<PAGE>
As filed with the Securities and Exchange Commission on February 4, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
McLeodUSA Incorporated
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 4813 42-1407240
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
---------------
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Clark E. McLeod
Chairman and Chief Executive Officer
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Nicholas S. Hodge, Esq. Joseph G. Connolly, Jr., Esq.
Stephen O. Meredith, Esq. James G. McMillan, Esq.
Edwards & Angell, LLP Hogan & Hartson L.L.P.
101 Federal Street 555 13th Street, N.W.
Boston, MA 02110 Washington, D.C. 20004
(617) 439-4444 (202) 637-5600
</TABLE>
---------------
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, please check
the following box and list the Securities Act of 1933 registration statement
number of the earlier effective registration statement for the same offering.
[_] ____________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_] _____________
---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
Proposed maximum Proposed maximum
Title of each class of Amount to be offering price aggregate Amount of
securities to be registered registered per share offering price registration fee
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock, $.01 par value (1) 5,750,000 $.53 (2) $12,720,000 (2) $3,537
==================================================================================================================
</TABLE>
(1) The Registration Statement relates to the securities of the registrant
issuable to holders of common stock of Ovation Communications, Inc., a
Delaware corporation ("Ovation"), in the proposed merger of Ovation with
and into a wholly owned subsidiary of the Registrant.
(2) Pursuant to Rule 457(f)(2), because there is currently no public trading
market for Ovation common stock, the registration fee was computed on the
basis of the book value of the shares of common stock of Ovation computed
as of December 31, 1998. Such book value equaled $12,720,000 in the
aggregate and, based on 23,971,756 shares of Ovation common stock
outstanding on December 31, 1998, equaled $.53 per share.
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
[Ovation Logo]
400 South Highway 169, Suite 750
Minneapolis, Minnesota 55426
_______________, 1999
MERGER PROPOSED
Dear fellow stockholder,
The Board of Directors of Ovation Communications, Inc. ("Ovation") is
furnishing this Prospectus and Proxy Statement to Ovation stockholders to
solicit proxies to vote at a special meeting of Ovation stockholders to be held
on _________, 1999 (the "Special Meeting"), and at any adjournment or
postponement of that meeting. At the Special Meeting, Ovation stockholders will
vote upon adoption of an Agreement and Plan of Merger (the "Merger Agreement").
Pursuant to the Merger Agreement, Ovation would become a wholly owned subsidiary
of McLeodUSA Incorporated ("McLeodUSA").
If the merger is completed as proposed, (1) each share of Ovation's Series
A preferred stock ("Ovation Preferred Stock") would be converted into the right
to receive cash, and (2) each share of Ovation's common stock ("Ovation Common
Stock") would be converted, at the election of its holder, into the right to
receive cash or shares of McLeodUSA's Class A common stock ("McLeodUSA Common
Stock"). The amount of cash into which each share of Ovation Preferred Stock
would be converted and the amount of cash or number of shares of McLeodUSA
Common Stock into which each share of Ovation Common Stock would be converted
will be determined immediately prior to consummation of the merger in accordance
with formulas specified in the Merger Agreement and described in the attached
materials. There is no established public trading market for Ovation Common
Stock or Ovation Preferred Stock. McLeodUSA Common Stock is quoted on The
Nasdaq Stock Market under the symbol "MCLD." The closing price for McLeodUSA
Common Stock reported on The Nasdaq Stock Market on _______________, 1999, was
$____ per share.
This is a prospectus of McLeodUSA relating to its offering of up to
5,750,000 shares of McLeodUSA Common Stock to Ovation stockholders in the
proposed merger and a proxy statement of Ovation. It contains important
information concerning McLeodUSA, Ovation, the terms of the proposed merger and
the conditions which must be satisfied before the merger can occur. You should
carefully consider the "Risk Factors," beginning on page ____, for certain
considerations relevant to an investment in McLeodUSA Common Stock.
. The merger cannot occur unless the holders of a majority of the voting
power attributable to the outstanding shares of Ovation Common Stock and
Ovation Preferred Stock, voting together as a class, vote FOR adoption
of the Merger Agreement at the Special Meeting. Whether or not you
expect to attend the Special Meeting in person, please sign and date the
enclosed proxy card and mail it promptly in the enclosed envelope.
. Certain stockholders of Ovation holding in the aggregate approximately
94% of the voting power attributable to the Ovation Common Stock and
Ovation Preferred Stock have agreed to vote all of their shares in favor
of the approval and adoption of the Merger Agreement. Consequently,
adoption of the Merger Agreement and approval of the merger is assured.
. If the merger occurs and you have not perfected your dissenter's rights
under Delaware law, you may be required personally to indemnify
McLeodUSA, the surviving corporation of the merger and their affiliates
against certain losses due to the breach of any of Ovation's
representations, warranties or agreements in the Merger Agreement.
Sincerely,
Timothy T. Devine
President and Chief Executive Officer
The Board of Directors of Ovation unanimously recommends that you vote
FOR adoption of the Merger Agreement.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this Prospectus and Proxy Statement. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Prospectus and Proxy Statement dated ________________, 1999
First mailed to stockholders on or about ______________, 1999
<PAGE>
[LOGO OF OVATION]
OVATION COMMUNICATIONS, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Minneapolis, Minnesota
_____________, 1999
TO THE STOCKHOLDERS OF
OVATION COMMUNICATIONS, INC.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of Ovation
Communications, Inc., a Delaware corporation ("Ovation"), will be held on
__________________________, 1999, at 10:00 a.m., local time, at 400 South
Highway 169, Suite 750, Minneapolis, Minnesota 55426, for the following
purposes:
1. To consider and vote on a proposal to adopt the Agreement and Plan of
Merger, dated as of January 7, 1999 (the "Merger Agreement"), by and among
McLeodUSA Incorporated, a Delaware corporation ("McLeodUSA"), Bravo
Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of McLeodUSA ("Merger Sub"), Ovation and M/C Investors L.L.C.,
Media/Communications Partners III Limited Partnership, Timothy T. Devine,
Kenneth A. Kirley, Nicholas Lenoci, Jr., Charles M. Osborne and Scott A.
Rediger, each a stockholder of Ovation (collectively, the "Principal Company
Stockholders"), pursuant to which, among other things, Ovation will become a
wholly owned subsidiary of McLeodUSA, and to approve the merger (the
"Merger") and the other transactions contemplated by the Merger Agreement,
as more fully described in the Prospectus and Proxy Statement; and
2. To transact such other business as may properly be brought before the
Special Meeting.
The close of business on ___________, 1999 has been fixed as the record date for
determining stockholders entitled to vote at the Special Meeting and any
adjournments or postponements of the Special Meeting. A list of stockholders
entitled to receive notice of and vote at the Special Meeting will be available
for examination by Ovation stockholders at the office of Kenneth A. Kirley,
General Counsel of Ovation, located at 400 South Highway 169, Suite 750,
Minneapolis, Minnesota 55426, during ordinary business hours for the 10-day
period before the Special Meeting.
Certain stockholders of Ovation holding in the aggregate approximately 94% of
the voting power attributable to the Ovation Common Stock and Ovation Preferred
Stock have agreed to vote all of their shares in favor of the adoption of the
Merger Agreement and approval of the Merger. Consequently, approval of the
Merger Agreement is assured.
BY ORDER OF THE BOARD OF DIRECTORS
Timothy T. Devine
President and
Chief Executive Officer
Whether or not you plan to attend the Special Meeting in person, please
complete, date, sign and return the enclosed proxy card in the enclosed
envelope. If you attend the Special Meeting, you may vote in person, even if
you have previously returned your proxy card.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
SUMMARY................................................................. 1
RISK FACTORS............................................................ 14
THE SPECIAL MEETING..................................................... 23
Date, Time and Place................................................. 23
Matters to be Considered............................................. 23
Proxies.............................................................. 23
Solicitation of Proxies.............................................. 24
Record Date and Voting Rights........................................ 24
Recommendation of Ovation Board...................................... 25
THE MERGER.............................................................. 26
General.............................................................. 26
Background of the Merger............................................. 26
Recommendation of the Ovation Board and Reasons for the Merger....... 27
Interests of Certain Persons in the Merger........................... 28
Accounting Treatment................................................. 30
Listing on The Nasdaq Stock Market................................... 31
Governmental and Regulatory Approvals................................ 31
Federal Income Tax Consequences...................................... 31
Restrictions on Resales by Affiliates................................ 33
Appraisal Rights..................................................... 34
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS.................. 37
General.............................................................. 37
Structure of the Merger.............................................. 37
Management After the Merger.......................................... 37
Conversion of Ovation Preferred Stock and Ovation Common Stock;
Treatment of Options............................................... 38
Election Procedures; Certain Adjustments............................. 39
Exchange of Certificates; Fractional Shares.......................... 41
Effective Time....................................................... 42
Representations and Warranties....................................... 42
Business of Ovation Pending the Merger; Certain Other Agreements..... 44
No Solicitation by Ovation and the Principal Company Stockholders.... 47
Additional Agreements of McLeodUSA................................... 47
Indemnification...................................................... 48
Director's and Officers' Insurance and Indemnification............... 49
Conditions to Consummation of the Merger............................. 49
Termination of the Merger Agreement.................................. 53
General Exclusion for Industry-Specific Events....................... 54
Waiver and Amendment of the Merger Agreement......................... 55
Expenses............................................................. 55
Voting Agreements.................................................... 55
Ovation Stockholders' Agreement...................................... 56
INFORMATION ABOUT MCLEODUSA AND MERGER SUB.............................. 58
INFORMATION ABOUT OVATION............................................... 68
OVATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS............................................ 87
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF OVATION........................................................... 92
OVATION EXECUTIVE COMPENSATION.......................................... 96
MCLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS............ 97
CERTAIN OTHER MATTERS................................................... 107
Legal Matters........................................................ 107
Experts.............................................................. 107
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 107
Other Matters........................................................ 108
Where You Can Find More Information.................................. 108
INDEX TO FINANCIAL STATEMENTS........................................... F-1
APPENDICES
APPENDIX A - AGREEMENT AND PLAN OF MERGER............................... A-1
APPENDIX B - SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW........ B-1
</TABLE>
-i-
<PAGE>
This Prospectus and Proxy Statement incorporates important business and
financial information about McLeodUSA that is not included in or delivered with
this Prospectus and Proxy Statement. This information is available without
charge to Ovation stockholders upon written or oral request. Stockholders may
request this information from McLeodUSA Incorporated, McLeodUSA Technology Park,
6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, Attn: General
Counsel, Telephone (319) 364-0000. To obtain timely delivery, stockholders must
request such information no later than _______________, 1999.
Forward-Looking Statements
Some of the statements contained, or incorporated by reference, in this
Prospectus and Proxy Statement discuss future expectations, contain projections
of results of operations or financial condition or state other "forward-looking"
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these so-called "forward-looking
statements" by words like "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of those words and other comparable words. You should be aware
that those statements only reflect our predictions. Actual events or results
may differ substantially. Important factors that could cause our actual results
to be materially different from the forward-looking statements are disclosed
under the heading "Risk Factors" and throughout this Prospectus and Proxy
Statement.
-ii-
<PAGE>
SUMMARY
This document constitutes the Prospectus of McLeodUSA and the Proxy
Statement of Ovation. This summary highlights selected information from the
Prospectus and Proxy Statement. It does not contain all of the information that
is important to you. You should carefully read the entire Prospectus and Proxy
Statement and the other documents to which this document refers you to fully
understand the Merger. See "Where You Can Find More Information" on page __.
In this Prospectus and Proxy Statement, "we," "us" and "our" may refer to either
McLeodUSA or Ovation depending on the context in which they are used, while
"you" and "your" refer solely to stockholders of Ovation.
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
McLeodUSA provides integrated communications services to business and
residential customers in the Midwestern and Rocky Mountain regions of the United
States. Our integrated communications services include local, long distance,
Internet access, data, voice mail and paging, all from a single company on a
single bill. We believe we are the first communications provider in most of our
markets to offer "one-stop shopping" for communications services tailored to
customers' specific needs.
Our approach makes it easier for both our business and our residential customers
to satisfy their telecommunications needs. It also allows businesses to receive
customized services, such as competitive long distance pricing and enhanced
calling features, that might not otherwise be directly available on a cost-
effective basis. As of December 31, 1998, we served over 397,600 local lines in
269 cities and towns.
In addition to our core business of providing competitive local, long distance
and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. incumbent local exchange services in east central Illinois
. communications network maintenance services
. telephone equipment sales, service and installation
. video services
. special access, private line and data services
. telemarketing services
. other communications services, including cellular, operator, payphone and
paging services
In most of our markets, we compete with the incumbent local phone company by
leasing their lines and switches. This allows customers to select our local
service without changing their existing telephone numbers. In other markets,
primarily in east central Illinois, we operate our own lines and switches. We
provide long distance services by using our own facilities and leasing capacity
from long-haul and local providers. We are constructing fiber optic networks in
Iowa, Illinois, Wisconsin, Indiana, Missouri, Minnesota, South Dakota and North
Dakota to carry additional communications traffic on our own network.
Bravo Acquisition Corporation
Merger Sub is a Delaware corporation and a wholly owned subsidiary of McLeodUSA.
