,603) (11,343) (10,558) (28,210) (69,369) (74,691) (15,168) (20,813) (20,813)
Interest income
(expense),
net............ 163 (73) (771) 5,369 (11,967) (34,265) 1,806 (10,141) (12,476)
Other income.... -- -- -- 495 1,426 2,508 7 687 687
Income taxes.... -- -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- --------- -------- -------- --------
Net loss........ $(2,440) $(11,416) $(11,329) $(22,346) $(79,910) $(106,448) $(13,355) $(30,267) $(32,602)
======= ======== ======== ======== ======== ========= ======== ======== ========
Loss per common
share.......... $ (.17) $ (.53) $ (.40) $ (.55) $ (1.45) $ (1.74) $ (0.26) $ (0.49) $ (0.52)
======= ======== ======== ======== ======== ========= ======== ======== ========
Weighted average
common shares
outstanding.... 14,761 21,464 28,004 40,506 54,974 61,184 52,327 62,227 62,227
======= ======== ======== ======== ======== ========= ======== ======== ========
Ratio of earn-
ings to fixed
charges(11).... -- -- -- -- -- -- -- -- --
======= ======== ======== ======== ======== ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MARCH 31,
DECEMBER 31, 1998
-------------------------------------------------- -----------
ACTUAL
1993 1994 1995(1) 1996(1)(12) 1997(1)(5)(13) ACTUAL(9)
------ ------- ------- ----------- -------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets......... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869 $ 762,714
Working capital
(deficit)............. $5,962 $ 1,659 $(1,208) $185,968 $ 378,617 $ 624,631
Property and equipment,
net................... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804 $ 406,168
Total assets........... $9,051 $10,687 $28,986 $452,994 $1,345,652 $1,634,216
Long-term debt......... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384 $ 922,449
Stockholders' equity... $7,936 $ 3,291 $14,958 $403,429 $ 559,379 $ 537,722
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------ -----------------------------------
PRO FORMA PRO FORMA
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7) 1997(1) 1998(9) 1998(7)
------- -------- ---------- ---------- ------------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL
DATA:
Capital
expenditures,
including
business
acquisitions... $ 2,052 $ 3,393 $14,697 $173,782 $601,137 $617,463 $42,876 $47,184 $47,184
EBITDA(14)...... $(2,368) $(10,571) $(8,723) $(17,345) $(31,462) $ (2,584) $(9,438) $ 518 $ 518
</TABLE>
(Footnotes on next page)
32
<PAGE>
- --------
(1) The acquisitions of MWR (now part of McLeodUSA Network Services), Ruffalo
Cody, McLeodUSA Publishing and CCI in April 1995, July 1996, September
1996 and September 1997, respectively, affect the comparability of the
historical data presented to the historical data for prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) 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.
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997
and the 1997 Senior Notes on July 21, 1997.
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997 and
certain adjustments attributable to the acquisition of CCI by the
Company. Also reflects certain adjustments attributable to the 1997
Senior Discount Notes, the 1997 Senior Notes and the 1998 Senior Notes
computed as if the 1997 Senior Discount Notes, the 1997 Senior Notes and
the 1998 Senior Notes had been issued on January 1, 1997.
(7) The issuance of the 1997 Senior Discount Notes in March 1997, the
issuance of the 1997 Senior Notes in July 1997, the acquisition of CCI in
September 1997 and the Offering affect the comparability of the pro forma
data presented to the data for prior periods shown.
(8) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997.
(9) Reflects the issuance of the 1998 Senior Notes on March 16, 1998.
(10) Reflects certain adjustments attributable to the 1998 Senior Notes
computed as if the 1998 Senior Notes had been issued on January 1, 1998.
(11) For the purpose of calculating the ratio of earnings to fixed charges,
earnings consist of net loss before income taxes plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest on
all debt (including capitalized interest), amortization of debt discount
and deferred loan costs and the portion of rental expense that is
representative of the interest component of rental expense (deemed to be
one-third of rental expense which management believes is a reasonable
approximation of the interest component). For each of the years ended
December 31, 1993, 1994, 1995, 1996 and 1997, earnings were insufficient
to cover fixed charges by $2.4 million, $11.4 million, $11.4 million,
$22.6 million and $84.4 million, respectively. For the three months ended
March 31, 1997 and 1998, earnings were insufficient to cover fixed
charges by $13.6 million and $32 million, respectively. On a pro forma
basis computed as if the CCI Acquisition, the 1997 Senior Discount Notes
Offering, the 1997 Senior Notes Offering and the Offering were
consummated at the beginning of the period presented, earnings would not
have been sufficient to cover fixed charges by $111.7 million and $34.3
million for the year ended December 31, 1997 and the three months ended
March 31, 1998, respectively.
(12) Includes Ruffalo Cody and McLeodUSA Publishing, which were acquired by
the Company on July 15, 1996 and September 20, 1996, respectively.
(13) Includes CCI, which was acquired by the Company on September 24, 1997.
(14) 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.
33
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to (i) the CCI Acquisition in September 1997, (ii) the issuance of
the 1997 Senior Discount Notes in March 1997, (iii) the issuance of the 1997
Senior Notes in July 1997, and (iv) the Offering. The Unaudited Pro Forma
Condensed Consolidated Statements of Operations reflects the CCI Acquisition
using the purchase method of accounting, and assumes that the CCI Acquisition,
the issuance of the 1997 Senior Discount Notes, the issuance of the 1997
Senior Notes and the Offering were consummated at the beginning of the periods
presented. The unaudited pro forma financial information is derived from and
should be read in conjunction with the Consolidated Financial Statements of
the Company and CCI and the related notes thereto contained elsewhere or
incorporated by reference in this Prospectus. The pro forma adjustments are
based upon available information and certain assumptions that management
believes to be reasonable.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the CCI Acquisition been consummated at the beginning
of the periods presented, nor is it necessarily indicative of future operating
results or financial position.
34
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------------------------------------
ADJUSTMENTS PRO FORMA
FOR1997 FOR 1997 ADJUSTMENTS PRO FORMA ADJUSTMENTS
SENIOR SENIOR CONSOLIDATED FOR FOR FOR 1997 PRO FORMA
MCLEODUSA DISCOUNT DISCOUNT COMMUNI- CCI CCI SENIOR FOR 1997 SENIOR
INCORPORATED NOTES NOTES CATIONS INC.(1) ACQUISITION ACQUISITION NOTES NOTES
------------ ----------- --------- --------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
STATEMENT DATA:
Revenue.......... $267,886 $ -- $267,886 $194,305 $ -- $462,191 $ -- $462,191
-------- ------- -------- -------- -------- -------- ------- --------
Operating
expenses:
Cost of service.. 155,430 -- 155,430 100,364 -- 255,794 -- 255,794
Selling, general
and
administrative... 143,918 -- 143,918 65,063 -- 208,981 -- 208,981
Depreciation and
amortization..... 33,275 -- 33,275 17,913 10,728 (2) 61,916 -- 61,916
Other............ 4,632 -- 4,632 -- 5,559 (3) 10,191 -- 10,191
-------- ------- -------- -------- -------- -------- ------- --------
Total operating
expenses........ 337,255 -- 337,255 183,340 16,287 536,882 -- 536,882
-------- ------- -------- -------- -------- -------- ------- --------
Operating income
(loss)........... (69,369) -- (69,369) 10,965 (16,287) (74,691) -- (74,691)
Interest expense,
net.............. (11,967) (2,246)(4) (14,213) (2,972) -- (17,185) (5,718)(5) (22,903)
Other non-
operating
income........... 1,426 -- 1,426 1,082 -- 2,508 -- 2,508
Income taxes..... -- -- -- (3,477) 3,477 (7) -- -- --
-------- ------- -------- -------- -------- -------- ------- --------
Net income
(loss)........... $(79,910) $(2,246) $(82,156) $ 5,598 $(12,810) $(89,368) $(5,718) $(95,086)
======== ======= ======== ======== ======== ======== ======= ========
Loss per common
share............ $ (1.45) $ (1.49) $ (1.46) $ (1.55)
======== ======== ======== ========
Weighted average
common shares
outstanding...... 54,974 54,974 61,184 61,184
======== ======== ======== ========
OTHER FINANCIAL
DATA:
EBITDA(8)........ $(31,462) $ -- $(31,462) $ 28,878 $ -- $ (2,584) $ -- $ (2,584)
<CAPTION>
ADJUSTMENTS PRO FORMA
FOR THE FOR THE
OFFERING OFFERING
-------------- ----------
<S> <C> <C>
OPERATIONS
STATEMENT DATA:
Revenue.......... $ -- $ 462,191
-------------- ----------
Operating
expenses:
Cost of service.. -- 255,794
Selling, general
and
administrative... -- 208,981
Depreciation and
amortization..... -- 61,916
Other............ -- 10,191
-------------- ----------
Total operating
expenses........ -- 536,882
-------------- ----------
Operating income
(loss)........... -- (74,691)
Interest expense,
net.............. (11,362)(6) (34,265)
Other non-
operating
income........... -- 2,508
Income taxes..... -- --
-------------- ----------
Net income
(loss)........... $(11,362) $(106,448)
============== ==========
Loss per common
share............ $ (1.74)
==========
Weighted average
common shares
outstanding...... 61,184
==========
OTHER FINANCIAL
DATA:
EBITDA(8)........ $ -- $ (2,584)
</TABLE>
(Table continued on following page.)
35
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------
PRO
ADJUSTMENTS FORMA
MCLEODUSA FOR THE FOR THE
INCORPORATED OFFERING OFFERING
------------ ----------- --------
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue................................. $134,331 $ -- $134,331
-------- ------- --------
Operating expenses:
Cost of service......................... 75,045 -- 75,045
Selling, general and administrative..... 58,768 -- 58,768
Depreciation and amortization........... 19,431 -- 19,431
Other................................... 1,900 -- 1,900
-------- ------- --------
Total operating expenses............... 155,144 -- 155,144
-------- ------- --------
Operating loss.......................... (20,813) -- (20,813)
Interest expense, net................... (10,141) (2,335)(6) (12,476)
Other non-operating income.............. 687 -- 687
Income taxes............................ -- -- --
-------- ------- --------
Net loss................................ $(30,267) $(2,335) $(32,602)
======== ======= ========
Loss per common share................... $ (0.49) $ (0.52)
======== ========
Weighted average common shares
outstanding............................ 62,227 62,227
======== ========
OTHER FINANCIAL DATA:
EBITDA(8)............................... $ 518 $ -- $ 518
</TABLE>
- --------
(1) Includes operations of CCI from January 1, 1997 to September 24, 1997.
(2) To adjust depreciation and amortization to include amortization of
intangibles acquired in the CCI Acquisition. The intangibles acquired in
the CCI Acquisition will be amortized over periods ranging from 3 to 30
years.
(3) To recognize the costs associated with the directories in progress at the
time of the Company's acquisition of McLeodUSA Publishing and CCI.
(4) To record the interest expense on the 1997 Senior Discount Notes at 10
1/2% compounded semi-annually, reduced by an estimated annual yield of 5%
on the net proceeds from the issuance of the 1997 Senior Discount Notes
and estimated additional interest capitalization for the year ended
December 31, 1997.
(5) To record the interest expense on the 1997 Senior Notes at 9 1/4% reduced
by an estimated annual yield of approximately 5% on the net proceeds from
the issuance of the 1997 Senior Notes.
(6) To record the interest expense on the 1998 Senior Notes at 8 3/8% reduced
by an estimated annual yield of approximately 5% on the net proceeds from
the Offering.