McLeodUSA formed Merger Sub in December 1998 to facilitate the Merger. Merger
Sub has not transacted any business other than that incident to its formation
and the completion of the Merger.
Ovation Communications, Inc.
400 South Highway 169, Suite 750
Minneapolis, Minnesota 55426
(612) 252-5000
Ovation is a diversified communications services company serving business
customers primarily in larger metropolitan areas in Minnesota, Illinois and
Wisconsin and in small to medium-sized cites in Michigan. Either directly or
through subsidiaries we provide:
. local and network access services
1
<PAGE>
. competitive local exchange services
. incumbent local exchange services
. long distance services
. voice mail, teleconferencing and calling card services
. Internet access and related services
We are a Delaware corporation originally organized in March 1997 under the name
OCI Communications, Inc. In May 1998 we changed our name to Ovation
Communications, Inc.
The Merger (page __)
The Merger Agreement provides that Ovation would merge with and into Merger Sub
and become a wholly owned subsidiary of McLeodUSA. McLeodUSA and Ovation hope
to complete the Merger during the first quarter of 1999.
The Merger Agreement is included as Appendix A to this Prospectus and Proxy
Statement. It is the legal document that governs the Merger.
Conversion and Exchange of Shares (page ___)
As a result of the Merger, each share of Ovation Preferred Stock that you own
would be converted into the right to receive an amount of cash, without
interest, equal to the liquidation preference of the Ovation Preferred Stock
($100 plus accrued and unpaid dividends on the Ovation Preferred Stock at the
time of the Merger). Each share of Ovation Common Stock that you own would be
converted into the right to receive, at your election, subject to adjustment in
certain cases, either:
(1) an amount of cash, without interest, equal to the quotient of:
(a) $289 million minus the amount of certain subordinated debt owed by
-----
Ovation to two of its stockholders at the time of the Merger ($8.8
million as of February 1, 1999), minus the amount to be paid in
-----
exchange for the Ovation Preferred Stock ($25.5 million as of February
1, 1999), minus the costs incurred by Ovation in connection with the
-----
Merger ($5 million as of February 1, 1999)
divided by:
----------
(b) the outstanding shares of Ovation Common Stock on the business day
before the Merger (23,971,756 as of February 1, 1999); or
(2) a number of shares of McLeodUSA Common Stock equal to the quotient of:
(a) $289 million minus the amount of certain subordinated debt owed by
-----
Ovation to two of its stockholders at the time of the Merger ($8.8
million as of February 1, 1999), minus the amount to be paid in
-----
exchange for the Ovation Preferred Stock ($25.5 million as of February
1, 1999), minus the costs incurred by Ovation in connection with the
-----
Merger ($5 million as of February 1, 1999)
divided by:
----------
(b) $29.00
divided by:
----------
(c) the outstanding shares of Ovation Common Stock on the business day
before the Merger (23,971,756 as of February 1, 1999).
. For example, if the Merger had occurred on February 1, 1999 and you owned
1,000 shares of Ovation Preferred Stock and 10,000 shares of Ovation Common
Stock, after the Merger you would receive (1) $100,000 plus accrued and
unpaid dividends on your Ovation Preferred Stock in exchange for your Ovation
Preferred Stock and (2) either $104,164 or 3,592 shares of McLeodUSA Common
Stock (or a combination of cash and McLeodUSA Common Stock) in exchange for
your Ovation Common Stock.
If you own shares of Ovation Common Stock and you elect to receive McLeodUSA
Common Stock in the Merger, you would not receive fractional shares. Instead,
you would receive a check in payment for any fractional shares based on the
market value of McLeodUSA Common Stock.
If you own shares of Ovation Common Stock, you will receive a form of election
allowing you to elect
2
<PAGE>
to receive cash or shares of McLeodUSA Common Stock for your shares of Ovation
Common Stock. In order for your election to be valid, McLeodUSA must receive
your completed form of election before the third business day preceding the
scheduled closing date. If you do not properly complete and return the form of
election by such time, you will be deemed to have elected to receive McLeodUSA
Common Stock for all of your Ovation Common Stock. In order to meet certain
requirements for the Merger to be considered a tax-free reorganization for
United States federal income taxes, if the value of the McLeodUSA Common Stock
to be issued in the Merger is less than a certain percent of the total value of
cash and McLeodUSA Common Stock to be paid to the Ovation stockholders in the
Merger, those holders of Ovation Common Stock who elected to receive cash for
their shares of Ovation Common Stock will instead receive a combination of cash
and shares of McLeodUSA Common Stock.
In making your election, you should consider the market value of the McLeodUSA
Common Stock that you may receive in the Merger for each share of your Ovation
Common Stock. This market value may be less than, equal to, or greater than the
amount of cash that you would receive if you elect cash because the formula for
stock elections uses a fixed value of $29.00 per share of McLeodUSA Common Stock
while the actual market price of McLeodUSA Common Stock is subject to
fluctuation. In addition, because of such fluctuations in market price, the
market value of the shares of McLeodUSA Common Stock you may receive in the
Merger could increase or decrease after the Merger.
At the earliest practicable date prior to the consummation of the Merger, you
will receive a letter of transmittal that will provide instructions on the
procedure for exchanging your share certificates representing Ovation Common
Stock or Ovation Preferred Stock for cash and/or share certificates representing
McLeodUSA Common Stock. For more information on how the election and exchange
procedures work, see "Terms of the Merger Agreement and Related Transactions--
Election Procedures; Certain Adjustments" on page __ and "Terms of the Merger
Agreement and Related Transactions--Exchange of Certificates; Fractional Shares"
on page __.
Please do not send your stock certificates at this time.
Vote Required (page ___)
The holders of a majority of the voting power attributable to the outstanding
shares of Ovation Common Stock and Ovation Preferred Stock, voting together as a
class, must vote in favor of adoption of the Merger Agreement before the Merger
can occur. There were 23,971,756 shares of Ovation Common Stock and 240,000
shares of Ovation Preferred Stock outstanding as of _________, 1999. Each
holder of Ovation Common Stock is entitled to one vote per share and each holder
of Ovation Preferred Stock is entitled to 50 votes per share with respect to all
matters as to which a vote is to be taken at the Special Meeting.
Certain directors, executive officers and stockholders of Ovation have entered
into an agreement with McLeodUSA to vote their shares of Ovation Common Stock
and Ovation Preferred Stock in favor of the Merger Agreement and against any
competing transaction. The 22,478,894 shares of Ovation Common Stock and
234,000 shares of Ovation Preferred Stock subject to these agreements represent
approximately 94% of the voting power attributable to the shares of Ovation
Common Stock and Ovation Preferred Stock entitled to vote at the Special
Meeting. Consequently, adoption of the Merger Agreement and approval of the
Merger is assured.
Appraisal Rights (page __)
Pursuant to Section 262 of the Delaware General Corporation Law, Ovation
stockholders have the right to be paid the appraised value of their shares of
Ovation Common Stock and Ovation Preferred Stock in connection with the Merger.
If you are an Ovation stockholder and wish to dissent, you must deliver to
Ovation, prior to the vote on the Merger at the Special Meeting, a written
demand for appraisal of your shares. You also must not vote in favor of the
Merger Agreement. To not vote in favor of the Merger Agreement, you can either:
- vote "no" in person at the Special Meeting or by proxy;
3
<PAGE>
- abstain from voting;
- fail to vote; or
- if you return a duly executed proxy that does not contain voting
instructions, revoke it.
Beneficial owners of shares of Ovation Common Stock or Ovation Preferred Stock
whose shares are held of record by another person, such as a broker, bank or
nominee, and who wish to seek appraisal, should instruct the record holder to
follow the procedures in Section 262. The provisions of Section 262 are
technical in nature and complex. If you wish to exercise appraisal rights and
obtain appraisal of the fair value of your shares, you may wish to consult with
legal counsel, since the failure to comply strictly with the provisions of
Section 262 may result in waiver or forfeiture of your appraisal rights.
A copy of Section 262 is attached as Appendix B to this Prospectus and Proxy
Statement.
What is Needed to Complete the Merger (page __)
Several conditions must be satisfied before the Merger will be completed. These
include:
. adoption of the Merger Agreement and approval of the Merger by the Ovation
stockholders
. approval of the Merger by certain federal and state regulatory authorities
. receipt of certain tax and corporate opinions
. certain other contractual conditions set forth in the Merger Agreement
If the law permits, McLeodUSA or Ovation may each waive conditions for the
benefit of their company and stockholders and complete the Merger even though
one or more of these conditions hasn't been met. We cannot assure you that the
conditions will be satisfied or waived or that the Merger will occur.
Indemnification (page ___)
If the Merger Agreement is approved and the Merger occurs, all holders of
Ovation Common Stock who have not perfected dissenter's rights under Delaware
law, by their receipt of cash or McLeodUSA Common Stock in the Merger, will be
deemed to have agreed personally to indemnify McLeodUSA, the surviving
corporation of the Merger and their affiliates against certain losses due to the
breach of any of Ovation's representations, warranties or agreements in the
Merger Agreement. See "Terms of the Merger Agreement and Related Transactions--
Indemnification."
Consequently, under certain circumstances you could be required to return to
McLeodUSA some or all of the cash and/or McLeodUSA Common Stock you receive in
the Merger.
Federal Income Tax Consequences (page __)
Ovation expects that the exchange of shares of Ovation Common Stock for shares
of McLeodUSA Common Stock in the Merger will not cause Ovation stockholders to
recognize gain or loss for United States federal income tax purposes. However,
Ovation stockholders who receive cash in the Merger (including cash in lieu of
fractional shares) will recognize a gain or a loss.
In the case of a holder of Ovation Preferred Stock, the amount of gain or loss
will equal the difference between the amount of cash received in the Merger and
such holder's tax basis in the Ovation Preferred Stock surrendered.
In the case of a holder of Ovation Common Stock, the amount of gain will equal
the lesser of (1) the difference between (a) the fair market value of the
McLeodUSA Common Stock and cash received in the Merger and (b) such holder's tax
basis in the Ovation Common Stock exchanged or (2) the amount of cash received
for the Ovation Common Stock.
The obligations of McLeodUSA and Ovation to complete the Merger are conditioned
on their receipt of legal opinions concerning the federal income tax treatment
of the Merger. These opinions will not bind the Internal Revenue Service (the
"IRS"), which could take a different view.
Determining the actual tax consequences of the Merger to you can be complicated.
They
4
<PAGE>
will depend on your specific situation and on variables not within the control
of Ovation or McLeodUSA. You should consult your own tax advisor for a full
understanding of the Merger's tax consequences to you.
You should also refer to the more detailed discussion of tax consequences and
opinions at page ___.
Accounting Treatment (page __)
McLeodUSA and Ovation expect to account for the Merger using the purchase method
of accounting.
Governmental and Regulatory Approvals (page __)
The Merger must be approved by the U.S. Department of Justice and/or the Federal
Trade Commission ("FTC"), or the applicable premerger waiting period must have
expired. In addition, certain state and other regulatory authorities will also
need to approve or be notified of the Merger before it can be completed.
Ovation and McLeodUSA have filed, or expect soon to file, all of the required
applications or notices with these regulatory authorities. While neither
Ovation nor McLeodUSA knows of any reason why we would not be able to obtain the
necessary approvals in a timely manner, we cannot be certain when or if we will
receive them.
Termination of the Merger Agreement; Expenses (page __)
McLeodUSA and Ovation may mutually agree at any time to terminate the Merger
Agreement without completing the Merger, even if the Ovation stockholders have
approved it. Also, either of us may decide, without the consent of the other,
to terminate the Merger Agreement if:
. the other party breaches the Merger Agreement in a way that would entitle the
terminating party not to complete the Merger, and the breaching party doesn't
correct the breach promptly
. any court or governmental entity issues a final order or judgment preventing
the completion of the Merger
. the holders of a majority of the voting power attributable to the outstanding
shares of Ovation Common Stock and Ovation Preferred Stock, voting together
as a class, do not vote to adopt the Merger Agreement
. the Merger has not been completed by the earlier of May 1, 1999 or the first
business day following the tenth day after the satisfaction or waiver of
certain conditions to the Merger, unless the failure to complete the Merger
by that time is due to a violation of the Merger Agreement by the party that
wants to terminate it
. the real property owned by Ovation contains or is subject to a risk of
contamination from hazardous materials, unless Ovation stockholders
representing at least 85% of the value of the consideration in the Merger
agree to indemnify McLeodUSA, the surviving corporation in the Merger and
their affiliates in connection with such risks
. the other party does not deliver certain certificates and waivers of claims
Regardless of whether the Merger is completed, each of us will pay our own fees
and expenses.
Waiver and Amendment (page __)
McLeodUSA and Ovation may agree to amend the Merger Agreement prior to the time
the Merger becomes effective, subject to applicable law. Either of us can waive
our right to require the other party to adhere to the terms and conditions of
the Merger Agreement, if the law allows, at any time prior to the time the
Merger becomes effective.
Interests of Ovation's Directors and Officers in the Merger (page __)
Some of Ovation's directors and officers have interests in the Merger that are
different from, or in addition to, their interests as Ovation stockholders.
These interests exist because of employment and other agreements that the
directors and officers have with Ovation and rights that they have under benefit
and compensation plans. Some of Ovation's officers and directors also have
entered into or would enter into employment agreements, advisory arrangements or
other agreements or
5
<PAGE>
arrangements with McLeodUSA after the Merger. The Merger Agreement requires
McLeodUSA to indemnify directors and officers of Ovation for events occurring
before the Merger, including events that are related to the Merger Agreement.
Interests of Ovation's directors and officers are described under "Interests of
Certain Persons in the Merger" at page __.
Reasons for the Merger (page ___)
The Ovation Board considered a variety of factors in making its decision to
approve the Merger Agreement and to recommend to the Ovation stockholders that
they vote their shares for adoption of the Merger Agreement. These factors
included:
. the business and financial condition of Ovation and McLeodUSA
. the business advantages of a combination
. the alternatives to the Merger
. the historical valuations of Ovation Preferred Stock and Ovation Common Stock
and the value offered by the Merger
. that McLeodUSA Common Stock is traded on The Nasdaq Stock Market, and there is
no established public trading market for Ovation Common Stock
. the terms and conditions of the Merger Agreement and the tax-free nature of
the Merger with respect to the receipt of shares of McLeodUSA Common Stock
. the opportunity of Ovation stockholders to participate in the potential future
value of McLeodUSA
After considering these and other factors, the Ovation Board concluded that the
Merger is fair to and in the best interests of Ovation and Ovation stockholders.
Recommendation of the Ovation Board (page __)
The Ovation Board believes that the Merger is fair to and in the best interests
of Ovation and Ovation stockholders, and unanimously recommends that Ovation
stockholders vote "FOR" the proposal to adopt the Merger Agreement.
Differences in the Rights of Stockholders (page __)
If you own Ovation Common Stock and elect to receive McLeodUSA Common Stock, you
would become a stockholder of McLeodUSA upon completion of the Merger. Your
rights would then be governed by Delaware law and by the McLeodUSA Certificate
of Incorporation and the McLeodUSA Bylaws, rather than the Ovation Certificate
of Incorporation and the Ovation Bylaws. Your rights as a stockholder of
McLeodUSA would differ from your rights as a stockholder of Ovation. To review
these differences in more detail, see "McLeodUSA Capital Stock and Comparison of
Stockholder Rights" on page __.
Special Meeting of Ovation Stockholders (page __)
The Special Meeting will be held on ___________, 1999 at 10:00 a.m. at 400 South
Highway 169, Suite 750, Minneapolis, Minnesota 55426. At the Special Meeting,
you will be asked to vote to adopt the Merger Agreement and to approve the
Merger and the transactions contemplated by the Merger Agreement.
You can vote, or submit a proxy to vote, at the Special Meeting if you were a
record holder of Ovation Common Stock or Ovation Preferred Stock at the close of
business on ____________, 1999. You can vote your shares by attending the
meeting and voting in person or you can mark the enclosed proxy card with your
vote, sign it and mail it in the enclosed return envelope. You can revoke your
proxy at any time prior to its being exercised.
6
<PAGE>
Recent Developments
The DTG Merger Agreement
On October 27, 1998, McLeodUSA entered into an Agreement and Plan of Merger
(the "DTG Merger Agreement") with Dakota Telecommunications Group, Inc., a
Delaware corporation ("DTG"). Pursuant to the DTG Merger Agreement, DTG will
become a wholly owned subsidiary of McLeodUSA by merger (the "DTG Merger"). As a
result of the DTG Merger, each share of DTG's common stock will be converted
into the right to receive 0.4328 of a share of McLeodUSA Common Stock (the "DTG
Exchange Ratio"). The maximum number of shares of McLeodUSA Common Stock
issuable pursuant to the DTG Merger (assuming the exercise of all outstanding
options to purchase DTG common stock and including shares to be issued to
certain executive officers of DTG who are entering into employment agreements
with McLeodUSA) is expected to be approximately 1,375,000.
DTG is a diversified communications services company, headquartered in
Irene, South Dakota. DTG offers local, long distance, operator,
telecommunications equipment sale and leasing, cable television, computer
networking, Internet access, mobile radio, paging and other communications
services to business and residential customers in southeastern South Dakota and
neighboring areas. As of December 31, 1998, DTG operated 13 telephone exchanges
and 26 cable television systems, incorporating over 2,240 miles of copper plant,
300 miles of coaxial cable and approximately 9,100 fiber miles of fiber optic
lines, serving approximately 7,350 local access lines, 5,930 cable television
subscribers, 7,200 Internet users, and over 2,000 active computer networking
business customers. DTG had pro forma revenues of $24.2 million for the nine
months ended September 30, 1998. DTG has 188 employees.
The TDI and Info America Merger Agreements
On January 7, 1999, McLeodUSA and its indirect wholly owned subsidiary,
McLeodUSA Publishing Company ("Pubco"), entered into an Agreement and Plan of
Merger (the "TDI Merger Agreement") with Talking Directories, Inc., a Michigan
corporation ("TDI"), and the stockholders of TDI pursuant to which McLeodUSA
will acquire TDI by merger (the "TDI Merger"). As a result of the TDI Merger,
each share of TDI common stock will be converted into the right to receive a
number of shares of McLeodUSA Common Stock determined in accordance with a
formula contained in the TDI Merger Agreement. The maximum number of shares of
McLeodUSA Common Stock issuable pursuant to the TDI Merger is expected to be
approximately 2,556,391. McLeodUSA will also assume approximately $15.6 million
of TDI debt.
In a related transaction, on January 7, 1999, McLeodUSA and Pubco entered
into an Agreement and Plan of Merger (the "Info America Merger Agreement") with
Info America Phone Books, Inc., a Michigan corporation ("Info America"), and
certain stockholders of Info America pursuant to which McLeodUSA will acquire
Info America by merger (the "Info America Merger"). As a result of the Info
America Merger, each share of Info America's common stock will be converted into
the right to receive a number of shares of McLeodUSA Common Stock determined in
accordance with a formula contained in the Info America Merger Agreement. The
maximum number of shares of McLeodUSA Common Stock issuable pursuant to the Info
America Merger is expected to be approximately 1,203,007.
TDI and Info America are related companies, headquartered in Grand Rapids,
Michigan, that together publish and distribute proprietary "white page" and
"yellow page" telephone directories primarily in Michigan and northwestern Ohio.
In 1998, TDI and Info America collectively published and distributed
approximately 2.6 million copies of 19 telephone directories. As of December 31,
1998, TDI had 257 employees and Info America had no employees. McLeodUSA expects
to consummate the TDI Merger and the Info America Merger in February 1999.
7
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
(unaudited)
The information in the following unaudited table is based on historical
financial information included in McLeodUSA's prior SEC filings. The following
summary financial information should be read in connection with this historical
financial information including the notes which accompany such financial
information. This historical financial information has also been incorporated
into this document by reference. See "Where You Can Find More Information" on
page ___. McLeodUSA's audited historical financial statements as of December
31, 1997 and 1996, and for each of the three years ended December 31, 1997 were
audited by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5)(8) 1997(6)(7)(15)
-------- --------- ------------ ------------ ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue.................... $ 1,550 $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 466,154
------- -------- -------- -------- ------------- ----------
Operating expenses:
Cost of service........... 1,528 6,212 19,667 52,624 155,430 258,537
Selling, general and
administrative............ 2,390 12,373 18,054 46,044 143,918 212,993
Depreciation and
amortization.............. 235 772 1,835 8,485 33,275 81,594
Other..................... -- -- -- 2,380 4,632 10,191
------- -------- -------- -------- ------------- ----------
Total operating
expenses.................. 4,153 19,357 39,556 109,533 337,255 563,315
------- -------- -------- -------- ------------- ----------
Operating loss............. (2,603) (11,343) (10,558) (28,210) (69,369) (97,161)
Interest income
(expense), net............. 163 (73) (771) 5,369 (11,967) (49,529)
Other income............... -- -- -- 495 1,426 2,508
Income taxes............... -- -- -- -- -- --
------- -------- -------- -------- ------------- ----------
Net loss................... $(2,440) $(11,416) $(11,329) $(22,346) $ (79,910) $ (144,182)
======= ======== ======== ======== ============= ==========
Loss per common
share...................... $(.17) $(.53) $(.40) $(.55) $(1.45) $(2.18)
======= ======== ======== ======== ============= ==========
Weighted average
common shares
outstanding................ 14,761 21,464 28,004 40,506 54,974 66,287
======= ======== ======== ======== ============= ==========
<CAPTION>
Nine Months
Ended September 30,
-------------------------------------------
Pro Forma
1997(1)(5) 1998(9) 1998(7)(10)(15)
------------ ----------- ----------------
<S> <C> <C> <C>
Operations Statement
Data:
Revenue.................... $131,595 $438,642 $ 460,418
-------- -------- -----------
Operating expenses:
Cost of service........... 77,745 239,195 245,912
Selling, general and
administrative............ 86,363 189,579 201,199
Depreciation and
amortization.............. 15,708 63,663 80,646
Other..................... 2,689 5,575 5,575
-------- -------- -----------
Total operating
expenses.................. 182,505 498,012 533,332
-------- -------- -----------
Operating loss............. (50,910) (59,370) (72,914)
Interest income
(expense), net............. (2,686) (35,519) (51,093)
Other income............... 40 1,789 1,789
Income taxes............... -- -- --
-------- -------- -----------
Net loss................... $(53,556) $(93,100) $ (122,218)
======== ======== ===========
Loss per common
share...................... $(1.02) $(1.49) $(1.80)
======== ======== ===========
Weighted average
common shares
outstanding................ 52,752 62,620 67,723
======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1993 1994 1995(1) 1996(1)(11) 1997(1)(5)(12)
------- -------- ----------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets....................... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869
Working capital (deficit)............ $5,962 $ 1,659 $(1,208) $185,968 $ 378,617
Property and equipment, net.......... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804
Total assets......................... $9,051 $10,687 $28,986 $452,994 $1,345,652
Long-term debt....................... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384
Stockholders' equity................. $7,936 $ 3,291 $14,958 $403,429 $ 559,379
<CAPTION>
September 30, 1998
--------------------------------
Pro
Actual(9) Forma (13)(15)
-------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Current assets....................... $ 570,784 $ 737,093
Working capital (deficit)............ $ 409,266 $ 545,457
Property and equipment, net.......... $ 559,317 $ 615,555
Total assets......................... $1,621,564 $2,191,584
Long-term debt....................... $ 939,102 $1,306,734
Stockholders' equity................. $ 483,745 $ 656,015
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7)(15)
--------- --------- ------------ ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures,
including business
acquisitions.............. $ 2,052 $ 3,393 $14,697 $173,782 $ 601,137 $ 955,782
EBITDA(14)................. $(2,368) $(10,571) $(8,723) $(17,345) $ (31,462) $ (5,376)
<CAPTION>
Nine Months
Ended September 30,
------------------------------------------
Pro Forma
1997(1) 1998(9) 1998(7)(10)(15)
------------ ----------- ----------------
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures,
including business
acquisitions.............. $547,345 $251,253 $ 597,711
EBITDA(14)................. $(32,513) $ 9,868 $ 13,307
</TABLE>
(footnotes are located on the following page)
8
<PAGE>
- -------------
(1) The acquisitions of MWR Telecom, Inc. (``MWR'') (now part of McLeodUSA
Network Services, Inc. (``McLeodUSA Network Services'')), Ruffalo, Cody &
Associates, Inc. ("Ruffalo Cody"), McLeodUSA Media Group, Inc. ("McLeodUSA
Publishing") and Consolidated Communications Inc. ("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 $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 on March 4, 1997 (the "1997 Senior Discount Note Offering") and the
issuance of $225 million principal amount at maturity of 9 1/4% Senior
Notes due July 15, 2007 (the "1997 Senior Notes") yielding net proceeds of
approximately $217.6 million on July 21, 1997 (the "1997 Senior Note
Offering").
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997, pro
forma operations of Ovation from January 1, 1997 to December 31, 1997 and
certain adjustments attributable to these acquisitions. Also reflects
certain adjustments attributable to the 1997 Senior Discount Notes, the
1997 Senior Notes, the issuance of $300 million principal amount at
maturity of 8-3/8% Senior Notes due March 15, 2008 (the "March 1998 Senior
Notes") yielding net proceeds of approximately $291.9 million on March 10,
1998 (the "March 1998 Senior Note Offering") and the issuance of $300
million principal amount at maturity of 9-1/2% Senior Notes due November 1,
2008 (the "October 1998 Senior Notes") yielding net proceeds of
approximately $291.9 million on October 30, 1998 (the "October 1998 Senior
Note Offering") computed as if the 1997 Senior Discount Notes, the 1997
Senior Notes, the March 1998 Senior Notes and the October 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 (the "CCI Acquisition"), the issuance of the March 1998 Senior Notes
in March 1998, the issuance of the October 1998 Senior Notes in October
1998 and the Merger 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 March 1998 Senior Notes on March 16, 1998.
(10) Includes pro forma operations of Ovation from January 1, 1998 to September
30, 1998 and certain adjustments attributable to the March 1998 Senior Note
Offering and the October 1998 Senior Note Offering as if each had occurred
on January 1, 1998.