(7) Net income (loss) includes pro forma adjustments for income taxes due to
the availability of net operating loss carryforwards and a valuation
allowance.
(8) 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.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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 contained elsewhere or incorporated by reference in this
Prospectus.
OVERVIEW
The Company derives its revenue from (i) the sale of "bundled" local and
long distance telecommunications services to end users, (ii)
telecommunications network maintenance services and telephone equipment sales,
service and installation, (iii) special access, private line and data
services, (iv) the sale of advertising space in telephone directories, (v)
local exchange services through the operation of an independent local exchange
company, ICTC, acquired as part of the CCI Acquisition, (vi) telemarketing
services and (vii) other telecommunications services, including cellular,
operator, payphone and paging services. The Company began providing local
exchange services and other telecommunications services as a result of the CCI
Acquisition in September 1997, telephone directory advertising as a result of
its acquisition of McLeodUSA Publishing in September 1996, and telemarketing
services as a result of its acquisition of Ruffalo Cody in July 1996. The
table set forth below summarizes the Company's percentage of revenues from
these sources:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ------------------
1995 1996 1997(1) 1997 1998
------- ------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Local and long distance
telecommunications
services............... 74% 51% 41% 42% 46%
Network maintenance and
equipment services..... 17 7 8 5 5
Special access, private
line and data
services............... 9 13 6 7 7
Telephone directory
advertising............ -- 19 30 40 21
Local exchange services
(ICTC)................. -- -- 6 -- 12
Telemarketing services.. -- 10 5 6 4
Other telecommunications
services............... -- -- 4 -- 5
------- ------- ------- ------- -------
100% 100% 100% 100% 100%
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes revenues from CCI from September 25, 1997 through December 31,
1997.
The Company began offering "bundled" local and long distance services to
business customers in January 1994. At the end of 1995, the Company began
offering, 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. During 1997 the Company expanded the states in which
it offers service to business customers to include Iowa, Illinois, Indiana,
Minnesota, Wisconsin, North Dakota, South Dakota, Colorado and Wyoming. During
1997 the Company also expanded its PrimeLine(R) service to certain additional
cities in Iowa and Illinois and began offering the service to customers in
North Dakota, South Dakota, Wisconsin and Colorado. The Company plans to
continue its efforts to market and provide local, long distance and other
telecommunications services to business customers and market its PrimeLine(R)
service to residential customers. The Company believes its efforts to market
its integrated telecommunications services have been enhanced by its July 1996
acquisition of Ruffalo Cody, which specializes in direct marketing and
telemarketing services, including telecommunications sales, its September 1996
acquisition of McLeodUSA Publishing, which publishes and distributes
competitive "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, and its September 1997
acquisition of CCI, including its subsidiary Consolidated Communications
Directories Inc. ("CCD"), which publishes and distributes "white page" and
"yellow page" telephone directories in 38 states and the United States Virgin
Islands.
37
<PAGE>
In September 1997, the Company completed the CCI Acquisition. For the period
beginning January 1, 1997 through September 24, 1997, CCI had revenues of
$194.3 million and net income of $5.6 million. As a result of the CCI
Acquisition, the Company now owns all of the former CCI subsidiaries,
including ICTC, an independent local exchange carrier serving east central
Illinois; Consolidated Communications Telecom Services Inc. ("CCTS"), a
competitive local exchange carrier which offers integrated local, long
distance and other telecommunications services in central and southern
Illinois and in Indiana; CCD, a telephone directory company; an operator
service company; an inmate pay-phone company; a full service telemarketing
agency; a majority interest in a cable television company serving customers in
Greene, Sangamon and Menard counties in Illinois and Benton Harbor, Michigan;
and a minority interest in a cellular telephone partnership serving parts of
east central Illinois. The Company believes the CCI Acquisition will allow it
to enhance its efforts to offer its telecommunications services in adjoining
target markets including expansion into Indiana and Missouri, states where CCI
provided telecommunications services.
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 interexchange carriers, costs of
printing and distributing the telephone directories published by McLeodUSA
Publishing and CCD, costs associated with maintaining the Iowa Communications
Network and costs associated with operating the Company's 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. SG&A consists
of sales and marketing, customer service and administrative expenses.
Depreciation and amortization include depreciation of the Company's
telecommunications network and equipment; amortization of goodwill, and other
intangibles related to the Company's acquisitions, 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 local
telecommunications service.
As the Company expands into new markets, both cost of service and SG&A will
increase. The Company expects to incur cost of service and SG&A expenses prior
to achieving significant revenues in new markets. Fixed costs related to
leasing of central office facilities needed to provide telephone services must
be incurred prior to generating revenue in new markets, while significant
levels of marketing activity may be necessary in the new markets in order for
the Company to build a customer base large enough to generate sufficient
revenue to offset such fixed costs and marketing expenses.
In January and February 1996, the Company granted options to purchase an
aggregate of 965,166 and 688,502 shares of its 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. Additionally, in
September 1997, the Company granted options to purchase an aggregate of
1,468,945 shares of its Class A Common Stock at an exercise price of $24.50 to
certain employees of CCI. The fair market value of these options, in the
aggregate, at the date of grant exceeded the aggregate exercise price by
approximately $15.8 million. These amounts are being 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.
In addition, the projected increases in capital expenditures will continue to
generate negative cash flows from construction activities during the next
several years while the Company installs and expands its fiber optic network
and develops and constructs its proposed PCS system. The Company may also be
forced to change its pricing policies
38
<PAGE>
to respond to a changing competitive environment, and there can be no
assurance that the Company will be able to maintain its operating margin.
There can be no assurance that growth in the Company's revenue or customer
base will continue or that the Company will be able to achieve or sustain
profitability or positive cash flows.
The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has reduced the
net deferred tax assets generated by these losses by a valuation allowance
which offsets the net deferred tax asset due to the uncertainty of realizing
the benefit of the tax loss carryforwards. The Company will reduce the
valuation allowance when, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
be realized.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Total revenue increased from $35.7 million for the three months ended March
31, 1997 to $134.3 million for the three months ended March 31, 1998,
representing an increase of $98.6 million or 276%. Revenue from the sale of
local and long distance telecommunications services accounted for $46.8
million of the increase, including $19.2 million contributed by CCI, which was
acquired on September 24, 1997. Local exchange services provided by ICTC
generated revenues of $15.9 million for the period, for which there were no
corresponding 1997 revenues. Private line and data revenues accounted for $7
million of increased revenues over 1997, which was primarily attributable to
the CCI Acquisition. Network maintenance and equipment revenue increased $5.5
million over 1997 due primarily to the acquisitions of Digital Communications
of Iowa, Inc. ("Digital Communications"), ESI Communications, Inc. ("ESI
Communications") and CCI. Other telecommunications revenue, which was due
entirely to the CCI Acquisition, represented $6.9 million of the first quarter
1998 revenues, for which there was no corresponding 1997 amount. Directory
revenues increased $13.8 million from the first quarter of 1997 to the first
quarter of 1998 due to revenues from new directories acquired in 1997 and the
acquisition of CCD on September 24, 1997. Telemarketing revenues increased
$2.7 million from the first quarter of 1997 to the first quarter of 1998 with
the increase due almost entirely to the CCI Acquisition.
Cost of service increased from $20.2 million for the three months ended
March 31, 1997, to $75 million for the three months ended March 31, 1998,
representing an increase of $54.8 million or 271%. 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 Digital
Communications, ESI Communications and CCI, which contributed an aggregate of
$34.1 million to the increase. Cost of service as a percentage of revenue
decreased from 57% for the three months ended March 31, 1997 to 56% for the
three months ended March 31, 1998, primarily as a result of the effect of
these acquisitions. The cost of providing competitive local and long distance
services as a percentage of competitive local and long distance
telecommunications revenue decreased from 76% for the three months ended March
31, 1997 to 70% for the three months ended March 31, 1998, primarily due to
the realization of benefits associated with new wholesale line cost rate
agreements with the Regional Bell Operating Companies.
SG&A increased from $24.9 million for the three months ended March 31, 1997
to $58.8 million for the three months ended March 31, 1998, an increase of
$33.9 million or 136%. The acquisitions of Digital Communications, ESI
Communications and CCI contributed an aggregate of $22.7 million to the
increase. Also contributing to this increase were increased costs of $11.2
million related primarily to expansion of selling, customer support and
administration activities to support the Company's growth.
Depreciation and amortization expenses increased from $4.1 million for the
three months ended March 31, 1997 to $19.4 million for the three months ended
March 31, 1998, representing an increase of $15.3 million or 371%. This
increase consisted of $10.5 million related to the acquisitions of Digital
Communications, ESI Communications and CCI, and $4.8 million due primarily to
the growth of the Company's network.
39
<PAGE>
Other operating expenses represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
CCD directories in progress at the time the Company acquired CCI.
Interest income increased from $4.3 million for the three-month period ended
March 31, 1997, to $4.6 million for the same period in 1998. This increase
resulted from increased earnings on investments made with the remaining
proceeds from the 1997 Senior Discount Note Offering, the 1997 Senior Note
Offering and the Offering.
Gross interest expense increased from $2.7 million for the first quarter of
1997 to $16.5 million for the first quarter of 1998. This increase was
primarily a result of an increase in the accretion of interest on the 1997
Senior Discount Notes of $5.8 million and the accrual of interest on the 1997
Senior Notes and the 1998 Senior Notes of $6.3 million. Interest expense of
approximately $1.7 million and $290,000 was capitalized as part of the
Company's construction of its fiber optic network during the first quarter of
1998 and 1997, respectively.
Net loss increased from $13.4 million for the three months ended March 31,
1997 to $30.3 million for the three months ended March 31, 1998, an increase
of $16.9 million. This increase resulted primarily from the following three
factors: the construction and expansion of the Company's network which require
significant expenditures, a substantial portion of which is incurred before
the realization of revenues; the increased depreciation expense related to
those networks and amortization of intangibles related to acquisitions; and
net interest expense on indebtedness to fund market expansion, network
development and acquisitions.
YEAR ENDED 1997 COMPARED WITH YEAR ENDED 1996
Revenue was $267.9 million for the year ended December 31, 1997, an increase
of $186.6 million or 229% from $81.3 million for 1996. This increase was due
to the many acquisitions completed in 1997 and 1996 as well as the increase in
local and long distance customers. Revenue from the sale of local and long
distance telecommunications services accounted for $68.6 million of the
increase, including $23.1 million contributed by CCI from September 25, 1997
to December 31, 1997. Local exchange services generated by ICTC represented
$16.1 million for the period from September 25, 1997 to December 31, 1997, for
which there were no corresponding 1996 revenues. Private line and data
revenues accounted for $6.9 million of increased revenues over 1996 which was
primarily attributable to the CCI Acquisition. Network maintenance and
equipment revenue increased $15.0 million over 1996 due to the acquisitions of
Digital Communications, ESI Communications and CCI. Other telecommunications
revenue that was due entirely to the CCI Acquisition represented $9.9 million
of 1997 revenues with no corresponding 1996 amount. Directory revenues
increased $65.9 million from 1996 to 1997 and were due to a full year of
McLeodUSA Publishing revenues in 1997 and the acquisition of CCD on September
24, 1997. The increase in telemarketing revenues from 1996 to 1997 of $4.1
million was due almost entirely to the CCI Acquisition.
Cost of service increased from $52.6 million for the year ended December 31,
1996 to $155.4 million for the year ended December 31, 1997, representing an
increase of $102.8 million or 195%. 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, McLeodUSA
Publishing, Digital Communications, ESI Communications and CCI, which
contributed an aggregate of $62.2 million to the increase. Cost of service as
a percentage of revenue decreased from 65% for the year ended December 31,
1996 to 58% for the year ended December 31, 1997, 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 70% for the year ended December 31, 1996 to 73% for the year
ended December 31, 1997, primarily as a result of increased line costs
associated with the Company's accelerated expansion into new markets.