(11) Includes Ruffalo Cody and McLeodUSA Publishing, which McLeodUSA acquired on
July 15, 1996 and September 20, 1996, respectively.
(12) Includes CCI, which McLeodUSA acquired on September 24, 1997.
(13) Reflects the net proceeds of the October 1998 Senior Note Offering and
includes Ovation on a pro forma basis. McLeodUSA agreed to acquire Ovation
pursuant to the Merger Agreement on January 7, 1999.
(14) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA 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.
(15) Other pending acquisitions described in "Recent Developments" on page __
are not reflected in pro forma data.
9
<PAGE>
Selected Consolidated Financial and Operating Data of Ovation
(In thousands, except per share data)
(unaudited)
The information in the following unaudited table is based on Ovation's
financial statements presented later in this Prospectus and Proxy Statement,
including Ovation's financial statements for the period from March 27, 1997
(inception) to December 31, 1997, which were audited by Ernst & Young LLP,
independent certified public accountants. The following summary financial
information should be read in connection with these financial statements
including the notes which accompany them.
<TABLE>
<CAPTION>
Period from Nine Months Ended
Years Ended December 31, March 27, 1997 September 30,
----------------------------------- ( inception) to --------------------------------
Pro forma September 30, Pro forma
1997(1) 1997(1)(2) 1997 1998 1998(2)
-------------------- ------------- --------------------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue......................... $ 40 $ 3,963 $ -- $ 8,174 $21,776
------- ------- -------- ------- -------
Operating expenses:
Cost of service................ 61 2,743 4 1,584 6,717
Selling, general and
administrative................. 1,278 4,012 736 5,344 11,620
Depreciation and
amortization................... -- 4,250 -- 1,186 5,401
Other.......................... -- -- -- -- --
------- ------- -------- ------- -------
Total operating
expenses....................... 1,339 11,005 740 8,114 23,738
------- ------- -------- ------- -------
Operating loss.................. (1,299) (7,042) (740) 60 (1,962)
Interest income
(expense), net.................. (1) (545) 9 (1,165) (2,200)
Other income.................... -- -- -- -- --
Income taxes.................... -- -- -- -- --
------- ------- -------- ------- -------
Net loss........................ $(1,300) $(7,587) $ (731) $(1,105) $(4,162)
------- ------- -------- ------- -------
Less preferred stock dividends.. (240) (240) -- (639) (639)
------- ------- -------- ------- -------
Net loss per share applicable
to common stockholders.......... (1,540) (7,827) (731) (1,744) (4,801)
======= ======= ======== ======= =======
Loss per common
share........................... $(.15) $(.52) $(.10) $(.16) $(.30)
======= ======= ======== ======= =======
Weighted average
common shares
outstanding..................... 10,008 15,171 7,534 10,996 16,159
======= ======= ======== ======= =======
<CAPTION>
December 31, 1997 September 30, 1998
----------------- -------------------------
Actual Pro forma(3)
------ ------------
Balance Sheet Data:
Current Assets................. $ 804 $ 8,073 15,434
Working capital (deficit)...... (1,836) (2,451) (4,684)
Property and equipment, net.... 15,927 35,398 56,238
Total Assets................... 17,203 43,945 129,128
Long-Term Debt................. 9,309 19,762 67,632
Stockholders' Equity........... 5,253 13,659 41,378
- --------------
</TABLE>
(1) Includes the operations of Ovation from March 27, 1997 (date of inception)
to December 31, 1997.
(2) Includes the operations of BRE Communications, L.L.C. d/b/a Phone Michigan
acquired on October 1, 1998.
(3) Includes BRE Communications, L.L.C. d/b/a Phone Michigan acquired on
October 1, 1998.
10
<PAGE>
Comparative Per Share Data
The following table summarizes certain per share information for McLeodUSA
and Ovation on a historical, pro forma combined, and equivalent pro forma basis.
The Ovation "equivalent pro forma amounts" are calculated by multiplying the
unaudited pro forma combined per share amounts by .3592, which represents the
number of shares of McLeodUSA Common Stock that Ovation stockholders who elect
to receive McLeodUSA Common Stock in the Merger would have received in exchange
for each share of Ovation Common Stock if the Merger had been consummated on
February 1, 1999. The pro forma data do not purport to be indicative of the
results of future operations or the actual results that would have occurred had
the Merger occurred at the beginning of the period presented. The pro forma
financial data have been included in accordance with the rules of the SEC and
are provided for comparative purposes only.
<TABLE>
<CAPTION>
As of or for the As of or for the
nine months ended year ended
September 30, 1998 December 31, 1997
-------------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
McLeodUSA Common Stock
Income from Continuing Operations
Basic earnings per share
Historical $ (1.49) $ (1.45)
Pro Forma for the Merger(1) (1.80)(2) (2.18)(3)
Diluted earnings per share
Historical (1.49) (1.45)
Pro Forma for the Merger(1) (1.80)(2) (2.18)(3)
Book value per share at period end
Historical 7.66 9.05
Pro Forma for the Merger 9.61 (4) 10.94 (4)
Ovation Common Stock(5)
Income from Continuing Operations
Basic earnings per share
Historical $ (.16) $ (.15)
Pro Forma for Ovation (.30)(6) (.52)(7)
Equivalent pro forma (.65) (.78)
Diluted earnings per share
Historical (.16) (.15)
Pro Forma for Ovation (.30)(6) (.52)(7)
Equivalent pro forma (.65) (.78)
Book value per share at period end
Historical(8) 1.30 .52
Pro Forma for Ovation 4.00 1.78
Equivalent pro forma 3.45 3.93
</TABLE>
Dividends. McLeodUSA has never declared or paid a cash dividend with respect to
its common stock and Ovation has never declared or paid a cash dividend with
respect to the Ovation Common Stock or the Ovation Preferred Stock.
(footnotes are located on the following page)
11
<PAGE>
____________
(1) Earnings per share were calculated using income (loss) from continuing
operations. In calculating pro forma earnings per share, no adjustments to
the pro forma amounts have been made to reflect potential expense reductions
or revenue enhancements that may result from the Merger or the effect of
repurchases of McLeodUSA Common Stock, Ovation Common Stock or Ovation
Preferred Stock subsequent to the stated period. Pro Forma data does not
reflect other pending acquisitions described in "Recent Developments" on
page ___.
(2) Includes the pro forma operations of Ovation from January 1, 1998 to
September 30, 1998 and certain adjustments attributable to the March 1998
Senior Note Offering and the October 1998 Senior Note Offering as if each
had occurred on January 1, 1998.
(3) Includes the operations of CCI from January 1, 1997 to December 31, 1997,
the pro forma operations of Ovation for the period from March 27, 1997 (date
of inception) to December 31, 1997 and certain adjustments attributable to
the 1997 Senior Discount Note Offering, the 1997 Senior Note Offering, the
March 1998 Senior Note Offering and the October 1998 Senior Note Offering as
if each had occurred on January 1, 1997.
(4) Gives effect to the Merger as if it had occurred at the end of the period.
Pro Forma data does not reflect other pending acquisitions described in
"Recent Developments" on page ___.
(5) The equivalent pro forma computations assume that for each share of Ovation
Common Stock outstanding, Ovation stockholders who elect to receive
McLeodUSA Common Stock would receive .3592 shares of McLeodUSA Common Stock.
(6) Includes the operations of Ovation and BRE Communications, L.L.C. d/b/a
Phone Michigan on a pro forma basis for the nine months ended September 30,
1998.
(7) Includes the operations of Ovation from March 27, 1997 (date of inception)
to December 31, 1997 and BRE Communications, L.L.C. d/b/a Phone Michigan for
the year ended December 31, 1997 on a pro forma basis.
(8) Calculated by dividing stockholders' equity by the actual number of shares
of Ovation Common Stock outstanding at the end of the periods presented.
Shares of Ovation Common Stock outstanding as of September 30, 1998 and
December 31, 1997 were 18,808,342 and 10,526,316, respectively.
12
<PAGE>
Comparative Market Data
McLeodUSA. McLeodUSA Common Stock is, and the shares of McLeodUSA Common Stock
offered to Ovation stockholders are expected to be, listed on The Nasdaq Stock
Market and traded under the symbol "MCLD." McLeodUSA Common Stock has been
quoted on The Nasdaq Stock Market since McLeodUSA's initial public offering on
June 11, 1996. Prior to June 11, 1996, no established public trading market for
McLeodUSA Common Stock existed. The following table sets forth for the periods
indicated the high and low reported sales price per share of McLeodUSA Common
Stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
1996
Second Quarter (from June 11, 1996).... $ 26.75 $ 22.25
Third Quarter.......................... 39.50 23.50
Fourth Quarter......................... 34.50 25.00
1997
First Quarter.......................... $ 28.75 $17.375
Second Quarter......................... 34.25 16.375
Third Quarter.......................... 40.00 25.625
Fourth Quarter......................... 41.75 32.00
1998
First Quarter.......................... $46.375 $ 30.50
Second Quarter......................... 48.312 38.00
Third Quarter.......................... 40.125 21.375
Fourth Quarter......................... 38.50 15.25
1999
First Quarter (through Feb. __, 1999).. $ $______
</TABLE>
On January 6, 1999, the last full trading day prior to the public
announcement of the proposed Merger, the closing price of McLeodUSA Common Stock
was $33.125 per share. On February 1, 1999, the closing price reported for
McLeodUSA Common Stock was $41.625 per share.
As of February __, 1999, there were ___ holders of record of McLeodUSA
Common Stock.
Ovation. There is no established public trading market for Ovation Common Stock
or Ovation Preferred Stock.
Comparison. The following table shows (1) closing prices for McLeodUSA Common
Stock, (2) the estimated value of the McLeodUSA Common Stock into which Ovation
Common Stock would be convertible in the Merger, on an equivalent per share
basis calculated as if the Merger had occurred on February 1, 1999, and (3) the
amount of cash into which Ovation Common Stock would be convertible in the
Merger, calculated as if the Merger had occurred on February 1, 1999:
<TABLE>
<CAPTION>
Ovation Ovation
McLeod USA Common Stock Common Stock
Common Stock Equivalent Cash Consideration
Date Actual Price Per Share Per Share
- ---- ------------ --------- ---------
<S> <C> <C> <C>
January 6, 1999 $33.125 $11.899 $10.42
February 1, 1999 $41.625 $14.952 $10.42
</TABLE>
13
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors relating to McLeodUSA
and the other information in this Prospectus and Proxy Statement (including the
matters addressed in "Forward-Looking Statements" on page ii), before you decide
whether to adopt the Merger Agreement and approve the Merger. You should also
consider the additional information set forth in McLeodUSA's SEC Reports on
Forms 10-K, 10-Q and 8-K and in the other documents incorporated by reference in
this Prospectus and Proxy Statement. See "Where You Can Find More Information"
on page __.
Limited Operating History; Recent and Anticipated Losses.
McLeodUSA began operations in 1992. McLeodUSA's limited operating history and
rapid growth may make it more difficult for you to evaluate its performance. As
a result of expenses related to the expansion of its existing businesses and
strategic acquisitions, McLeodUSA has incurred significant losses. Since January
1, 1995, McLeodUSA's net losses have been as follows:
<TABLE>
<CAPTION>
Net Losses
----------
Period Amount
------ ------
<S> <C> <C>
1995 $ 11.3 million
1996 $ 22.3 million
1997 $ 79.9 million
1998 $ 124.9 million
</TABLE>
McLeodUSA expects to incur significant operating losses during the next several
years while it develops its businesses, expands its fiber optic network and
develops a personal communications services ("PCS") system. If McLeodUSA does
not become profitable in the future, it could have difficulty obtaining funds to
continue its operations. See "--Significant Capital Requirements."
Significant Capital Requirements.
McLeodUSA needs significant capital to continue to expand its operations,
facilities, network and services. As of September 30, 1998, based on its plan
and projections as of that date, McLeodUSA estimated that it would require $1.1
billion through 2001. This estimate included the projected costs of:
. building its fiber optic network, including intra-city fiber optic networks
. expanding operations in existing and new markets
. developing a PCS system
. funding general corporate expenses
Since September 30, 1998, McLeodUSA has entered into agreements to acquire
DTG, TDI and Info America, in addition to the transaction described in this
Prospectus and Proxy Statement. These transactions change McLeodUSA's business
plan and growth projections. McLeodUSA anticipates that it will need additional
capital to continue to expand its markets, operations, facilities, network and
services.
McLeodUSA expects to use the following to address its capital needs:
. approximately $591.7 million of cash and investments on hand at December 31,
1998
. additional issuances of debt or equity securities
. a proposed $100.0 million revolving credit facility
. projected operating cash flow
McLeodUSA cannot assure you that its capital resources will permit it to fund
its planned network deployment and operations or achieve operating
profitability.
McLeodUSA's estimate of 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 actual amount and timing of
14
<PAGE>
McLeodUSA's future capital requirements may differ substantially from its
estimate due to factors such as:
. strategic acquisitions such as the Merger, the DTG Merger, the TDI Merger and
the Info America Merger
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for its services
. regulatory, technological or competitive developments
. new opportunities
McLeodUSA also expects to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. McLeodUSA may require additional
financing if it pursues any of these opportunities.