40
<PAGE>
SG&A increased from $46 million for the year ended December 31, 1996 to
$143.9 million for the year ended December 31, 1997, an increase of $97.9
million or 213%. The acquisitions of Ruffalo Cody, McLeodUSA Publishing,
Digital Communications, ESI Communications and CCI contributed an aggregate of
$54.3 million to the increase. Also contributing to this increase were
increased costs of $43.6 million primarily related to expansion of selling,
customer support and administration activities to support the Company's
growth.
Depreciation and amortization expenses increased from $8.5 million for the
year ended December 31, 1996 to $33.3 million for the year ended December 31,
1997, representing an increase of $24.8 million or 292%. The increase was
primarily due to $14.3 million related to the acquisitions of Ruffalo Cody,
McLeodUSA Publishing, Digital Communications, ESI Communications and CCI, and
$3.8 million due primarily to the growth of the Company's network in 1997.
Other operating expenses in 1997 represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
McLeodUSA Publishing and CCD directories in progress at the time of the
acquisitions.
Interest income increased from $6 million for the year ended December 31,
1996 to $22.7 million for the year ended December 31, 1997. This increase
resulted from increased earnings on investments made with a portion of the
proceeds from the Company's offerings of Class A Common Stock in June and
November 1996 and from the offerings of the 1997 Senior Discount Notes and the
1997 Senior Notes in March 1997 and July 1997, respectively.
Gross interest expense increased from $869,000 for the year ended December
31, 1996 to $39.1 million for the year ended December 31, 1997. This increase
was primarily a result of accretion of interest on the 1997 Senior Discount
Notes of $26.8 million and accrual of interest on the 1997 Senior Notes of
$9.5 million. Interest expense of approximately $4.4 million and $204,000 was
capitalized as part of the Company's construction of its fiber optic network
during the years ended December 31, 1997 and 1996, respectively.
Net loss increased from $22.3 million for the year ended December 31, 1996
to $79.9 million for the year ended December 31, 1997, an increase of $57.6
million. This increase resulted primarily from the following three factors:
the construction and expansion of the Company's network which require
significant expenditures, a substantial portion of which is incurred before
the realization of revenues; the increased depreciation expense related to
those networks and amortization of intangibles related to acquisitions; and
net interest expense on indebtedness to fund market expansion, network
development and acquisitions.
Operating loss before depreciation, amortization and other non-recurring
operating expenses increased from a negative $17.3 million for the year ended
December 31, 1996 to a negative $31.5 million for the year ended December 31,
1997, an increase of $14.2 million. The change reflected the increase in the
operating loss incurred in 1997 due primarily to the expansion of the
Company's local, long distance and other telecommunications services as
described above.
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.
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
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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 repayment 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.
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 non-recurring
operating expenses increased 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, an increase 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. 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
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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.
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.
Operating loss before depreciation, amortization and other non-recurring
operating expenses 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's total assets increased to $1.6 billion at March 31, 1998 from
$1.3 billion at December 31, 1997 and $453 million at December 31, 1996,
primarily due to the net proceeds of approximately $292.6 million from the
Offering in March 1998, the net proceeds of approximately $506.5 million from
the Company's private offerings of the 1997 Senior Discount Notes and the 1997
Senior Notes in March 1997 and July 1997, respectively, and the acquisition of
CCI in September 1997. At March 31, 1998, the Company's current assets of
$762.7 million exceeded its current liabilities of $138.1 million, providing
working capital of $624.6 million, which represents an increase of $246.1
million compared to December 31, 1997 primarily attributable to the net
proceeds from the Offering. At December 31, 1997, the Company's current assets
of $517.8 million exceeded its current liabilities of $139.3 million,
providing working capital of $378.5 million, which represents an increase of
$192.5 million compared to December 31, 1996 primarily attributable to the net
proceeds from the private offerings of the 1997 Senior Discount Notes and the
1997 Senior Notes. At December 31, 1996, the Company's current assets of
$224.4 million exceeded current liabilities of $38.4 million, providing
working capital of $186 million.
Net cash used in operating activities totaled $12.4 million, $8.8 million
and $11.8 million for the three months ended March 31, 1998, and the years
ended December 31, 1997 and 1996, respectively. During the three months ended
March 31, 1998, cash for operating activities was used primarily to fund the
Company's net loss
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of $30.3 million for such period. The Company also required cash to fund the
growth in trade receivables and deferred line installation costs of $6.2
million and $3.4 million, respectively, primarily as a result of the expansion
of the Company's local and long distance telecommunications services. During
the year ended December 31, 1997, cash for operating activities was used
primarily to fund the Company's net loss of $79.9 million for such period. The
Company also required cash to fund the growth in trade receivables and
deferred line installation costs of $15.9 million and $9.7 million,
respectively, offset by increases in accounts payable and accrued expenses of
$27.1 million, deferred revenues of $7.2 million and customer deposits of $3
million. 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 an increase in deferred revenue of $9.5
million.
Net cash used in investing activities totaled $289 million, $242.8 million
and $283.1 million during the three months ended March 31, 1998 and the years
ended December 31, 1997 and 1996, respectively. The expansion of the Company's
local and long distance telecommunications services, development and
construction of the Company's fiber optic network and other capital
expenditures resulted in purchases of equipment and fiber optic cable and
other property and equipment totaling $41.5 million, $151.3 million and $70.3
million during the three months ended March 31, 1998 and the years ended
December 31, 1997 and 1996, respectively. The Company also used cash of $390.4
million to acquire available-for-sale securities during the first three months
of 1998, offset by proceeds from sales and maturities of available-for-sale
securities of $149.9 million during the period. During the year ended December
31, 1997, the cash used in investing activities was partially offset by net
proceeds of $120.2 million from the sales and maturities of available-for-sale
securities.
In April and June 1997, the FCC granted the Company 26 "D" and "E" block
frequency PCS licenses and in September 1997 the Company acquired one
additional "E" block frequency license as a result of the CCI Acquisition (the
"CCI PCS License"), giving the Company 27 PCS licenses in a total of 25
markets covering areas of Iowa, Illinois, Minnesota, Nebraska and South
Dakota. The Company paid the FCC an aggregate of approximately $32.8 million
for the 26 PCS licenses granted to the Company by the FCC in April and June
1997. The Company made a deposit of $4.8 million with the FCC at the beginning
of the bidding process in 1996 and paid approximately $28 million during 1997
for the 26 PCS licenses. CCI paid the FCC for the CCI PCS License prior to the
CCI Acquisition. The Company will be required to make significant additional
expenditures to develop, construct and operate a PCS system.
During the three months ended March 31, 1998, the Company used an aggregate
of $5.7 million cash to acquire one directory from F.D.S.D. Rapid City, Inc.
in Rapid City, South Dakota, and one directory from Bi-Rite Directories, Inc.
in Springfield, Missouri, on March 17, 1998 and March 20, 1998, respectively.
During the year ended December 31, 1997, the Company used cash of $23.5
million to acquire substantially all of the assets of ESI Communications and
related entities in June 1997 and certain telephone directories published by
Fronteer Financial Holdings, Ltd., Indiana Directories, Inc., Smart Pages Inc.
and Yellow Pages Publishers, Inc. in February 1997, March 1997, September 1997
and September 1997, respectively.
On September 24, 1997, the Company issued an aggregate of 8,488,586 shares
of Class A Common Stock and paid approximately $155 million in cash to the
shareholders of CCI in exchange for all of the outstanding shares of CCI in a
transaction accounted for using the purchase method of accounting. The total
purchase price was approximately $382.1 million, which includes approximately
$3.4 million of estimated direct acquisition costs.
Net cash received from financing activities was $288.7 million and $487
million during the three months ended March 31, 1998 and the year ended
December 31, 1997, respectively, primarily as a result of the Offering in
March 1998, the Company's private offerings of the 1997 Senior Discount Notes
in March 1997 and the
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1997 Senior Notes in July 1997. Cash received from financing activities during
the year ended December 31, 1996 was $391.4 million and was primarily obtained
from 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 proceeds from its initial public offering.
On March 4, 1997, the Company completed the 1997 Senior Discount Note
Offering. The 1997 Senior Discount Notes were issued at an original issue
discount in which the Company received approximately $288.9 million in net
proceeds. The 1997 Senior Discount Notes accrete from March 4, 1997 at a rate
of 10 1/2% per year, compounded semi-annually to an aggregate principal amount
of $500 million by March 1, 2002. As of March 31, 1998, the accreted balance
of the 1997 Senior Discount Notes was $335.2 million. Interest will not accrue
on the 1997 Senior Discount Notes prior to March 1, 2002. Thereafter, interest
will accrue at a rate of 10 1/2% per annum and will be payable in cash semi-
annually in arrears on March 1 and September 1 of each year, commencing
September 1, 2002. The 1997 Senior Discount Notes are 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 33 1/3% of the
original principal amount of the 1997 Senior Discount Notes at a redemption
price of 110.5% of the accreted value thereof. In addition, in the event of a
Change of Control (as defined in the 1997 Senior Discount Note Indenture) of
the Company, each holder of 1997 Senior Discount Notes will have the right to
require the Company to repurchase all or any part of such holder's 1997 Senor
Discount Notes at a purchase 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 1997 Senor
Discount Notes will mature on March 1, 2007.
On July 21, 1997, the Company completed the 1997 Senior Note Offering in
which the Company received net proceeds of approximately $217.6 million.
Interest on the 1997 Senior Notes accrues at the rate of 9 1/4% per annum and
is payable in cash semi-annually in arrears on July 15 and January 15,
commencing January 15, 1998. The 1997 Senior notes are redeemable at the
option of the Company, in whole or in part, at any time on or after July 15,
2002 at 104.625% of their principal amount at maturity, plus accrued and
unpaid interest, declining to 100.000% of their principal amount at maturity,
plus accrued and unpaid interest, on or after July 15, 2005. In the event of
certain equity investments in the Company by certain strategic investors on or
before July 15, 2000, the Company may, at its option, use all or a portion of
the of the net proceeds from such sale to redeem up to 33 1/3% of the original
principal amount of the 1997 Senior Notes at a redemption price equal to
109.25% of the principal amount of the 1997 Senior Notes plus accrued and
unpaid interest thereon, if any, to but excluding the redemption date,
provided that at least 66 2/3% of the original principal amount of the 1997
Senior Notes would remain outstanding immediately after giving effect to such
redemption. In addition, in the event of a Change of Control (as defined in
the 1997 Senior Note Indenture) of the Company, each holder of 1997 Senior
Notes shall have the right to require the Company to repurchase all or any
part of such holder's 1997 Senior Notes at a purchase price equal to 101% of
the principal amount of the 1997 Senior Notes tendered by such holder plus
accrued and unpaid interest, if any, to any Change of Control Payment Date (as
defined in the 1997 Senior Note Indenture). The 1997 Senior Notes will mature
on July 15, 2007.
On March 16, 1998, the Company completed a private offering of the 1998
Senor Notes in which the Company received net proceeds of approximately $292.6
million. Interest on the 1998 Senior Notes accrues at the rate of 8 3/8% per
annum and is payable in cash semi-annually in arrears on March 15 and
September 15, commencing September 15, 1998. The 1998 Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time on
or after March 15, 2003 at 104.188% of their principal amount at maturity,
plus accrued and unpaid interest, declining to 100.000% of their principal
amount at maturity, plus accrued and unpaid interest, on or after March 15,
2006. In the event of certain equity investments in the Company by certain
strategic investors on or before March 15, 2001, the Company may, at its
option, use all or a portion of the net proceeds from such sale to redeem up
to 33 1/3% of the original principal amount of the 1998 Senior Notes at a
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redemption price equal to 108.375% of the principal amount of the 1998 Senior
Notes plus accrued and unpaid interest thereon, if any, to but excluding the
redemption date, provided that at least 66 2/3% of the original principal
amount of the 1998 Senior Notes would remain outstanding immediately after
giving effect to such redemption. In addition, in the event of a Change of
Control (as defined in the 1998 Senior Note Indenture) of the Company, each
holder of 1998 Senior Notes shall have the right to require the Company to
repurchase all or any part of such holder's 1998 Senior Notes at a purchase
price equal to 101% of the principal amount of the 1998 Senior Notes tendered
by such holder plus accrued and unpaid interest, if any, to any Change of
Control Payment Date (as defined in the 1998 Senior Note Indenture). The 1998
Senior Notes will mature on March 15, 2008.
The 1997 Senior Discount Notes, the 1997 Senior Notes and the 1998 Senior
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 senior to all existing and future subordinated
debt of the Company. The 1997 Senior Discount Notes, the 1997 Senior Notes and
the 1998 Senior 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 1997 Senior Discount
Notes, the 1997 Senior Notes and the 1998 Senior Notes also are effectively
subordinated to all existing and future third-party indebtedness and other
liabilities of the Company's subsidiaries.
The Indentures impose 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, redeem 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 interests of the Company.
As of March 31, 1998, the Company estimates that its aggregate capital
requirements for the remainder of 1998, 1999 and 2000 will be approximately
$850 million. The Company's estimated capital requirements include the
estimated cost of (i) developing and constructing its fiber optic network,
which in the future is expected to include the expansion of intra-city fiber
optic networks, (ii) market expansion activities, (iii) developing,
constructing and operating a PCS system and (iv) completing construction of
its new corporate headquarters and associated buildings. These capital
requirements are expected to be funded, in large part, out of the
approximately $292.6 million in net proceeds from the Offering, the
approximately $308 million in net proceeds remaining from the 1997 Senior
Discount Note Offering and the 1997 Senior Note Offering, additional debt and
equity issuances 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.
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. As of the date hereof, the Company is negotiating with a major bank
to obtain one or more syndicated credit facilities. There can be no assurance,
however, that the Company will be successful in obtaining such credit
facilities on terms acceptable to the Company or at all, or that the Company
will otherwise 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 "Risk Factors--Significant Capital Requirements."
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MARKET RISK
At March 31, 1998 and December 31, 1997, marketable equity securities of the
Company were recorded at a fair value of $34.2 million and $27.5 million,
respectively. The marketable equity securities held by the Company have
exposure to price risk. A hypothetical ten percent adverse change in quoted
market prices would amount to a decrease in the recorded value of investments
of approximately $3.4 million and $2.8 million at March 31, 1998 and December
31, 1997, respectively. The Company believes its exposure to market rate
fluctuations on all other investments is nominal due to the short-term nature
of its investment portfolio.
The Company has no material future earnings or cash flow exposures from
changes in interest rates on its long-term debt obligations, as substantially
all of the Company's long-term debt obligations are fixed rate obligations.
YEAR 2000 DATE CONVERSION
The Company is currently working to verify system readiness for the
processing of date-sensitive information by the Company's computerized
information systems. The Year 2000 problem impacts computer programs and
hardware timers using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive functions may
recognize a date using "00" as the year 1900 rather than 2000, which could
result in miscalculations or system failures. The Company is conducting a
review of its computer systems and programs to determine which, if any,
systems and programs are not capable of recognizing the year 2000 and to
verify system readiness for the millennium date change. The Company is in the
process of confirming with its key vendors that they will be Year 2000 ready.
The total cost of addressing potential problems, which will be expensed as
incurred, is not known as of the date hereof. Based on the preliminary
information, however, such costs are not currently expected to have a material
adverse effect on the Company's financial position, results of operations or
cash flows in future periods. However, if the Company, its customers or
vendors are unable to resolve such processing issues in a timely manner, it
could have a material adverse effect on future operations. Accordingly, the
Company plans to devote the necessary resources to resolve all significant
year 2000 issues in a timely manner. While the Company's efforts are designed
to be successful, because of the complexity of the Year 2000 issues and the
interdependence of organizations using computer systems, there can be no
assurance that the Company's efforts, or those of a third party with whom the
Company interacts, will be satisfactorily completed in a timely fashion.
EFFECTS OF NEW ACCOUNTING STANDARD
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This
pronouncement is effective for calendar year 1998 financial statements and
requires reporting segment information consistent with the way executive
management of an entity disaggregates its operations internally to assess
performance and make decisions regarding resource allocations. Among
information to be disclosed, SFAS 131 requires an entity to report a measure
of segment profit or loss, certain specific revenue and expense items and
segment assets. SFAS 131 also requires reconciliations of total segment
revenues, total segment profit or loss and total segment assets to the
corresponding amounts shown in the entity's consolidated financial statements.
The Company is in the process of identifying reportable segments and has not
yet determined the effect of implementing SFAS 131.
INFLATION
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
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DESCRIPTION OF THE 1998 EXCHANGE NOTES
GENERAL
The 1998 Senior Notes were, and the 1998 Exchange Notes will be, issued
under an indenture dated as of March 16, 1998 (the "1998 Senior Note
Indenture") between the Company and United States Trust Company of New York,
as trustee under the 1998 Senior Note Indenture (the "Trustee"). For purposes
of this Description of the 1998 Exchange Notes, the term "Company" refers to
McLeodUSA Incorporated and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the 1998 Exchange Notes are identical in all material respects
to the 1998 Senior Notes, except that (i) the 1998 Exchange Notes have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the 1998 Senior Notes and (ii)
Holders of the 1998 Exchange Notes will not be entitled to certain rights of
Holders of 1998 Senior Notes under the Registration Agreement. The terms of
the 1998 Exchange Notes include those stated in the 1998 Senior Note Indenture
and those made a part of the 1998 Senior Note Indenture by reference to the
Trust Indenture Act of 1939 as in effect on the date of the 1998 Senior Note
Indenture (the "Trust Indenture Act"). The 1998 Exchange Notes are subject to
all such terms, and Holders of the 1998 Exchange Notes are referred to the
1998 Senior Note Indenture and the Trust Indenture Act for a complete
statement of such terms. A copy of the 1998 Senior Note Indenture is available
from the Company on request. The statements and definitions of terms under
this caption relating to the 1998 Exchange Notes and the 1998 Senior Note
Indenture are summaries and do not purport to be complete. Such summaries make
use of certain terms defined in the 1998 Senior Note Indenture and are
qualified in their entirety by express reference to the 1998 Senior Note
Indenture. Certain terms used herein are defined below under "--Certain
Definitions."
The 1998 Exchange Notes will rank pari passu in right of payment with the
1997 Senior Discount Notes, the 1997 Senior Notes, the 1998 Senior Notes and
all other existing and future senior unsecured indebtedness of the Company and
will rank senior in right of payment to all existing and future subordinated
indebtedness of the Company. As of March 31, 1998, the Company had no
outstanding subordinated indebtedness and, other than the 1997 Senior Discount
Notes and the 1997 Senior Notes, had no outstanding indebtedness that would
rank pari passu with the 1998 Exchange Notes. The 1998 Exchange Notes will not
be secured by any assets and will be effectively subordinated to any existing
and future secured indebtedness of the Company and its subsidiaries, including
any Senior Credit Facility or Qualified Receivable Facility, to the extent of
the value of the assets securing such indebtedness. As of March 31, 1998, the
total secured indebtedness of the Company and its subsidiaries was
approximately $26 million.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the 1998 Exchange Notes and will not guarantee the 1998
Exchange Notes. As a result, the 1998 Exchange Notes will be effectively
subordinated to all existing and future third-party indebtedness (including
any Senior Credit Facility or any applicable Qualified Receivable Facility)
and other liabilities of the Company's subsidiaries (including trade
payables). As of March 31, 1998, the total liabilities of the Company's
subsidiaries (after the elimination of loans and advances by the Company to
its subsidiaries) were approximately $223 million. Any rights of the Company
and its creditors, including the Holders of 1998 Exchange Notes, to
participate in the assets of any of the Company's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors (including trade creditors).
PRINCIPAL, MATURITY AND INTEREST
The 1998 Exchange Notes will be limited in principal amount to $300 million
and will mature on March 15, 2008. Interest on the 1998 Exchange Notes will
accrue at the rate of 8 3/8% per annum and will be payable in cash semi-
annually in arrears on March 15 and September 15 of each year, commencing
September 15, 1998. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
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<PAGE>
Principal and interest will be payable at the office of the Paying Agent
but, at the option of the Company, interest may be paid by check mailed to the
registered Holders at their registered addresses. The 1998 Exchange Notes will
be issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and any integral multiples of $1,000 in excess
thereof. Unless otherwise designated by the Company, the Company's office or
agency in New York will be the office of the Trustee maintained for such
purpose.
The interest rate on the 1998 Exchange Notes will be subject to increase in
certain circumstances if the registration statement is not declared effective
on a timely basis or if certain other conditions are not satisfied, all as
further described under "--Exchange Offer; Registration Rights." All
references herein to interest shall include such Special Interest, if
appropriate.
BOOK-ENTRY SYSTEM
The 1998 Exchange Notes will initially be issued in the form of one or more
Global Securities (as defined in the 1998 Senior Note Indenture) held in book-
entry form. The 1998 Exchange Notes will be deposited with the Trustee as
custodian for the Depository, and the Depository or its nominee will initially
be the sole registered Holder of the 1998 Exchange Notes for all purposes
under the 1998 Senior Note Indenture. Except as set forth below, a Global
Security may not be transferred except as a whole by the Depository to a
nominee of the Depository or by a nominee of the Depository to the Depository.
The 1998 Exchange Notes that are issued as described below under "--
Certificated Notes" will be issued in definitive form.
Upon the transfer of a 1998 Exchange Note in definitive form, such 1998
Exchange Note will, unless the Global Security has previously been exchanged
for 1998 Exchange Notes in definitive form, be exchanged for an interest in
the Global Security representing the principal amount 1998 Exchange Notes
being transferred.
Upon the issuance of a Global Security, the Depository or its nominee will
credit, on its internal system, the accounts of persons holding through it
with the respective principal amounts of the individual beneficial interests
represented by such Global Security purchased by such persons in the Offering.
Ownership of beneficial interests in a Global Security will be limited to
persons that have accounts with the Depository ("participants") or persons
that may hold interests through participants. Ownership of beneficial
interests by participants in a Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depository or its nominee for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal of, premium, if any, on and interest on 1998 Exchange
Notes represented by any such Global Security will be made to the Depository
or its nominee, as the case may be, as the sole registered owner and the sole
Holder of the 1998 Exchange Notes represented thereby for all purposes under
the 1998 Senior Note Indenture. None of the Company, the Trustee, any agent of
the Company or the Initial Purchasers will have any responsibility or
liability for (i) any aspect of the Depository's reports relating to or
payments made on account of beneficial ownership interests in a Global
Security representing any 1998 Exchange Notes or for maintaining, supervising
or reviewing any of the Depository's records relating to such beneficial
ownership interests or (ii) any other matter relating to the actions and
practices of the Depository or any of its participants.