McLeodUSA may meet any additional capital needs by issuing additional debt or
equity securities or borrowing funds from one or more lenders. McLeodUSA cannot
assure you that it will have timely access to additional financing sources on
acceptable terms. Failure to generate or raise sufficient funds may require
McLeodUSA to delay or abandon some of its expansion plans or expenditures, which
could have a material adverse effect on its business, results of operations or
financial condition.
Variability of Operating Results.
McLeodUSA's revenues and operating results may fluctuate significantly from
period to period for many reasons, including:
. competition
. availability or announcement of alternative technologies
. fluctuations in the results of operations of existing business units,
recently acquired subsidiaries or newly established business units
. changes in market growth rates for different products and services
. general economic conditions
. significant expenses associated with the construction and expansion of its
network and services, including the development, construction and operation
of a PCS system
These factors and any resulting fluctuations in McLeodUSA's operating results
will make period to period comparisons of its financial condition less
meaningful and could have a material adverse effect on its business, results of
operations and financial condition.
Uncertainties of Expansion.
McLeodUSA has rapidly expanded and developed its network and services. Further
expansion and development will depend on a number of factors, including:
. cooperation of the incumbent local exchange carriers
. regulatory and governmental developments
. changes in the competitive climate in which it operates
. development of customer billing, order processing and network management
systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
McLeodUSA will need to continue to improve its operational and financial
systems and its procedures and controls. McLeodUSA must also grow, train and
manage its employees. Failure by McLeodUSA to manage its anticipated growth
effectively could have a material adverse effect on its business, results of
operations and financial condition.
Risks Associated With Acquisitions.
As part of its strategy, McLeodUSA has acquired other companies. McLeodUSA
will
15
<PAGE>
continue to evaluate additional strategic acquisitions and alliances principally
relating to its current operations. These transactions commonly involve a number
of risks, including:
. difficulty assimilating acquired operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel
. inability to successfully incorporate acquired assets and rights into
McLeodUSA's service offerings
. inability to maintain uniform standards, controls, procedures and policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on McLeodUSA's business,
results of operations and financial condition. In connection with these
transactions, McLeodUSA may also issue additional equity securities, incur
additional debt or incur significant amortization expenses related to goodwill
and other intangible assets.
Dependence on Regional Bell Operating Companies.
McLeodUSA depends on the Regional Bell Operating Companies ("RBOCs") to
provide most of its core local and some of its long distance services. U S WEST
Communications, Inc. ("U S WEST"), Ameritech Corporation ("Ameritech") and
Southwestern Bell Telephone Company ("SBC") are McLeodUSA's primary suppliers of
local central office switching and local access lines. Their facilities allow
McLeodUSA to provide (1) local service, (2) long distance service and (3)
interexchange private lines. Today, without using these facilities, McLeodUSA
could not provide bundled local and long distance services to most of its
customers, although it could provide stand-alone long distance service to some
customers and stand-alone local and long distance service to a few customers.
McLeodUSA's plans to provide additional local services using its own switches
also depend on the RBOCs. In order to interconnect its switches and other
facilities to network elements controlled by the RBOCs, McLeodUSA must first
negotiate and enter into interconnection agreements with them. In August 1996,
the Federal Communications Commission ("FCC") released a decision (the "FCC
Interconnection Decision") implementing the portions of the Telecommunications
Act of 1996 (the "Telecommunications Act") that impose interconnection
obligations on the RBOCs. The U.S. Eighth Circuit Court of Appeals vacated
certain provisions of the FCC Interconnection Decision. In January 1999, the
U.S. Supreme Court reversed major portions of the decision of the U.S. Eighth
Circuit Court of Appeals and remanded the case for further proceedings. These
further proceedings could affect McLeodUSA's ability to obtain interconnection
agreements on acceptable terms. McLeodUSA cannot assure you that it will
succeed in obtaining interconnection agreements on terms that would permit it to
offer local services at profitable and competitive rates.
Any successful effort by U S WEST, SBC, Ameritech or other local exchange
carriers to deny or limit McLeodUSA's access to their network elements or
wholesale services would have a material adverse effect on its business, results
of operations and financial condition.
U S WEST Centrex Action and Other Actions by U S WEST.
On February 5, 1996, U S WEST filed tariffs and other notices with the public
utilities commissions in its fourteen-state service region to limit future
Centrex access to its switches (the "U S WEST Centrex Action"). Centrex access
allows a large customer to aggregate lines, have control over certain
characteristics of those lines and provide a set of standard features on those
lines. Under the terms of the U S WEST Centrex Action, U S WEST would permit
McLeodUSA to use U S WEST's central office switches until April 2005, but would
not allow McLeodUSA to expand to new cities and would severely limit the number
of new lines it could partition onto U S WEST's switches in cities served by
McLeodUSA.
McLeodUSA has challenged, or is challenging, the U S WEST Centrex Action in
many of the
16
<PAGE>
states where McLeodUSA does business or plans to do business. McLeodUSA has
succeeded in blocking the U S WEST Centrex Action in Iowa, Minnesota, South
Dakota, North Dakota and Colorado, although U S WEST could take further action
in some of these states. In Montana, Nebraska and Idaho, however, similar
challenges to the U S WEST Centrex Action have not succeeded. In Wyoming and
Utah, challenges to the U S WEST Centrex Action remain pending.
U S WEST has introduced other measures that may make it more difficult or
expensive for McLeodUSA to use Centrex service. In January 1997, U S WEST
proposed certain interconnection surcharges in several of the states in its
service region. In February 1997, McLeodUSA joined other parties in filing a
petition with the FCC objecting to this proposal based on McLeodUSA's belief
that it violates certain provisions of the Telecommunications Act. The matter
remains pending before the FCC and various state public utilities commissions.
McLeodUSA anticipates that U S WEST will also pursue legislative initiatives
in states within McLeodUSA's target market area to reduce state regulatory
oversight over its rates and operations. If adopted, these initiatives could
make it more difficult for McLeodUSA to challenge U S WEST's actions in the
future.
McLeodUSA cannot assure you it will succeed in its challenges to the U S WEST
Centrex Action or other actions by U S WEST that would prevent or deter
McLeodUSA from using U S WEST's Centrex service or network elements. If U S WEST
prevails in any jurisdiction, McLeodUSA may not be able to offer integrated
telecommunications services in that jurisdiction, which could have a material
adverse effect on its business, results of operations and financial condition.
PCS System Implementation Risks.
McLeodUSA does not own or operate any facilities for providing PCS services to
the public. Developing a PCS system involves a high degree of risk and will
impose significant demands on McLeodUSA's management and financial resources.
McLeodUSA may not succeed in developing a PCS system. Even if McLeodUSA spends
substantial amounts to develop such a system, McLeodUSA may not make a profit
from PCS operations. To implement a PCS system successfully, McLeodUSA must,
among other things:
. Select a Digital Protocol. McLeodUSA must choose from among several competing
and potentially incompatible digital protocol technologies. If the digital
protocol technology McLeodUSA chooses does not become widely employed,
McLeodUSA's future offering of PCS service could fail.
. Build Out its Wireless Infrastructure. FCC rules impose minimum PCS buildout
and population coverage requirements. If McLeodUSA does not comply with these
requirements, the FCC could fine McLeodUSA or revoke its PCS licenses, even
after it has spent substantial amounts to develop a PCS system.
. Enter Into "Roaming" Arrangements. The success of McLeodUSA's PCS system will
depend on its ability to enter into "roaming" arrangements with other PCS
operators throughout the United States. McLeodUSA has not entered into any
such arrangements and cannot assure you that it will be able to do so.
. Relocate Fixed Microwave Licensees. To secure a sufficient unencumbered PCS
spectrum, McLeodUSA may need to move 19 microwave licensees to a different
spectrum. The time and expense of negotiating with and relocating these
microwave licensees could adversely affect McLeodUSA's proposed PCS system.
McLeodUSA's success in implementing and operating a PCS system will also
depend on a number of factors beyond McLeodUSA's control, including:
. changes in communications service rates charged by other companies
. changes in the supply and demand for PCS services due to competition with
other wireline and wireless operators in the same geographic area
17
<PAGE>
. changes in the federal, state or local regulatory requirements affecting the
operation of PCS systems
. changes in PCS or competing wireless technologies that could render obsolete
the technology and equipment McLeodUSA chooses for its PCS system
Dependence on Key Personnel.
McLeodUSA's future success depends on the continued employment of its senior
management team, particularly Clark E. McLeod, McLeodUSA's Chairman and Chief
Executive Officer, and Stephen C. Gray, McLeodUSA's President and Chief
Operating Officer. McLeodUSA does not have term employment agreements with these
employees.
McLeodUSA believes its success also depends in large part on its ability to
attract, develop, motivate and retain experienced and innovative management. The
loss of the services of key personnel, or the inability to attract additional
qualified personnel, could have a material adverse effect on McLeodUSA's
business, results of operations and financial condition.
Need to Obtain and Maintain Permits and Rights-of-Way.
To obtain access to rights-of-way needed to install its fiber optic cable,
McLeodUSA must reach agreements with state highway authorities, local
governments, transit authorities, local exchange carriers, other utilities,
railroads, interexchange carriers and other parties. The loss of any of its
rights-of-way could have a material adverse effect on McLeodUSA's business,
results of operations and financial condition. For example, McLeodUSA may need
to spend significant sums to remove and relocate its facilities.
Rapid Technological Changes.
Communications technology is changing quickly. Unexpected developments, or
McLeodUSA's failure to adapt to them, could have a material adverse effect on
McLeodUSA's business, results of operations and financial condition.
Control by Management and Principal Stockholders.
As of December 31, 1998, IES Investments Inc. ("IES"), MHC Investment Company
("MHC"), Richard A. Lumpkin and various trusts for the benefit of his family,
Clark and Mary McLeod, and McLeodUSA's directors and executive officers
beneficially owned approximately 59.4% of the outstanding McLeodUSA Common
Stock. These stockholders can collectively control management policy and all
corporate actions requiring a stockholder vote, including election of the Board
of Directors. IES, MHC, Mr. Lumpkin and various trusts for the benefit of his
family, and Mr. and Mrs. McLeod have entered into certain arrangements for the
election of directors and other matters. The fact that these stockholders hold
so much McLeodUSA Common Stock could make it more difficult for a third party to
acquire McLeodUSA. McLeodUSA's Certificate of Incorporation contains provisions
that may have the same effect.
Significant Debt.
McLeodUSA has substantial debt. As of December 31, 1998, McLeodUSA had $1.2
billion of long-term debt and $459.1 million of stockholders' equity. As a
result, McLeodUSA expects its fixed charges to exceed its earnings for the
foreseeable future. This amount of debt could adversely affect McLeodUSA in a
number of ways, including:
. limiting its ability to obtain necessary financing in the future
. limiting its flexibility to plan for, or react to, changes in its business
. requiring it to use a substantial portion of its cash flow from operations to
pay debt rather than for other purposes, such as working capital or capital
expenditures
. making it more highly leveraged than some of its competitors, which may place
it at a competitive disadvantage
18
<PAGE>
. making it more vulnerable to a downturn in its business
Restrictive Covenants Imposed by Indentures.
The indentures that govern the terms of McLeodUSA's debt impose operating and
financial restrictions that limit its discretion on certain business matters.
These restrictions limit or prohibit McLeodUSA's ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. create liens
. enter into transactions with affiliates or related persons
. sell assets
. consolidate, merge or sell all or substantially all of its assets
These restrictions could make it more difficult for McLeodUSA to expand,
finance its operations or engage in other business activities that may be in its
interest.
Competition.
Wireline Competition. McLeodUSA faces intense competition from incumbent local
exchange carriers, including U S WEST, Ameritech, SBC and GTE. These companies
currently dominate their local telecommunications markets.
McLeodUSA's long distance services compete with hundreds of other companies in
the long distance marketplace. Three major competitors, AT&T, MCI WorldCom and
Sprint, dominate the long distance market. AT&T, MCI WorldCom and Sprint have
also indicated their intention to offer local telecommunications services,
either directly or in conjunction with competitive access providers or cable
television operators.
Other competitors may include cable television companies, competitive access
providers, microwave and satellite carriers, wireless telecommunications
providers, teleports, private networks owned by large end-users, and
telecommunications management companies.
These and other firms may enter the markets where McLeodUSA focuses its sales
efforts. Many of McLeodUSA's existing and potential competitors have financial
and other resources far greater than those of McLeodUSA.
The trend toward business combinations and strategic alliances may strengthen
certain of McLeodUSA's competitors. For example, WorldCom acquired MCI in
September 1998 and AT&T acquired Teleport Communications Group Inc. in July
1998. In addition, merger plans have been announced by:
. AT&T and Tele-Communications, Inc.
. SBC and Ameritech
. Bell Atlantic and GTE
U S WEST and Ameritech also announced in May 1998 that each had entered into a
marketing arrangement with Qwest Communications, a long distance company. The
FCC ruled these marketing arrangements violate the Telecommunications Act, but
both U S WEST and Ameritech have appealed this ruling. If these or other
competitors enter into alliances or combinations it could put McLeodUSA at a
significant disadvantage.