The Company has been advised by the Depository that upon receipt of any
payment of principal of, premium, if any, on or interest on any Global
Security, the Depository will immediately credit, on its book-entry
registration and transfer system, the accounts of participants with payments
in amounts proportionate to their respective beneficial interests in the
principal or face amount of such Global Security, as shown on the records
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of the Depository. The Company expects that payments by participants to owners
of beneficial interests in a Global Security held through such participants
will be governed by standing instructions and customary practices as is now
the case with securities held for customer accounts registered in "street
name" and will be the sole responsibility of such participants.
So long as the Depository or its nominee is the registered owner or Holder
of such Global Security, the Depository or such nominee, as the case may be,
will be considered the sole owner or Holder of the 1998 Exchange Notes
represented by such Global Security for the purposes of receiving payment on
the 1998 Exchange Notes, receiving notices and for all other purposes under
the 1998 Senior Note Indenture and the 1998 Exchange Notes. Beneficial
interests in 1998 Exchange Notes will be evidenced only by, and transfers
thereof will be effected only through, records maintained by the Depository
and its participants. Except as provided above, owners of beneficial interests
in a Global Security will not be entitled to and will not be considered the
Holders of such Global Security for any purposes under the 1998 Senior Note
Indenture. Accordingly, each person owning a beneficial interest in a Global
Security must rely on the procedures of the Depository and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a Holder under the 1998
Senior Note Indenture. The Company understands that, under existing industry
practices, in the event that the Company requests any action of Holders or
that an owner of a beneficial interest in a Global Security desires to give or
take any action that a Holder is entitled to give or take under the 1998
Senior Note Indenture, the Depository would authorize the participants holding
the relevant beneficial interest to give or take such action, and such
participants would authorize beneficial owners owning through such
participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
The Depository has advised the Company that it will take any action
permitted to be taken by a Holder of 1998 Exchange Notes (including the
presentation of 1998 Exchange Notes for exchange as described below) only at
the direction of one or more participants to whose account with the Depository
interests in the Global Security are credited and only in respect of such
portion of the aggregate principal amount of the 1998 Exchange Notes as to
which such participant or participants has or have given such direction.
The Depository has advised the Company that the Depository is a limited-
purpose trust company organized under the Banking Law of the State of New
York, a "banking organization" within the meaning of New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Depository was created to hold the securities of its
participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of the participants, thereby eliminating the
need for physical movement of securities certificates. The Depository's
participants include securities brokers and dealers (including the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations some of whom (and/or their representatives) own the Depository
Access to the Depository's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that the Company
believes to be reliable, but the Company takes no responsibility for the
accuracy thereof.
CERTIFICATED NOTES
The 1998 Exchange Notes represented by a Global Security are exchangeable
for certificated 1998 Exchange Notes only if (i) the Depository notifies the
Company that it is unwilling or unable to continue as a depository for such
Global Security or if at any time the Depository ceases to be a clearing
agency registered under the Exchange Act, and a successor depository is not
appointed by the Company within 90 days, (ii) the Company executes and
delivers to the Trustee a notice that such Global Security shall be so
transferable,
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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 1998 Exchange Notes represented by such Global Security. Any Global
Security that is exchangeable for certificated 1998 Exchange Notes pursuant to
the preceding sentence will be transferred to, and registered and exchanged
for, certificated 1998 Exchange Notes in authorized denominations and
registered in such names as the Depository or its nominee holding such Global
Security may direct. Subject to the foregoing, a Global Security is not
exchangeable, except for a Global Security of like denomination to be
registered in the name of the Depository or its nominee. In the event that a
Global Security becomes exchangeable for certificated 1998 Exchange Notes, (i)
certificated 1998 Exchange Notes will be issued only in fully registered form
in denominations of $1,000 or integral multiples thereof, (ii) payment of
principal, any repurchase price, and interest on the certificated 1998
Exchange Notes will be payable, and the transfer of the certificated 1998
Exchange Notes will be registrable, at the office or agency of the Company
maintained for such purposes and (iii) no service charge will be made for any
issuance of the certificated 1998 Exchange Notes, although the Company may
require payment of a sum sufficient to cover any tax or governmental charge
imposed in connection therewith.
OPTIONAL REDEMPTION
The 1998 Exchange Notes will be subject to redemption at the option of the
Company, in whole or in part, at any time on or after March 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' notice, in amounts
of $1,000 or an integral multiple of $1,000, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest thereon (if any), if redeemed during the twelve months
beginning March 15, 2003 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003............................................................ 104.188%
2004............................................................ 102.792%
2005............................................................ 101.396%
2006 and thereafter............................................. 100.000%
</TABLE>
The 1998 Exchange Notes will be redeemable prior to March 15, 2001 only in
the event that the Company receives net proceeds from the sale of its Common
Stock in a Strategic Equity Investment on or before March 15, 2001, in which
case the Company may, at its option, use all or a portion of any such net
proceeds to redeem up to 33 1/3% of the originally issued principal amount of
the 1998 Notes; provided, that at least 66 2/3% of the originally issued
principal amount of the 1998 Notes would remain outstanding after such
redemption. Such redemption must occur on a Redemption Date within 90 days of
such sale and upon not less than 30 nor more than 60 days' notice mailed to
each Holder of 1998 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 equal to 108.375% of the principal amount of the 1998 Notes
so redeemed, plus accrued and unpaid interest thereon (if any) to but
excluding the Redemption Date.
If less than all of the 1998 Notes are to be redeemed, the Trustee shall
select, in such manner as it shall deem fair and appropriate, the particular
1998 Notes to be redeemed or any portion thereof that is an integral multiple
of $1,000.
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MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control" and "--Asset Sales," the Company is not required to make
mandatory redemption payments or sinking fund payments with respect to the
1998 Exchange Notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require the Company to repurchase all or any part (equal to $1,000
principal amount or an integral multiple thereof) of such Holder's 1998
Exchange Notes pursuant to the offer described below (the "Change of Control
Offer") at a purchase price (the "Change of Control Purchase Price") equal to
101% of the principal amount of the 1998 Exchange Notes plus accrued and
unpaid interest, if any, to any Change of Control Payment Date.
Within 30 days following any Change of Control, the Company or the Trustee
(at the request and expense of the Company) shall mail a notice to each Holder
stating: (i) that a Change of Control Offer is being made pursuant to the
covenant described under "--Repurchase at the Option of Holders upon a Change
of Control" and that all 1998 Exchange Notes timely tendered will be accepted
for payment; (ii) the Change of Control Purchase Price and the purchase date
(the "Change of Control Payment Date"), which shall be no earlier than 30 days
nor later than 60 days from the date such notice is mailed; (iii) that any
1998 Exchange Notes or portions thereof not tendered or accepted for payment
will continue to accrue interest; (iv) that, unless the Company defaults in
the payment of the Change of Control Purchase Price, all 1998 Exchange Notes
or portions thereof accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest from and after the Change of Control
Payment Date; (v) that Holders electing to have any 1998 Exchange Notes or
portions thereof purchased pursuant to a Change of Control Offer will be
required to surrender their 1998 Exchange Notes prior to the close of business
on the third Business Day preceding the Change of Control Payment Date; (vi)
that Holders will be entitled to withdraw their 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 1998 Exchange Notes delivered for purchase, and a statement that
such Holder is withdrawing its election to have such 1998 Exchange Notes or
portions thereof purchased; (vii) that Holders electing to have 1998 Exchange
Notes purchased pursuant to the Change of Control Offer must specify the
principal amount that is being tendered for purchase, which principal amount
must be $1,000 or an integral multiple thereof; (viii) that Holders whose 1998
Exchange Notes are being purchased only in part will be issued new 1998
Exchange Notes equal in principal amount to the unpurchased portion of the
1998 Exchange Note or 1998 Exchange Notes surrendered, which unpurchased
portion must be equal to $1,000 in principal amount or an integral multiple
thereof; and (ix) any other information necessary to enable any Holder to
tender 1998 Exchange Notes and to have such 1998 Exchange Notes purchased
pursuant to the 1998 Senior Note Indenture.
The Company will 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 repurchase of 1998
Exchange Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (i) accept for
payment 1998 Exchange Notes or portions thereof properly tendered pursuant to
the Change of Control Offer; (ii) irrevocably deposit with the Paying Agent in
immediately available funds an amount equal to the Change of Control Purchase
Price in respect of all 1998 Exchange Notes or portions thereof so accepted;
and (iii) deliver, or cause to be delivered, to the Trustee the 1998 Exchange
Notes so accepted together with an Officers' Certificate listing the 1998
Exchange Notes or portions thereof tendered to the Company and accepted for
payment. The Paying Agent shall promptly mail to each Holder of 1998 Exchange
Notes so accepted payment in an amount equal to the Change of Control Purchase
Price for such 1998 Exchange Notes, and the Trustee shall promptly
authenticate and mail to each Holder a new 1998 Exchange Note equal in
principal amount to any unpurchased portion of the 1998 Exchange
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Notes surrendered, if any; provided that each such new 1998 Exchange Note
shall be in a principal amount of $1,000 or any integral multiple thereof.
The existence of the Holders' right to require, subject to certain
conditions, the Company to repurchase 1998 Exchange Notes upon a Change of
Control may deter a third party from acquiring the Company in a transaction
that constitutes a Change of Control. If a Change of Control Offer is made,
there can be no assurance that the Company will have sufficient funds to pay
the Change of Control Purchase Price for all 1998 Exchange Notes tendered by
Holders seeking to accept the Change of Control Offer. In addition,
instruments governing other indebtedness of the Company may prohibit the
Company from purchasing any 1998 Exchange Notes prior to their Stated
Maturity, including pursuant to a Change of Control Offer. In the event that a
Change of Control Offer occurs at a time when the Company does not have
sufficient available funds to pay the Change of Control Purchase Price for all
1998 Exchange Notes tendered pursuant to such offer or at a time when the
Company is prohibited from purchasing the 1998 Exchange Notes (and the Company
is unable either to obtain the consent of the holders of the relevant
indebtedness or to repay such indebtedness), an Event of Default would occur
under the 1998 Senior Note Indenture. In addition, one of the events that
constitutes a Change of Control under the 1998 Senior Note Indenture is a
sale, conveyance, transfer or lease of all or substantially all of the
property of the Company. The 1998 Senior Note Indenture is governed by New
York law, and there is no established definition under New York law of
"substantially all" of the assets of a corporation. Accordingly, if the
Company were to engage in a transaction in which it disposed of less than all
of its assets, a question of interpretation could arise as to whether such
disposition was of "substantially all" of its assets and whether the Company
was required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the 1998
Senior Note Indenture does not contain any other provisions that permit
Holders of 1998 Exchange Notes to require that the Company repurchase or
redeem 1998 Exchange Notes in the event of a takeover, recapitalization or
similar restructuring.
ASSET SALES
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an 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% of the consideration received by the Company or such Restricted
Subsidiary for such Property or assets consists of (a) cash, readily-
marketable cash equivalents, 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 1998 Exchange 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 the next paragraph.
Within 360 days after 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 Indebtedness to a Restricted
Subsidiary) that is senior to or pari passu with the 1998 Exchange Notes or to
the permanent reduction of Indebtedness or preferred stock of any Restricted
Subsidiary (other than Indebtedness to, or preferred stock owned by, the
Company or another Restricted Subsidiary). Any Net Cash Proceeds from any
Asset Sale that are not used to reinvest in Telecommunications Assets or in
Capital Stock of any Person engaged in the Telecommunications Business and/or
to reduce senior or pari passu Indebtedness of the Company or Indebtedness or
preferred stock of its Restricted Subsidiaries shall constitute Excess
Proceeds.