The Telecommunications Act provides the incumbent local exchange carriers with
new competitive opportunities. It will permit the RBOCs, upon the satisfaction
of certain conditions, to offer out-of-region long distance services to
customers in their respective regions. In December 1997, the U.S. District Court
for the Northern District of Texas ruled certain of these conditions
unconstitutional. In September 1998, the U.S. Fifth Circuit Court of Appeals
reversed the District Court decision and the U.S. Supreme Court has denied all
petitions for certiorari. Additional competition from the RBOCs could have a
material adverse effect on McLeodUSA's business, results of operations and
financial condition.
19
<PAGE>
Wireless Competition. The wireless telecommunications industry is experiencing
significant technological change. McLeodUSA believes the market for wireless
services will expand significantly as:
. equipment costs decline
. equipment becomes more convenient and functional
. wireless services become more diverse
. technology improves
. new competitors enter the market
McLeodUSA also believes wireless service providers will offer wireline
replacement products that may result in wireless services becoming the
customer's primary means of communication. McLeodUSA expects up to eight
wireless competitors in each of its proposed PCS markets. McLeodUSA could face
additional competition from mobile satellite services.
Competition with these or other providers of wireless telecommunications
services may be intense. Many of McLeodUSA's potential wireless competitors have
financial and other resources far greater than those of McLeodUSA and have more
experience testing new or improved products and services. In addition, several
wireless competitors operate or plan to operate, through joint ventures and
affiliation arrangements, wireless telecommunications systems that encompass
most of the United States.
Significant Government Regulation.
McLeodUSA's facilities and services are subject to federal, state and local
regulation. The FCC has jurisdiction over all of McLeodUSA's facilities and
services to the extent they are used for interstate or international
communications. State regulatory commissions retain jurisdiction over the same
facilities and services to the extent they are used for intrastate
communications. Local governments generally require McLeodUSA to obtain licenses
or permits to install and operate its networks in public rights-of-way.
McLeodUSA's proposed wireless system will be subject to varying degrees of
regulation by the FCC, state regulatory commissions and local governments.
McLeodUSA's direct marketing, telemarketing and fund-raising activities are also
subject to federal and state regulatory requirements. Any of the following could
have a material adverse effect on McLeodUSA's business, results of operations
and financial condition:
. failure to maintain proper federal and state tariffs
. failure to maintain proper state certifications
. failure to comply with federal, state or local laws and regulations
. failure to obtain and maintain required licenses and permits
. burdensome license or permit requirements to operate in public rights-of-way
. burdensome or adverse regulatory requirements
Volatility of Stock Price.
The market price of McLeodUSA Common Stock is extremely volatile and has
fluctuated over a wide range. From January 1, 1998 to December 31, 1998, the
McLeodUSA Common Stock has traded as high as $48.3125 per share and as low as
$15.25 per share. The market price may continue to fluctuate significantly in
response to various factors, including:
. low trading volume
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. market conditions in the industry
. announcements by competitors
. regulatory and judicial actions
. general economic conditions
In addition, the stock market has from time to time experienced significant
price and volume fluctuations unrelated to the operating performance of
particular companies. These fluctuations may continue to affect the stock prices
of high growth companies (such as McLeodUSA) in particular. The market price of
the McLeodUSA Common Stock may decline.
20
<PAGE>
Year 2000 Date Conversion.
McLeodUSA is currently verifying system readiness for the processing of date-
sensitive information by its computerized information systems. The Year 2000
problem impacts computer programs and hardware timers using two digits (rather
than four) to define the applicable year. Some of McLeodUSA's programs and
timers 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.
McLeodUSA is reviewing its information technology ("IT") and non-IT computer
systems and programs to determine which are not capable of recognizing the Year
2000 and to verify system readiness for the millennium date. The review covers
all of McLeodUSA's operations and is centrally managed. The review includes:
1. increasing employee awareness and communication of Year 2000 issues
2. inventorying hardware, software and data interfaces and confirming Year 2000
readiness of key vendors
3. identifying mission-critical components for internal systems, vendor
relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. remediating any identified problems by correcting or replacing systems or
components
7. testing and verifying systems
8. implementing the remediation plan
9. developing contingency plans
10. training for contingency plans
McLeodUSA has completed more than 90% of the activities required for the first
three of these steps, more than 60% of the activities required for the fourth
and fifth steps and more than 25% of the activities required for the sixth step.
McLeodUSA is in the initial stages of performing the activities required to
complete the remaining steps and has begun to develop contingency plans to
handle its most reasonably likely worst case Year 2000 scenarios.
McLeodUSA estimates that its Year 2000 readiness costs will not exceed $11.5
million. McLeodUSA generally expenses these costs as incurred. While certain
costs have been incurred, McLeodUSA has not incurred any material historical
costs for remediation. McLeodUSA does not expect these costs to have a material
adverse effect on its financial position, results of operations or cash flows.
McLeodUSA's estimate of its Year 2000 readiness costs is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Costs, results, performance and
effects of Year 2000 activities described in those forward-looking statements
may differ materially from actual costs, results, performance and effects in the
future due to the interrelationship and interdependence of McLeodUSA's computer
systems and those of its vendors, material service providers, customers and
other third parties.
McLeodUSA has not yet fully identified its most reasonably likely worst case
Year 2000 scenarios. McLeodUSA continues to contact its vendors, suppliers and
third parties with which it has material relationships, regarding their state of
readiness. This activity is focused primarily on mission critical systems and
key business suppliers. Until McLeodUSA has received and analyzed substantial
responses from them it will have difficulty determining its worst case
scenarios.
McLeodUSA has begun to develop contingency plans to handle worst case
scenarios, to the extent they can be identified fully. McLeodUSA intends to
complete its contingency planning after completing its determination of worst
case scenarios. Completion of these activities depends upon the responses to the
inquiries McLeodUSA has made of its major vendors, material service providers
and third parties with which it has material relationships. McLeodUSA has also
begun work on contingency plans for certain systems identified as critical to
its operations.
If McLeodUSA, its major vendors, its material service providers or its
customers fail to address Year 2000 issues in a timely manner, such failure
21
<PAGE>
could have a material adverse effect on McLeodUSA's business, results of
operations and financial condition. McLeodUSA depends on local exchange
carriers, primarily the RBOCs, to provide most of its local and some of its long
distance services. To the extent U S WEST, Ameritech or SBC fail to address Year
2000 issues which might interfere with their ability to fulfill their
obligations to McLeodUSA, such interference could have a material adverse effect
on McLeodUSA's future operations. If other telecommunications carriers are
unable to resolve Year 2000 issues, it is likely that we will be affected to a
similar degree as others in the telecommunications industry.
Prohibition on Dividends.
The indentures governing McLeodUSA's debt prohibit McLeodUSA from paying
cash dividends. Consequently, McLeodUSA does not anticipate paying any dividends
for the foreseeable future.
22
<PAGE>
THE SPECIAL MEETING
This Prospectus and Proxy Statement is first being mailed by Ovation to the
holders of the Ovation Common Stock and the Ovation Preferred Stock on or about
__________, 1999, and is accompanied by the notice of the Special Meeting of
Ovation stockholders and a form of proxy being solicited by the Ovation Board
for use at the Special Meeting and at any adjournments or postponements thereof.
Date, Time and Place
The Special Meeting is scheduled to be held on ____________________, 1999,
at 10:00 a.m. local time, at 400 South Highway 169, Suite 750, Minneapolis,
Minnesota 55426.
Matters to be Considered
At the Special Meeting, Ovation stockholders will be asked to consider and
vote on a proposal to adopt the Merger Agreement by and among McLeodUSA, Merger
Sub, Ovation and the Principal Company Stockholders, and approve the Merger and
the transactions contemplated by the Merger Agreement, and on such other matters
as may properly be submitted to a vote at the Special Meeting. Pursuant to the
Merger Agreement, Ovation would be merged with and into Merger Sub and become a
wholly owned subsidiary of McLeodUSA.
Proxies
The accompanying form of proxy is for use at the Special Meeting if an
Ovation stockholder cannot or does not wish to attend and vote in person. You
may revoke your proxy at any time before it is exercised, by submitting to the
Corporate Secretary of Ovation written notice of revocation or a properly
executed proxy with a later date, or by attending the Special Meeting and voting
in person. Written notices of revocation and other communications with respect
to the revocation of proxies should be addressed to Ovation Communications,
Inc., 400 South Highway 169, Suite 750, Minneapolis, Minnesota 55426,
Attention: Corporate Secretary. All shares represented by valid proxies
received, and not revoked before they are exercised, will be voted in the manner
specified in such proxies. If no specification is made, such shares will be
voted in favor of the adoption of the Merger Agreement and approval of the
Merger and the transactions contemplated by the Merger Agreement.
The Ovation Board is not currently aware of any other matters which will
come before the Special Meeting. If any other matter should be presented at the
Special Meeting for action, the persons named in the accompanying proxy card
will vote the proxy in their own discretion.
OVATION STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS.
23
<PAGE>
Solicitation of Proxies
Ovation will bear the entire cost of soliciting proxies from the Ovation
stockholders including the printing costs of this Prospectus and Proxy Statement
and related materials. In addition to solicitation of the proxies by mail,
Ovation will request banks, brokers and other record holders to send proxies and
proxy material to the beneficial owners of Ovation Common Stock and Ovation
Preferred Stock and secure their voting instructions. Ovation will reimburse
such record holders for their reasonable expenses in so doing. Ovation intends
to use several of its officers and regular employees, who will not be specially
compensated, to solicit proxies from stockholders, either personally or by
telephone, telegram, facsimile or electronic or United States mail.
Record Date and Voting Rights
Pursuant to the provisions of the Delaware General Corporation Law (the
"DGCL") and the Ovation Bylaws, holders of record of shares of Ovation Common
Stock or Ovation Preferred Stock at the close of business on ___________, 1999
will be entitled to notice of and to vote at the Special Meeting (the "Record
Date"). 23,971,756 shares of Ovation Common Stock and 240,000 shares of Ovation
Preferred Stock are entitled to vote at the Special Meeting. On the Record
Date, there were 26 record holders of Ovation Common Stock and 3 record holders
of Ovation Preferred Stock.
Each share of Ovation Common Stock entitles its holder to one vote and each
share of Ovation Preferred Stock entitles its holder to 50 votes. The
affirmative vote of a majority of the voting power attributable to the
outstanding shares of Ovation Common Stock and Ovation Preferred Stock, voting
together as a class, is required to adopt the Merger Agreement and approve the
transactions contemplated thereby.
Shares of Ovation Common Stock and Ovation Preferred Stock present in
person at the Special Meeting but not voting, and shares of Ovation Common Stock
and Ovation Preferred Stock for which Ovation has received proxies but with
respect to which holders of such shares have abstained, will be counted as
present at the Special Meeting for purposes of determining the presence of a
quorum for transacting business. Certain brokers who hold shares of Ovation
Common Stock or Ovation Preferred Stock in nominee or "street" name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote shares held for such customers with respect to the
matters to be voted upon at the Special Meeting without specific instructions
from such customers. Shares represented by proxies returned by a broker holding
such shares in "street" name will be counted for purposes of determining whether
a quorum exists, even if such shares are not voted in matters where
discretionary voting by the broker is not allowed ("broker non-votes").
Certain directors, executive officers and stockholders of Ovation have
entered into voting agreements with McLeodUSA pursuant to which such persons
have agreed to vote their shares in favor of the Merger Agreement and against
any competing transaction. The 22,478,894 shares of Ovation Common Stock and
234,000 shares of Ovation Preferred Stock subject to these agreements represent
approximately 94% of the voting power attributable to the shares of Ovation
Common Stock and Ovation Preferred Stock entitled to vote at the Special
Meeting. Consequently, adoption of the Merger Agreement and approval of the
Merger is assured.
For additional information about beneficial ownership of Ovation Common
Stock and Ovation Preferred Stock by stockholders owning more than 5% of the
Ovation Common Stock or Ovation Preferred Stock and by directors and executive
officers of Ovation, see "Security Ownership of Certain Beneficial Owners and
Management of Ovation."
24
<PAGE>
Recommendation of Ovation Board
The Ovation Board has determined that the Merger is fair to Ovation and its
stockholders and is in the best interests of Ovation and its stockholders, and,
therefore, has approved the Merger Agreement. THE OVATION BOARD UNANIMOUSLY
RECOMMENDS THAT THE STOCKHOLDERS OF OVATION VOTE FOR ADOPTION OF THE MERGER
AGREEMENT. See "The Merger--Recommendation of the Ovation Board and Reasons for
the Merger."
25
<PAGE>
THE MERGER
General
The Board of Directors of McLeodUSA (the "McLeodUSA Board"), the
Ovation Board and the Board of Directors of Merger Sub have each unanimously
approved the Merger Agreement, which provides for the merger of Ovation with and
into Merger Sub, with Merger Sub as the surviving corporation in the Merger (the
"Surviving Corporation"). Each share of Ovation Preferred Stock outstanding
immediately prior to the Merger (other than shares owned by Ovation, McLeodUSA
or any direct or indirect wholly owned subsidiary of McLeodUSA or Ovation) would
be converted into the right to receive an amount of cash, and each share of
Ovation Common Stock outstanding immediately prior to the Merger (other than
shares owned by Ovation, McLeodUSA or any direct or indirect wholly owned
subsidiary of McLeodUSA or of Ovation) would be converted, at the election of
the holder thereof, into the right to receive an amount of cash or shares of
McLeodUSA Common Stock. The amount of cash into which each share of Ovation
Preferred Stock would be converted and the amount of cash or shares of McLeodUSA
Common Stock into which each share of Ovation Common Stock would be converted
will be determined immediately prior to consummation of the Merger in accordance
with formulas specified in the Merger Agreement, as described under "Terms of
the Merger Agreement and Related Transactions--Conversion of Ovation Preferred
Stock and Ovation Common Stock; Treatment of Options." Fractional shares of
McLeodUSA Common Stock will not be issued in connection with the Merger, and
Ovation stockholders otherwise entitled to a fractional share would be paid in
cash for such fractional share, in the manner described under "Terms of the
Merger Agreement and Related Transactions--Exchange of Certificates; Fractional
Shares."