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If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $5 million, the Company shall, within 30 days, use such Excess
Proceeds to make an offer to purchase (an "Asset Sale Offer") on a pro rata
basis, from all Holders, 1998 Notes in an aggregate principal amount equal to
the maximum principal amount that may be purchased out of Excess Proceeds, at
a purchase price (the "Offer Purchase Price") in cash equal to 100% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
purchase date, in accordance with the procedures set forth in the 1998 Senior
Note Indenture. Upon completion of an Asset Sale Offer (including payment of
the Offer Purchase Price), 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.
The Company will 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 repurchase of 1998
Notes pursuant to an Asset Sale Offer.
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the 1998 Senior
Note Indenture:
Limitation on Consolidated Indebtedness
The Company will not, and will 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 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.
Notwithstanding the foregoing limitation, the Company and any Restricted
Subsidiary may Incur each and all of the following:
(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;
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(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 1998 Notes or Indebtedness outstanding at the date of
the 1998 Senior Note 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 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
1998 Notes or Indebtedness which is pari passu to the 1998 Notes or
Indebtedness which is subordinate in right of payment to the 1998 Notes
shall only be permitted under this clause (v) if (A) in the case of any
refinancing of the 1998 Notes or Indebtedness which is pari passu to the
1998 Notes, the refinancing Indebtedness is made pari passu to the 1998
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
under "--Repurchase at the Option of Holders upon a Change of Control;"
(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
(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.
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Notwithstanding any other provision of this "--Certain Covenants--Limitation
on Consolidated Indebtedness" covenant, the maximum amount of Indebtedness
that the Company or a Restricted Subsidiary may Incur pursuant to this "--
Certain Covenants--Limitation on Consolidated Indebtedness" covenant shall not
be deemed to be exceeded due solely as the result of fluctuations in the
exchange rates of currencies.
For purposes of determining any particular amount of Indebtedness under this
"--Certain Covenants--Limitation on Consolidated Indebtedness" covenant, (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 the "--Certain Covenants--Limitation on
Liens" covenant described below shall not be treated as Indebtedness. For
purposes of determining compliance with this "--Certain Covenants--Limitation
on Consolidated Indebtedness" covenant, 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.
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries
The Company will 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 1998
Senior Note Indenture after giving effect to the application of the
proceeds of the 1998 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 "--Certain
Covenants--Limitation on Consolidated Indebtedness;"
(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
"--Certain Covenants--Limitation on Consolidated Indebtedness;"
(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;
(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
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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 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
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 under
"Repurchase at the Option of Holders upon a Change of Control" 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; and
(ix) Indebtedness Incurred or Preferred Stock issued by a Restricted
Subsidiary, provided that the Fair Market Value of the Company's Investment
in all Restricted Subsidiaries which Incur Indebtedness or issue Preferred
Stock pursuant to this clause (ix) shall not exceed, at any time, $30
million in the aggregate, provided further, that such Indebtedness Incurred
is otherwise permitted pursuant to the covenant described under "--
Limitation on Consolidated Indebtedness."
Limitation on Restricted Payments
The Company will 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 "--
Certain Covenants--Limitation on Consolidated Indebtedness"; 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
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each case to the Company or any 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"), 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 1998 Senior Note
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 the 1998 Senior Note Indenture.
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; (ii) retiring (A) any Capital
Stock of the Company or any Restricted Subsidiary of the Company, (B)
Indebtedness of the Company that is subordinate to the 1998 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 1998 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 1998 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 the covenant described under "--Certain Covenants--Limitation
on Consolidated Indebtedness" (in the case of Indebtedness of the Company) and
"--Certain Covenants--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries" (in the case of Indebtedness of Restricted
Subsidiaries) and that (A) is not 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 1998 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 under "--Consolidation, Merger,
Conveyance, Lease or Transfer"; (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; (viii)
making Investments in any Person primarily engaged in the Telecommunications
Business; provided, that the aggregate amount of such Investments does not
exceed at any time the sum of (A) $30 million plus (B) the amount of Net Cash
Proceeds received by the Company after the Issue Date as a capital
contribution or from the sale of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company, except to the
extent such Net Cash Proceeds are used to make Restricted Payments permitted
pursuant to clauses (x), (y) and (z) of the first paragraph, or clause (ii) or
this clause (viii) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (C) the net reduction in Investments made pursuant to
this clause (viii) resulting from distributions on or repayments of such
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Investments or from the Net Cash Proceeds from the sale of any such Investment
(except in each case to the extent any such payment or proceeds are included
in the calculation of Consolidated Net Income) or from such Person becoming a
Restricted Subsidiary (valued in each case as provided in the definition of
"Investment"), provided that the net reduction in any Investment shall not
exceed the amount of such Investment; and (ix) making Investments not
otherwise permitted in an aggregate amount not to exceed $15 million at any
time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (ii), (iii) and (iv) of the
foregoing paragraph shall not be included as Restricted Payments.
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.
Limitation on Liens
The Company may not, and may 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
provision for securing the 1998 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 1998 Notes, prior to such
Indebtedness as to such property for so long as such Indebtedness will be so
secured.
The foregoing restrictions shall not apply to: (i) Liens existing on the
date of the 1998 Senior Note Indenture and securing Indebtedness outstanding
on the date of the 1998 Senior Note 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 1998 Notes to secure Purchase Money Indebtedness
which is otherwise permitted under the 1998 Senior Note 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 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 "--Certain Covenants--Limitation on Consolidated
Indebtedness" (in the case of Indebtedness of the Company) or clause (viii) of
"--Certain Covenants--Limitation on Indebtedness and
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Preferred Stock of Restricted Subsidiaries" (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 1998 Notes;
and (ix) Permitted Liens.
Limitation on Sale and Leaseback Transactions
The Company will not, and will 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 the
covenant described under "--Certain Covenants--Limitation on Consolidated
Indebtedness" or "--Certain Covenants--Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries", 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 1998 Notes by the covenant described under
"--Certain Covenants--Limitation on Liens"; and (iv) the Net Cash Proceeds
from such transaction are applied in accordance with the covenant described
under "--Asset Sales"; provided that the Company shall be permitted to enter
into Sale and Leaseback Transactions for up to $30 million with respect to
construction of the Company's headquarters buildings located in Cedar Rapids,
Iowa, 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.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company will not, and will 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 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 pursuant to the 1998 Senior Note Indenture or
any other agreement relating to any Existing Indebtedness or any Indebtedness
under a Qualified Receivable Facility otherwise permitted under the 1998
Senior Note 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 1998 Senior Note 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
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Subsidiary otherwise permitted under the 1998 Senior Note 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 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 "--Certain Covenants--Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any other Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted under
the "--Certain Covenants--Limitation on Liens" covenant 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 "-- Certain Covenants--
Limitation on Consolidated Indebtedness" or "--Certain Covenants--Limitations
on Indebtedness and Preferred Stock of Restricted Subsidiaries", as the case
may be.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Company (i) shall not permit any Restricted 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 "--Certain Covenants--
Limitation on Restricted Payments" 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 "--Asset Sales"; (b) a sale of the
Capital Stock of a Restricted Subsidiary sold in a transaction not prohibited
by the covenant described under "--Asset Sales" if, after giving effect
thereto, greater than 50% of the Capital Stock of such Restricted Subsidiary
is owned by the Company or by a Wholly-Owned Restricted Subsidiary; (c)
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;
(d) 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;
(e) any Preferred Stock permitted to be issued under "--Certain Covenants--
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries";
and (f) ownership by any Person other than the Company or a Subsidiary of less
than 50% of the Capital Stock of a Person (A) in which the Company or a
Restricted Subsidiary has made a Permitted Investment pursuant to clause (iii)
of the definition of "Permitted Investments", (B) of which more than 50% of
such Person's Capital Stock is owned, directly or indirectly, by the Company
and (C) as to which the Company has the power to direct the policies,
management and affairs.
Transactions with Affiliates
The Company will not, and will 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 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
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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 the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments"; (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 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).
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 the first paragraph of "--Certain Covenants--
Limitation on Restricted Payments" 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 will not, and will 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 $1.00 of additional
Indebtedness pursuant to the first paragraph of "--Certain Covenants--
Limitation on Consolidated Indebtedness" 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
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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.
Reports
The Company has agreed that, for so long as any 1998 Notes remain
outstanding, it will furnish to the Holders of the 1998 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 will 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 Exchange Act, the Company will nevertheless
continue to file such reports with the Commission (unless the Commission will
not accept such a filing) and the Trustee. The Company will furnish copies of
the SEC Reports to the Holders of 1998 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.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
The Company will not, in any transaction or series of 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 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 the
Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b) 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 the
Restricted Subsidiaries taken as a whole (such corporation or Person, 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 a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the 1998 Notes and
the performance of the Company's covenants and obligations under the 1998
Senior Note Indenture;
(ii) immediately after giving effect to such transaction or series of
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), no Event of
Default or Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
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 at least $1.00 of additional Indebtedness pursuant to
the first paragraph of "--Certain Covenants--Limitation on Consolidated
Indebtedness" 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
(iv) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the 1998
Senior Note Indenture described under "--Certain Covenants--Limitation on
Liens" above, the Company or the successor entity to the Company shall have
secured the 1998 Notes as required thereby.
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EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the 1998 Senior Note
Indenture:
(a) default in the payment of interest on any 1998 Note when the same
becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any 1998 Note at its maturity, upon 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
1998 Note as required;
(c) the Company fails to comply with any of its covenants or agreements
described under "--Repurchase at the Option of the Holders upon a Change of
Control," "--Asset Sales" or "--Consolidation, Merger, Conveyance, Lease or
Transfer";
(d) default in the performance, or breach, of any covenant or warranty of
the Company in the 1998 Senior Note Indenture (other than a covenant or
warranty addressed in (a), (b) or (c) above) and continuance of such
Default or breach for a period of 60 days after written notice thereof has
been given to the Company by the Trustee or to the Company and the Trustee
by Holders of at least 25% of the aggregate principal amount of the
outstanding 1998 Notes;
(e) Indebtedness of the Company or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by
the Holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more final
judgments against the Company or any Restricted Subsidiary in an uninsured
or unindemnified aggregate amount in excess of $10 million which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of
45 consecutive days;
(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 in an involuntary case or proceeding under U.S. 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 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 under U.S. 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 or of any substantial part of the
Property or assets of the Company or any Restricted Subsidiary, or ordering
the winding up or liquidation of the affairs of the Company or any
Restricted Subsidiary, 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 days; or
(h) (i) the commencement by the Company or any Restricted Subsidiary of a
voluntary case or proceeding under U.S. 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 to the entry of a decree or
order for relief in respect of the Company or any Restricted Subsidiary in
an involuntary case or proceeding under U.S. 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; or (iii) the filing by the Company or any Restricted
Subsidiary of a petition or answer or consent seeking reorganization or
relief under U.S. 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 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 or of any substantial part of the Property or assets of the
Company or any Restricted Subsidiary, or the making by the Company or any
Restricted Subsidiary of an assignment for the benefit of creditors; or
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(v) the admission by the Company or any Restricted Subsidiary 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 in
furtherance of any such action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
Trustee or the Holders of not less than 25% of the outstanding aggregate
principal amount of 1998 Notes may declare the Default Amount (as defined
herein) and any accrued and unpaid interest on all 1998 Notes then outstanding
to be immediately due and payable by a notice in writing to the Company (and
to the Trustee if given by Holders of the 1998 Notes), and upon any such
declaration, such Default Amount and any accrued interest will become and be
immediately due and payable. If any Event of Default specified in clause (g)
or (h) above occurs, the Default Amount and any accrued and unpaid interest on
the 1998 Notes then outstanding shall become immediately due and payable
without any declaration or other act on the part of the Trustee or any Holder
of 1998 Notes. In the event of a declaration of acceleration because an Event
of Default set forth in clause (e) above 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 clause (e)
shall be remedied, or cured or waived by the Holders of the relevant
Indebtedness, within 60 days after such event of default, provided that no
judgement or decree for the payment of money due on the 1998 Notes has been
obtained by the Trustee. The Default Amount shall equal 100% of the principal
amount of the 1998 Notes. Under certain circumstances, the Holders of a
majority in principal amount of the outstanding 1998 Notes by notice to the
Company and the Trustee may rescind an acceleration and its consequences.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the 1998 Senior Note Indenture, and the Company is
required within 30 days after becoming aware of any Default or Event of
Default, to deliver to the Trustee a statement describing such Default or
Event of Default, its status and what action the Company is taking or proposes
to take with respect thereto. The Trustee may withhold from Holders of the
1998 Notes notice of any continuing Default or Event of Default (other than
relating to the payment of principal or interest) if the Trustee determines
that withholding such notice is in the Holders' interest.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any Holder of 1998 Notes, enter into one or more
indentures supplemental to the 1998 Senior Note Indenture (1) to evidence the
succession of another Person to the Company and the assumption by such
successor of the covenants of the Company in the 1998 Senior Note Indenture
and the 1998 Notes; (2) to add to the covenants of the Company, for the
benefit of the Holders, or to surrender any right or power conferred upon the
Company by the 1998 Senior Note Indenture; (3) to add any additional Events of
Default; (4) to provide for uncertificated 1998 Notes in addition to or in
place of certificated 1998 Notes; (5) to evidence and provide for the
acceptance of appointment under the 1998 Senior Note Indenture of a successor
Trustee; (6) to secure the 1998 Notes; (7) to cure any ambiguity in the 1998
Senior Note Indenture, to correct or supplement any provision in the 1998
Senior Note Indenture which may be inconsistent with any other provision
therein or to add any other provisions with respect to matters or questions
arising under the 1998 Senior Note Indenture; provided such actions shall not
adversely affect the interests of the Holders in any material respect; or (8)
to comply with the requirements of the Commission in order to effect or
maintain the qualification of the 1998 Senior Note Indenture under the Trust
Indenture Act.
With the consent of the Holders of not less than a majority in principal
amount of the outstanding 1998 Notes, the Company and the Trustee may enter
into one or more indentures supplemental to the 1998 Senior Note Indenture for
the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the 1998 Senior Note Indenture or
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 1998 Note: (1) change the Stated Maturity of the principal of, or
any installment of interest on, any 1998 Note, or alter the redemption
provisions thereof, or reduce the principal amount thereof (or premium, if
any), or the interest thereon
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that would be due and payable upon Maturity thereof, or change the place of
payment where, or the coin or currency in which, any 1998 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; (2) reduce
the percentage in principal amount of the outstanding 1998 Notes, the consent
of whose Holders is necessary for any such supplemental indenture or required
for any waiver of compliance with certain provisions of the 1998 Senior Note
Indenture or certain Defaults thereunder; (3) subordinate in right of payment,
or otherwise subordinate, the 1998 Notes to any other Indebtedness; or (4)
modify any provision of this paragraph (except to increase any percentage set
forth herein).
The Holders of not less than a majority in principal amount of the
outstanding 1998 Notes may, on behalf of the Holders of all the 1998 Notes,
waive any past Default under the 1998 Senior Note Indenture and its
consequences, except a Default (1) in the payment of the principal of (or
premium, if any) or interest on any 1998 Note, or (2) in respect of a covenant
or provision hereof which under the proviso to the prior paragraph cannot be
modified or amended without the consent of the Holder of each outstanding 1998
Note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company may terminate its obligations under the 1998 Senior Note
Indenture when (i) either (A) all outstanding 1998 Notes have been delivered
to the Trustee for cancellation or (B) all such 1998 Notes not theretofore
delivered to the Trustee for cancellation have become due and payable, will
become due and payable within one year or 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 has irrevocably deposited or caused to
be deposited with the Trustee funds in an amount sufficient to pay and
discharge the entire indebtedness on the 1998 Notes not theretofore delivered
to the Trustee for cancellation, for principal of (or premium, if any, on) and
interest to the date of deposit or maturity or date of redemption; (ii) the
Company has paid or caused to be paid all sums payable by the Company under
the 1998 Senior Note Indenture; and (iii) the Company has delivered an
Officers' Certificate and an Opinion of Counsel relating to compliance with
the conditions set forth in the 1998 Senior Note Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the 1998 Notes and the 1998 Senior Note Indenture shall
cease to be of further effect as to all outstanding 1998 Notes (except as to
(i) rights of registration of transfer, substitution and exchange of 1998
Notes and the Company's right of optional redemption, (ii) rights of Holders
to receive payments of principal of, premium, if any, and interest on the 1998
Notes (but not the Change of Control Purchase Price or the Offer Purchase
Price) and any rights of the Holders with respect to such amounts, (iii) the
rights, obligations and immunities of the Trustee under the 1998 Senior Note
Indenture and (iv) certain other specified provisions in the 1998 Senior Note
Indenture) or (b) cease to be under any obligation to comply with certain
restrictive covenants including those described under "--Certain Covenants,"
after the irrevocable deposit by the Company with the Trustee, in trust for
the benefit of the Holders, at any time prior to the maturity of the 1998
Notes, of (A) money in an amount, (B) U.S. Government Obligations which
through the payment of interest and principal will provide, not later than one
day before the due date of payment in respect of the 1998 Notes, money in an
amount, or (C) a combination thereof, sufficient to pay and discharge the
principal of, and interest on, the 1998 Notes then outstanding on the dates on
which any such payments are due in accordance with the terms of the 1998
Senior Note Indenture and of the 1998 Notes. Such defeasance or covenant
defeasance shall be deemed to occur only if certain conditions are satisfied,
including, among other things, delivery by the Company to the Trustee of an
opinion of counsel reasonably acceptable to the Trustee to the effect that (i)
such deposit, defeasance and discharge will not be deemed, or result in, a
taxable event for federal income tax purposes with respect to the Holders; and
(ii) the Company's deposit will not result in the Trust or the Trustee being
subject to regulation under the Investment Company Act of 1940.
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THE TRUSTEE
United States Trust Company of New York is the Trustee under the 1998 Senior
Note Indenture and its current address is 114 West 47th Street, New York, New
York 10036.
The Holders of not less than a majority in principal amount of the
outstanding 1998 Notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
Trustee, subject to certain exceptions. Except during the continuance of an
Event of Default, the Trustee will perform only such duties as are
specifically set forth in the 1998 Senior Note Indenture. The 1998 Senior Note
Indenture provides that in case an Event of Default shall occur (which shall
not be cured or waived), the Trustee will be required, in the exercise of its
rights and powers under the 1998 Senior Note Indenture, to use the degree of
care of a prudent person in the conduct of such person's own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the 1998 Senior Note Indenture at the request of
any of the Holders of the 1998 Notes, unless such Holders shall have offered
to the Trustee indemnity satisfactory to it against any loss, liability or
expense.
NO PERSONAL LIABILITY OF CONTROLLING PERSONS, DIRECTORS, OFFICERS, EMPLOYEES
AND STOCKHOLDERS
No controlling Person, director, officer, employee, incorporator or
stockholder of the Company, as such, shall have any liability for any
covenant, agreement or other obligations of the Company under the 1998 Notes
or the 1998 Senior Note 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 1998 Note
each Holder waives and releases all such liability (but only such liability).
The waiver and release are part of the consideration for issuance of the 1998
Notes. Nonetheless, such waiver may not be effective to waive liabilities
under the federal securities laws and it has been the view of the Commission
that such a waiver is against public policy.
TRANSFER AND EXCHANGE
The 1998 Senior Notes are subject to certain restrictions on transfer. A
Holder may transfer or exchange 1998 Notes in accordance with the 1998 Senior
Note Indenture. The Company, the Registrar and the Trustee may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the 1998 Senior Note Indenture.
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into the Registration Agreement with the Initial
Purchasers, for the benefit of the holders of 1998 Senior Notes, pursuant to
which the Company agreed to file the Registration Statement (of which this
Prospectus constitutes a part) with the Commission. The Registration Agreement
provides that the Company will, at its cost, use its best efforts to cause the
Registration Statement to be declared effective under the Securities Act not
later than 150 days after the Closing Date (as defined in the Purchase
Agreement among the Company and the Initial Purchasers attached as an exhibit
to the Registration Statement of which this Prospectus is a part). Upon the
effectiveness of the Registration Statement, the Company will offer the 1998
Exchange Notes in exchange for surrender of the 1998 Senior Notes. The Company
has agreed to keep the 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 Exchange Offer is mailed to the holders of 1998 Senior Notes.
For each 1998 Senior Note surrendered to the Company pursuant to the Exchange
Offer, the holder of such 1998 Senior Note will receive a 1998 Exchange Note
having a principal amount equal to that of the surrendered 1998 Senior Note.
Under existing Commission interpretations, the 1998 Exchange Notes would be
freely transferable by holders other than affiliates of the Company after the
Exchange Offer without further registration under the Securities Act if the
holder of the 1998 Exchange Notes represents that it is acquiring the 1998
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 1998
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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 1998 Exchange Notes in the Exchange
Offer will have a prospectus delivery requirement with respect to resales of
such 1998 Exchange Notes. The Commission has taken the position that
Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to 1998 Exchange Notes with the prospectus contained
in the Registration Statement under certain circumstances. 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 this Prospectus in connection with the resale of such 1998
Exchange Notes.
A holder of 1998 Senior Notes (other than certain specified holders) who
wishes to exchange such 1998 Senior Notes for 1998 Exchange Notes in the
Exchange Offer will be required to represent that, among other things, any
1998 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
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 1998 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.
The Company has filed the Registration Statement and will commence the
Exchange Offer pursuant to the Registration Agreement. In the event that
applicable interpretations of the staff of the Commission do not permit the
Company to effect the Exchange Offer, or if for any other reason the Exchange
Offer is not consummated within 180 days after the Closing Date, or if the
Initial Purchasers so request with respect to 1998 Senior Notes not eligible
to be exchanged for 1998 Exchange Notes in the Exchange Offer, or if any
holder of 1998 Senior Notes does not receive freely tradeable 1998 Exchange
Notes in the Exchange Offer, the Company has agreed, at its cost, (a) as
promptly as practicable, to file a shelf registration statement (the "Shelf
Registration Statement") covering resales of the 1998 Senior Notes or the 1998
Exchange Notes, as the case may be, (b) to use its best efforts to cause the
Shelf Registration Statement to be declared effective under the Securities Act
and (c) to keep the Shelf Registration Statement effective until two years
after its effective date or such shorter period ending when all resales of
1998 Senior Notes or 1998 Exchange Notes covered by such Shelf Registration
Statement have been made. The Company has agreed, in the event a Shelf
Registration Statement is filed, among other things, to 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, to notify each such
holder when the Shelf Registration Statement has become effective and to take
certain other actions as are required to permit unrestricted resales of the
1998 Senior Notes or the 1998 Exchange Notes, as the case may be. A holder
selling such 1998 Senior Notes or 1998 Exchange Notes pursuant to the Shelf
Registration Statement generally would be required to be 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 150 days after the Closing Date, the Registration Statement
has not been declared effective; (ii) within 180 days after the Closing Date,
neither the Exchange Offer has been consummated nor the Shelf Registration
Statement has been declared effective; or (iii) after either the 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 1998 Senior
Notes or 1998 Exchange Notes in accordance with and during the periods
specified in the Registration Agreement (each such event referred to in
clauses (i) through (iii), a "Registration Default"), additional interest
("Special Interest") will accrue on the 1998 Senior Notes and the 1998
Exchange Notes (in addition to the stated interest on the 1998 Senior Notes
and the 1998 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.