Background of the Merger
On May 7, 1998, Steve Gray, President and Chief Operating Officer of
McLeodUSA and John Wray, Vice President for Corporate Development of McLeodUSA,
telephoned Paul Thibeau, Vice President of Sales and Marketing for Ovation
Communications, Inc. to initiate discussions between the two companies,
potentially leading to a mutually beneficial business combination.
On June 17, 1998, David Boatner, Group Vice President at McLeodUSA, met
with Tim Devine, Chief Executive Officer of Ovation and expressed continued
interest in developing a relationship between the two companies. A meeting was
scheduled for July 7, 1998.
On June 24, 1998, Ken Kirley, Ovation's General Counsel, forwarded a
nondisclosure agreement to Mr. Boatner. On June 29, 1998, the parties entered
into a nondisclosure agreement.
The July 7, 1998 meeting was subsequently rescheduled to August 13, 1998
when Messrs. Gray, Boatner and Wray met with Mr. Devine, Scott Rediger, Senior
Vice President of Business Development of Ovation and Nick Lenoci, Ovation's
Chief Operating Officer at the McLeodUSA headquarters in Cedar Rapids, Iowa to
discuss the respective companies' history and business plans.
From August 13, 1998 through October 13, 1998, numerous discussions were
held between Messrs. Gray and Devine.
On October 13, 1998, Messrs. Gray, Boatner and Wray traveled to Ovation's
headquarters located in Minneapolis, Minnesota, toured the facilities and each
of the parties agreed that it was desirable to pursue further discussions
concerning a possible business relationship. Such discussions were primarily
held between Messrs. Gray and Devine via the telephone over the next two weeks.
26
<PAGE>
On October 26, 1998, Mr. Wray requested certain financial information
concerning Ovation from Mr. Devine. Such information was received within the
next month. Throughout this time, telephone conversations between Messrs. Gray
and Devine continued.
On December 17, 1998, Clark McLeod, McLeodUSA's Chairman, Mr. Gray, J. Lyle
Patrick, Group Vice President and Chief Financial Officer for McLeodUSA, Mr.
Wray and Tracy Millard, Director of Corporate Development for McLeodUSA,
traveled to Chicago, Illinois to tour Ovation's Chicago facilities and meet with
Messrs. Devine, Rediger and Charles Osborne, Ovation's Chief Financial Officer
and Treasurer. Ovation's principal stockholder, Media/Communications Partners
III Limited Partnership, was represented by Jim Wade, General Partner, and Peter
Claudy, Partner. Extensive discussions took place at this meeting and
negotiations to combine the two companies commenced.
On December 22 and 23, 1998, conference calls between Ovation,
Media/Communications Partners III Limited Partnership and McLeodUSA were held to
discuss the specific issues related to the proposed merger transaction. On
December 23, 1998 the two parties reached agreement on the substantive points of
the transaction contingent on negotiating an acceptable definitive merger
agreement, stockholders' agreement and obtaining board of director approval. It
was determined that all parties would work toward execution of a definitive
merger agreement by January 7, 1999.
Significant negotiations and discussions ensued between Ovation and
McLeodUSA and their respective legal counsel on the terms of the proposed merger
agreement.
On December 29, 1998 and December 30, 1998 various McLeodUSA
representatives met with members of the Ovation management team in Minneapolis,
Minnesota to review Ovation and its operations.
Extensive negotiations continued between the parties concerning the terms
of a possible business combination between Ovation and McLeodUSA.
On January 7, 1999, the parties resolved all terms of the Merger Agreement
and a stockholders' agreement and the Merger Agreement was executed by all
parties.
After the Merger Agreement was signed on January 7, 1999, McLeodUSA and
Ovation each issued a press release announcing the execution of the Merger
Agreement and the transactions contemplated by the Merger Agreement.
Recommendation of the Ovation Board and Reasons for the Merger
The Ovation Board believes that the Merger is fair to, and in the best
interests of, Ovation and Ovation stockholders. Accordingly, the Ovation Board
has unanimously approved the Merger Agreement and unanimously recommends that
Ovation stockholders vote for the adoption of the Merger Agreement and the
approval of the Merger and the transactions contemplated by the Merger
Agreement.
In making its decision to approve the Merger Agreement and to recommend to
the holders of Ovation Common Stock and Ovation Preferred Stock that they vote
their shares in favor of adoption of the Merger Agreement, the Ovation Board
considered a number of factors, including, among others, the following material
considerations:
(i) The directors' familiarity with and review of the business, financial
condition and result of operations of Ovation, Ovation's competitive position in
its business, and other financial information and general economic conditions;
27
<PAGE>
(ii) The advantages of a strategic combination with McLeodUSA in
enhancing Ovation's product and service offerings, growth prospects and
competitive position;
(iii) The possible alternatives to the Merger including, among others,
continuing to operate Ovation as an independent entity and the associated risks;
(iv) The historical valuations of Ovation Preferred Stock and Ovation
Common Stock relative to the value represented by the consideration to be
received in the Merger;
(v) The anticipated costs associated with pursuing other strategic
alternatives;
(vi) The directors' belief that the consideration payable in the Merger
represented the highest value per share that could be negotiated with McLeodUSA;
(vii) The timing of the transaction and premiums currently reported to be
obtained in comparable transactions;
(viii) That shares of McLeodUSA Common Stock are traded on The Nasdaq
Stock Market while there is no established market for shares of Ovation Common
Stock or Ovation Preferred Stock;
(ix) The proposed structure of the transaction, including its tax-free
nature;
(x) The terms and conditions of the Merger Agreement, including, among
others, the right of the Ovation Board in certain circumstances to terminate the
Merger Agreement, and the financial consequences of such termination; and
(xi) The financial condition of McLeodUSA.
The Ovation Board also recognized that holders of Ovation Common Stock will
be entitled to receive shares of McLeodUSA Common Stock in the Merger, and that
this would allow such holders the opportunity to participate in the benefits, if
any, of increases in the value of McLeodUSA's business and properties following
the Merger. Accordingly, the Ovation Board gave consideration to McLeodUSA's
future prospects, as well as its historical results of operations.
The Ovation Board did not assign relative weights to the foregoing factors
or determine that any factor was of specific importance relative to any other
factor. Rather, the Ovation Board viewed its position and recommendation as
being based on the totality of the information presented to it and considered by
it.
Interests of Certain Persons in the Merger
Certain members of Ovation's management and the Ovation Board may be deemed
to have certain interests in the Merger that are in addition to their interests
as Ovation stockholders generally. The Ovation Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the transactions contemplated thereby.
Employment Arrangements. It is expected that McLeodUSA would enter into an
agreement to employ Timothy T. Devine, President, Chief Executive Officer and a
Director of Ovation, on an "at will" basis beginning at the Effective Time. It
is expected that Mr. Devine would receive a base salary of $180,000 and would be
entitled to earn an annual bonus of up to approximately $90,000 based on the
financial performance of McLeodUSA. In addition, it is expected that Mr. Devine
would receive options to purchase 150,000 shares of McLeodUSA Common Stock that
would vest at a rate of 25% per year over a period of four years, and that Mr.
Devine would enter into a confidentiality, nonsolicitation and noncompetition
agreement with McLeodUSA
28
<PAGE>
pursuant to which he would agree not to compete with McLeodUSA in areas where it
provides telecommunications services (the "Noncompete Provision") for a period
of two years after his employment ends. In the event Mr. Devine's employment
ended sooner than two years after the Effective Time as the result of a
termination for cause or a voluntary resignation, his options would cease to
vest and the Noncompete Provision would remain in effect. In the event his
employment ended sooner than two years as the result of a mutual agreement or
the unilateral decision or action of McLeodUSA, he would receive a severance
payment equal to one year of compensation, the Noncompete Provision would remain
in effect and the vesting of options would continue during the period of the
Noncompete Provision. It is expected that Mr. Devine would also sign an
agreement not to sell the shares of McLeodUSA Common Stock he receives in the
Merger for a period of two years after the Effective Time. Finally, it is
expected that McLeodUSA would enter into a change-of-control agreement with Mr.
Devine which would provide generally that if, following a change of control of
McLeodUSA, his employment is terminated other than for cause, death, disability
or retirement, or if he resigns following a material reduction in duties or
compensation, he would be entitled to (1) a payment equal to two years of
compensation, (2) acceleration of the vesting of all of his outstanding options
to purchase McLeodUSA Common Stock, and (3) continuation of the employer-paid
portion of health insurance for two years or the statutory allowable period, if
he elects to continue coverage.
It is expected that McLeodUSA also would enter into agreements to employ
Nicholas Lenoci, Jr., Chief Operating Officer of Ovation, Charles M. Osborne,
Chief Financial Officer and Treasurer of Ovation, Scott A. Rediger, Senior Vice
President of Business Development of Ovation, and Paul N. Thibeau, Vice
President--Sales and Marketing of Ovation, on an "at will" basis following the
Effective Time. It is expected that Messrs. Lenoci, Osborne, Rediger and
Thibeau would receive starting bonuses in amounts not yet determined, base
compensation of $135,000, $135,000, $135,000 and $115,000, respectively, and
annual bonuses of up to approximately $65,000, $65,000, $65,000 and $40,000,
respectively, based on the financial performance of McLeodUSA. In addition, it
is expected that Mr. Rediger would receive options to purchase 100,000 shares of
McLeodUSA Common Stock, Messrs. Lenoci and Osborne would each receive options to
purchase 70,000 shares of McLeodUSA Common Stock, and Mr. Thibeau would receive
options to purchase 40,000 shares of McLeodUSA Common Stock. Such options would
vest at a rate of 25% per year over a period of four years. It is expected that
each of these individuals would also sign confidentiality, nonsolicitation and
noncompetition agreements with McLeodUSA similar to the confidentiality,
nonsolicitation and noncompetition agreement expected to be executed by Mr.
Devine, except the term of the Noncompete Provision and the basis for
calculating severance compensation would be one year. It is expected that
Messrs. Lenoci, Osborne and Rediger would also sign an agreement not to sell the
shares of McLeodUSA Common Stock they receive in the Merger for a period of one
year after the Effective Time. It is expected that McLeodUSA also would enter
into an agreement to employ Kenneth A. Kirley, General Counsel of Ovation, on
terms similar to those described above, at a base and bonus compensation yet to
be determined.
The exercise price for all of the options described above would be
established in accordance with McLeodUSA's 1996 Employee Stock Option Plan as
the higher of the fair market value of the shares of McLeodUSA Common Stock on
the trading day immediately preceding the grant date or the average trading
value of such stock during the thirty trading days immediately preceding the
grant date. All options would be subject to the terms of McLeodUSA's 1996
Employee Stock Option Plan.
Stock-Based Rights. Messrs. Devine, Rediger, Kirley, Thibeau, Lenoci
and Osborne currently own 1,555,315 shares, 614,544 shares, 248,000 shares,
148,800 shares, 383,000 shares and 325,000 shares of Ovation Common Stock,
respectively. Each of these individuals' shares of Ovation Common Stock would
be converted in the Merger, at their election, into either an amount of cash or
a number of shares of McLeodUSA Common Stock as determined by the Merger
Agreement. Messrs. Devine, Rediger, Lenoci, Osborne and Kirley have each
elected to receive McLeodUSA Common Stock in exchange for their shares of
Ovation Common Stock. Pursuant to the Merger Agreement, if the Merger had
occurred on February 1, 1999, the number of shares of McLeodUSA Common Stock
29
<PAGE>
that by Messrs. Devine, Rediger, Lenoci, Osborne and Kirley would receive in the
Merger is 558,697 shares, 220,755 shares, 137,580 shares, 116,746 shares and
89,086 shares, respectively. If Mr. Thibeau elects to receive shares of
McLeodUSA Common Stock in exchange for his Ovation Common Stock, he would
receive 53,452 shares of McLeodUSA Common Stock pursuant to the Merger
Agreement, calculated as if the Merger had occurred on February 1, 1999.
Pursuant to a stockholders' agreement dated January 7, 1999 among M/C
Investors L.L.C., Media/Communications Partners III Limited Partnership
(together, "M/C") and Ovation, Ovation must reserve for issuance 1,341,095
shares of Ovation Common Stock. This agreement grants Timothy T. Devine and
Scott A. Rediger the option, upon a sale of Ovation, to purchase (pro rata based
on their relative ownership of Ovation Common Stock at the time of the sale of
Ovation) any such shares that are neither outstanding nor subject to any options
or rights held by existing or former employees of Ovation. Pursuant to this
agreement, Timothy T. Devine and Scott A. Rediger will have the right to
purchase 79,025 and 31,225 shares of Ovation Common Stock, respectively, at the
time of the Merger for a price of $.40 per share.