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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 has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
1998 Senior Note Indenture. Reference is made to the 1998 Senior Note
Indenture for the full definition of all such terms, as well as any
capitalized terms used herein for which no definition is provided.
"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.
"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.
"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 provisions of the
1998 Senior Note Indenture described above under "--Certain Covenants--
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries"),
(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 a 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 the provisions of the 1998 Senior
Note Indenture applicable to consolidations, mergers, and transfers of all or
substantially all of the assets of the Company; 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.
"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
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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.
"Board Resolution" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination.
"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.
"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 (as defined below) or any Restricted
Subsidiary of the Company, shall have occurred; (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% 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 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.
"Common Stock" means Capital Stock other than Preferred Stock.
"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.
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"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
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) 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.
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"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.
"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.
"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, prior to the Stated Maturity of
the 1998 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 million 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 Corporation or A-2 or better from
Moody's Investors Service, Inc., (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 million and commercial paper issued by
others having one of the two highest ratings obtainable from either Standard &
Poor's Corporation or Moody's Investors Service, Inc. 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
million; (vii) deposits available for withdrawal on demand with a commercial
bank organized in the United States having capital and surplus in excess of
$500 million; and (viii) investments in money market funds substantially all
of whose assets comprise securities of the types described in clauses (i)
through (vi).
"Existing Indebtedness" means Indebtedness outstanding on the date of the
1998 Senior Note Indenture (other than under any 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, all
calculations made for purposes of determining compliance with the terms of the
provisions of the 1998 Senior Note Indenture shall utilize GAAP as in effect
on the Issue Date.
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"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 (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing).
"Holder" means (i) in the case of any certificated 1998 Note, the Person in
whose name such certificated 1998 Note is registered in the Note Register and
(ii) in the case of any Global 1998 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 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 as 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 the 1998 Senior Note 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 1997 Senior Discount 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.
"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.
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"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 shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the 1998 Senior Notes were first
authenticated and delivered under the 1998 Senior Note 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 1998 Note, the date on which
the principal of such 1998 Note becomes due and payable as provided therein or
in the 1998 Senior Note Indenture, whether on the date specified in such 1998
Note as the fixed date on which the principal of such 1998 Note is due and
payable, a Change of Control Payment Date or an Asset Sale Payment Date, or by
declaration of acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, cash or readily
marketable cash equivalents 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, 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 1998 Senior
Note Indenture.
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"Officers' Certificate" means a certificate signed by (i) the Chairman of
the Board, a Vice Chairman of the Board, 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 of the Company and delivered to the Trustee, which shall
comply with the 1998 Senior Note Indenture.
"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.
"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 the 1998 Senior Note Indenture; (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 by
the terms of the 1998 Senior Note Indenture to be outstanding; (vii) bonds,
notes, debentures or other debt securities received as a result of Asset Sales
permitted under the covenant described under "--Asset Sales"; (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; (x) stock, obligations or
securities received in satisfaction of judgments; and (xi) Investments made
pursuant to any deferred-compensation plan, including Investments made through
a trust (including a grantor trust) established in connection with any such
plan, for the benefit of employees of the Company or of any Restricted
Subsidiary.
"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
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property acquired after the Issue Date; provided that (a) such Lien is created
solely for the purpose of securing Indebtedness Incurred, in accordance with
"--Certain Covenants--Limitation on Consolidated Indebtedness," (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 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.
"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.
"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 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.
"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.
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"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.
"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 of the Company, 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 Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the 1998
Notes and which was scheduled to mature on or after the maturity of the 1998
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, (b) an Investment by the Company in a
Wholly-Owned Restricted Subsidiary or (c) an Investment by a Restricted
Subsidiary in the Company or a Wholly-Owned Restricted Subsidiary of the
Company.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated as an "Unrestricted Subsidiary."
"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.
"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.
"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.
"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 billion.
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"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 1998 Notes to at least the following extent:
(i) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so long as
any default in the payment of principal (or premium, if any) or interest on
the 1998 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 1998 Notes, upon notice by 25% or more in
principal amount of the 1998 Notes to the Trustee, 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 1998 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 1998 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 described under "--Repurchase at the Option of Holders upon a
Change of Control" (and which shall provide that such Indebtedness will not be
repurchased pursuant to such provisions prior to the Company's repurchase of
the 1998 Notes required to be repurchased by the Company pursuant to the
provisions described under "--Repurchase at the Option of Holders upon a
Change of Control").
"Subsidiary" means, with respect to any Person, (i) any corporation more
than 50% of the outstanding shares of Voting Stock of which is 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,
(ii) any general partnership, limited liability company, joint venture or
similar entity, more than 50% of the outstanding partnership, membership 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.
"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.
"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.
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"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 the terms of the 1998
Senior Note Indenture.
"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 any director's qualifying shares) of which shall at the time be
owned by such Person or by one or more other Wholly-Owned Restricted
Subsidiaries of such Person or by such Person and one or more other Wholly-
Owned Restricted Subsidiaries of such Person.
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OTHER INDEBTEDNESS
On March 4, 1997, the Company completed an offering of $500 million
aggregate principal amount at maturity of 1997 Senior Discount Notes. The 1997
Senior Discount Notes were priced at a discount and the Company received net
proceeds of approximately $288.9 million from the offering of the 1997 Senior
Discount Notes. The 1997 Senior Discount Notes will accrete to an aggregate
principal amount of $500 million by March 1, 2002. Interest will not accrue on
the 1997 Senior Discount Notes prior to March 1, 2002. Thereafter, interest
will accrue at a rate of 10 1/2% per annum and will be payable in cash semi-
annually in arrears on March 1 and September 1 of each year, commencing
September 1, 2002. The 1997 Senior Discount Notes rank pari passu in right of
payment with the 1997 Senior Notes and the 1998 Senior Notes. The 1997 Senior
Discount Notes will mature on March 1, 2007 and will be payable prior to the
maturity of the 1997 Senior Notes and the 1998 Senior Notes.
On July 15, 1997, the Company completed an additional offering of $225
million principal amount of 1997 Senior Notes. The Company received net
proceeds of approximately $217.6 million from the offering of the 1997 Senior
Notes. The 1997 Senior Notes will accrue interest at a rate of 9 1/4% per
annum and will be payable in cash semi-annually in arrears on July 15 and
January 15 of each year, commencing January 15, 1998. The 1997 Senior Notes
rank pari passu in right of payment with the 1997 Senior Discount Notes and
the 1998 Senior Notes. The 1997 Senior Notes will mature on July 15, 2007 and
will be payable prior to the maturity of the 1998 Senior Notes.
The 1997 Senior Discount Note Indenture and the 1997 Senior Note Indenture
impose operating and financial restrictions on the Company and its
subsidiaries that are substantially the same as the restrictions governing the
1998 Senior Notes. 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.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives 1998 Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such 1998 Exchange Notes. 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 1998 Exchange Notes
received in exchange for 1998 Senior Notes where such 1998 Senior Notes 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 1998 Exchange
Notes by broker-dealers. 1998 Exchange Notes 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 1998 Exchange Notes 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 1998
Exchange Notes. Any broker-dealer that resells 1998 Exchange Notes 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 1998 Exchange
Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit of any such resale of 1998 Exchange Notes 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 one 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 holders of the 1998 Senior Notes), other than commissions or
concessions of any brokers or dealers, and will indemnify the holders of the
1998 Senior Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the 1998 Exchange Notes offered hereby are being passed upon
for the Company by Hogan & Hartson L.L.P., Washington, D.C., special counsel
for the Company. Certain legal matters relating to the Offering were passed
upon for the Initial Purchasers by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996, the consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1997, and
the financial statement schedule incorporated by reference in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The consolidated balance sheets of Consolidated Communications Inc. as of
December 31, 1996 and 1995, and the consolidated statements of income, changes
in stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1996 incorporated by reference in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
stated in their report with respect thereto and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
CHANGES IN ACCOUNTANTS
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
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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 Company's two fiscal years ended December 31, 1995 and December 31,
1996 and during the interim period prior to the engagement of Arthur Andersen
LLP, there have been no consultations with the newly engaged accountants with
regard to either the application of accounting principles as to any specific
transaction, either completed or proposed; the type of audit opinion that
would be rendered on the Company's financial statements; or any matter of
disagreement with the former accountants.
During the two 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 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 the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1997).
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such reports, proxy statements and
other information can also be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, upon payment
of prescribed rates, or in certain cases by accessing the Commission's World
Wide Web site at http://www.sec.gov. Information regarding the operation of
the Commission's Public Reference Section can be obtained by calling 1-800-
SEC-0330. The Company's Class A Common Stock is quoted on The Nasdaq Stock
Market under the symbol "MCLD", and such reports, proxy statements and other
information concerning the Company also can be inspected at the offices of
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed a Registration Statement under the Securities Act with
respect to the Exchange Offer. As permitted by the rules and regulations of
the Commission, this Prospectus does not contain all the information set
forth, or incorporated by reference, in the Registration Statement. For
further information about the Company and the Exchange Offer, reference is
made to the Registration Statement and to the financial statements, exhibits
and schedules filed therewith or incorporated by reference thereto. The
statements contained in this Prospectus about the contents of any contract or
other document referred to are not necessarily complete, and in each instance,
reference is made to a copy of such contract or other document filed as an
exhibit, or incorporated by reference, to the Registration Statement, each
such statement being qualified in all respects by such reference. Copies of
each such document may be obtained from the Commission at its principal office
in Washington, D.C. upon payment or the charges prescribed by the Commission
or, in the case of certain such documents, by accessing the Commission's World
Wide Web site at http://www.sec.gov.
The Company is required by the terms of the Indentures to furnish the
Trustee with annual reports containing consolidated financial statements
audited by the Company's independent public accountants and with quarterly
reports containing unaudited condensed consolidated financial statements for
each of the first three quarters of each fiscal year.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER MADE HEREBY
EXCEPT AS CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, NO SUCH INFORMA-
TION OR REPRESENTATION SHOULD BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, THE INITIAL PURCHASERS OR ANY OF THEIR RESPECTIVE AGENTS. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATIONS THAT THERE HAS BEEN NO CHANGE IN THE INFOR-
MATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE 1998 EXCHANGE NOTES BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Incorporation of Certain Documents by Reference.......................... iv
Summary.................................................................. 1
Risk Factors............................................................. 9
The Exchange Offer....................................................... 22
Use of Proceeds.......................................................... 30
Capitalization........................................................... 31
Selected Consolidated Financial Data..................................... 32
Pro Forma Financial Data................................................. 34
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 37
Description of the 1998 Exchange Notes................................... 48
Other Indebtedness....................................................... 80
Plan of Distribution..................................................... 81
Legal Matters............................................................ 81
Experts.................................................................. 81
Changes in Accountants................................................... 81
Available Information.................................................... 82
</TABLE>
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$300,000,000
MCLEODUSA
INCORPORATED
8 3/8% SENIOR NOTES
DUE 2008
[LOGO OF MCLEODUSA(SM) APPEARS HERE]
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PROSPECTUS
DATED MAY 26, 1998
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