Indemnification; Directors and Officers Insurance. McLeodUSA has agreed
that for the period from the Effective Time until at least six years after the
Effective Time, (1) it will cause the Surviving Corporation to maintain
Ovation's current directors' and officers' insurance and indemnification policy
and related arrangements, or an equivalent policy and related arrangements, for
all present and former directors and officers of Ovation, covering claims made
and insurable events occurring prior to or within six years after the Effective
Time (provided that the Surviving Corporation will not be required to maintain
such policy except to the extent that the aggregate annual cost of maintaining
such policy is not in excess of 200% of the current annual cost, in which case
the Surviving Corporation shall maintain such policies up to an annual cost of
200% of the current annual cost); and (2) it will cause the Surviving
Corporation to maintain indemnification provisions, including, without
limitation, provisions for expense advances, for present and former officers and
directors in the Surviving Corporation's certificate of incorporation and bylaws
to the fullest extent permitted by the DGCL. McLeodUSA has also agreed to, or to
cause the Surviving Corporation to, indemnify and hold harmless, from and after
the Effective Time, to the full extent that the Surviving Corporation would be
permitted by applicable law (and as to matters arising from or relating to the
Merger Agreement and the possible change in control of Ovation, to the full
extent that McLeodUSA would be permitted under applicable law), each present or
former officer or director of Ovation against any losses, claims, damages,
liabilities, costs, expenses (including reasonable attorneys' fees), judgments,
fines and amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation to which such person is, or is threatened to be
made, a party by reason of the fact that such person is or was a director,
officer, employee or agent of Ovation, or is or was serving at the request of
Ovation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other entity, except that neither Ovation
nor McLeodUSA or the Surviving Corporation will be liable for any settlement
effected without its prior written consent (which consent may not be
unreasonably withheld).
Accounting Treatment
The Merger is expected to be accounted for using the purchase method
of accounting. McLeodUSA will be deemed the acquiror for financial reporting
purposes. Under the purchase method of accounting, the purchase price in the
Merger is allocated among Ovation assets acquired and Ovation liabilities
assumed to the extent of their fair market value, with any excess purchase price
being allocated to goodwill. Due to the expected significant amount of goodwill
to be acquired in the Merger, the purchase method of accounting and the related
amortization of goodwill may have a material effect on McLeodUSA's financial
statements.
30
<PAGE>
Listing on The Nasdaq Stock Market
McLeodUSA has agreed to cause the shares of McLeodUSA Common Stock to be
issued in the Merger to be approved for listing on The Nasdaq Stock Market.
Governmental and Regulatory Approvals
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (including the rules and regulations promulgated thereunder, the "HSR
Act"), the Merger may not be consummated until notifications have been given and
certain information has been furnished to the FTC and the Antitrust Division of
the Department of Justice (the "Antitrust Division") and specified waiting
period requirements have been satisfied. McLeodUSA and Ovation anticipate
filing premerger notification and report forms with the FTC and the Antitrust
Division soon.
At any time before or after the Effective Time, the Antitrust
Division, the FTC or a private person or entity could seek under antitrust laws,
among other things, to enjoin the Merger or to cause McLeodUSA to divest itself,
in whole or in part, of the Surviving Corporation or of certain businesses
conducted by the Surviving Corporation. There can be no assurance that a
challenge to the Merger will not be made or that, if such a challenge is made,
McLeodUSA will prevail. The obligations of McLeodUSA and Ovation to consummate
the Merger are subject to the condition that the applicable waiting period under
the HSR Act shall have expired without action by the Antitrust Division or the
FTC to prevent consummation of the Merger. See "Terms of the Merger Agreement
and Related Transactions--Conditions to Consummation of the Merger" and "Terms
of the Merger Agreement and Related Transactions--Termination of the Merger
Agreement; Effects of Termination."
In connection with the Merger, McLeodUSA will be required to submit
regulatory notices and may be required to take further actions in one or more of
the states in which McLeodUSA and its subsidiaries operate, including in
Minnesota before the Minnesota Public Utilities Commission. In some instances,
these regulatory notices and/or actions are required to be filed or taken in
advance of the Effective Time of the Merger. In addition, while not required,
McLeodUSA intends to provide courtesy notices prior to the Effective Time to
government entities which have issued certain licenses, certifications and
similar telecommunications regulatory approvals to McLeodUSA and its
subsidiaries. McLeodUSA and Ovation believe that any material regulatory
approvals will be obtained in the normal course; however, there can be no
assurance that all such approvals will be obtained by the Effective Time.
McLeodUSA and Ovation are aware of no other governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
federal and state laws referred to above.
Federal Income Tax Consequences
The following discussion is a summary of the material United States federal
income tax consequences of the Merger to a stockholder of Ovation (a "Holder")
that holds shares of Ovation Common Stock or Ovation Preferred Stock
(collectively, the "Ovation Capital Stock") as a capital asset (generally,
property held for investment), within the meaning of Section 1221 of the United
States Internal Revenue Code of 1986, as amended (the "Code"), at the Effective
Time. This discussion does not address all aspects of federal taxation that may
be relevant to particular Holders in light of their personal circumstances or to
Holders subject to special treatment under the Code, including, without
limitation, banks, tax-exempt organizations, insurance companies, dealers in
securities or foreign currencies, Holders who received their Ovation Capital
Stock through the exercise of employee stock options or otherwise as
compensation, Holders who are not U.S. persons (as defined in Section
7701(a)(30) of the Code) and Holders who hold Ovation Capital Stock as part of a
hedge, straddle or conversion transaction. In addition, the discussion does not
address any state, local or foreign tax consequences of the Merger. Finally,
the tax consequences to holders of stock
31
<PAGE>
options or restricted stock are not discussed. The discussion is based on the
Code, the United States Department of Treasury regulations promulgated
thereunder, and administrative rulings and court decisions as of the date of
this Prospectus and Proxy Statement, all of which are subject to change
(possibly with retroactive effect) and which are subject to differing
interpretations. No ruling has been or will be sought from the IRS concerning
the tax consequences of the Merger. Holders of Ovation Common Stock and Ovation
Preferred Stock are urged to consult their tax advisors regarding the tax
consequences of the Merger to them, including the effects of United States
federal, state, local, foreign and other tax laws.
Tax Opinions. Edwards & Angell, LLP, counsel to Ovation, has delivered to
Ovation an opinion, dated the date hereof (the "Tax Opinion") to the effect
that, for United States federal income tax purposes and subject to the
assumptions, limitations, qualifications and other considerations described
below under "--Federal Income Tax Consequences--Certain Considerations with
Respect to Opinions," the Merger will constitute a "reorganization" for U.S.
federal income tax purposes within the meaning of Section 368(a) of the Code,
and McLeodUSA, Merger Sub and Ovation will each be a party to such
"reorganization" within the meaning of Section 368(b) of the Code.
The obligations of McLeodUSA and Ovation to consummate the Merger are
conditioned upon their receipt from their respective counsels of a legal opinion
concerning the federal income tax treatment of the Merger (collectively, the
"Closing Tax Opinions").
Tax Consequences of the Merger. In accordance with the Tax Opinion and the
Edwards and Angell, LLP Closing Tax Opinion regarding the treatment of the
Merger as a reorganization within the meaning of Section 368(a) of the Code,
subject to the assumptions, limitations, qualifications and other considerations
described below under "--Federal Income Tax Consequences--Certain Considerations
with Respect to Opinions," in the opinion of Edwards & Angell, LLP:
(i) no gain or loss will be recognized by a Holder as a result of the
receipt solely of shares of McLeodUSA Common Stock in exchange for such
Holder's Ovation Common Stock, except to the extent of any cash received in
lieu of fractional shares;
(ii) a Holder who receives cash as consideration for such Holder's
Ovation Common Stock, whether in whole or in part, will recognize gain
equal to the lesser of (1) the difference between (a) the fair market value
of the McLeodUSA Common Stock and the amount of cash received in the Merger
and (b) the Holder's tax basis in the Ovation Common Stock exchanged
(assuming the Ovation Common Stock was held by such Holder as a capital
asset) or (2) the amount of cash received for the Ovation Common Stock;
(iii) a Holder who receives cash in lieu of a fractional share of
McLeodUSA Common Stock will be treated as if such Holder received such
fractional share and then sold such share back to McLeodUSA. Such Holder
will recognize gain or loss on the sale of the fractional share equal to
the difference between (1) the amount of cash received for such fractional
share and (2) the Holder's tax basis in such fractional share;
(iv) a Holder's tax basis in the McLeodUSA Common Stock received
pursuant to the Merger in respect of Ovation Common Stock will initially be
(1) equal to the Holder's tax basis in such Holder's Ovation Common Stock
immediately prior to the Merger, (2) increased by the amount of gain
recognized in the Merger under paragraph (ii) above, (3) reduced by the
amount of cash received for the Ovation Common Stock pursuant to paragraph
(ii) above and (4) reduced by the amount of basis allocable to the
fractional share (as described in paragraph (iii) above);
(v) a Holder's holding period for McLeodUSA Common Stock received
pursuant to the Merger will include the holding period of the Ovation
Common Stock
32
<PAGE>
for which it was exchanged (assuming such Ovation Common Stock was held as
a capital asset; and
(vi) a Holder who receives cash as consideration for such Holder's
Ovation Preferred Stock will recognize gain or loss measured by the
difference between the amount of cash received in the Merger and the
Holder's tax basis in the Ovation Preferred Stock surrendered (assuming the
Ovation Preferred Stock was held by such Holder as a capital asset).
Certain Considerations with Respect to Opinions. The Tax Opinion, the
Closing Tax Opinions and the foregoing summary of the U.S. federal income tax
consequences of the Merger are and will be subject to certain assumptions,
limitations and qualifications and are based on current law and, among other
things, certain representations of Ovation and McLeodUSA, including
representations made by the respective managements of Ovation and McLeodUSA.
Reference is made to the full text of the Tax Opinion, which sets forth the
assumptions made and matters considered in connection therewith, a copy of which
has been filed as an exhibit to the registration statement of which this
Prospectus and Proxy Statement forms a part (the "Registration Statement").
Opinions of counsel are not binding on the IRS and do not preclude the IRS from
adopting a contrary position. In addition, if any of such representations or
assumptions are inconsistent with the actual facts, the U.S. federal income tax
consequences of the Merger could be adversely affected.
ACCORDINGLY, HOLDERS OF OVATION CAPITAL STOCK ARE STRONGLY URGED TO CONSULT
WITH THEIR TAX ADVISORS WITH RESPECT TO THE PARTICULAR UNITED STATES FEDERAL,
STATE, LOCAL OR FOREIGN INCOME TAX OR OTHER TAX CONSEQUENCES OF THE MERGER TO
SUCH HOLDERS.
Restrictions on Resales by Affiliates
The McLeodUSA Common Stock to be issued to Ovation stockholders
pursuant to the Merger Agreement will be freely transferable under the
Securities Act of 1933, as amended (the "Securities Act"), except for shares
issued to any person who may be deemed to be an "affiliate" of Ovation within
the meaning of Rule 145 under the Securities Act or who will become an
"affiliate" of McLeodUSA within the meaning of Rule 144 under the Securities Act
after the Merger. Shares of McLeodUSA Common Stock received by persons who are
deemed to be Ovation affiliates or who become McLeodUSA affiliates may be resold
by such persons only in transactions permitted by the resale provisions of Rule
145 (permitting limited sales under certain circumstances) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Ovation generally include individuals or entities that, directly or
indirectly through one or more intermediaries, control, are controlled by or are
under common control with Ovation and may include certain officers, directors
and principal stockholders of Ovation. All Ovation stockholders who may be
deemed to be affiliates of Ovation will be so advised prior to the Effective
Time.
It is a condition to the consummation of the Merger that McLeodUSA
receive an agreement from each affiliate of Ovation prior to the Effective Time
(each, an "Affiliate Agreement"), pursuant to which each such Ovation affiliate
shall undertake not to make any sale of McLeodUSA Common Stock received upon
consummation of the Merger in violation of the Securities Act or the rules and
regulations promulgated thereunder. Generally, this will require that such
sales be made in accordance with Rule 145 under the Securities Act, which in
turn requires that, for specified periods, such sales be made in compliance with
the volume limitations, manner of sale provisions and current information
requirements of Rule 144 under the Securities Act.
The certificates evidencing McLeodUSA Common Stock issued to Ovation
affiliates pursuant to the Merger Agreement will bear a legend summarizing the
foregoing restrictions until a sale,
33
<PAGE>
transfer or other disposition of such McLeodUSA Common Stock has been registered
under the Securities Act or is made in compliance with Rule 145 under the
Securities Act.
Persons who are not affiliates of Ovation may generally sell their
McLeodUSA Common Stock without restrictions and without the necessity to deliver
this Prospectus and Proxy Statement.
Appraisal Rights
If you are an Ovation stockholder who does not vote in favor of the
Merger Agreement and who properly demands appraisal of your shares of Ovation
Common Stock or Ovation Preferred Stock, you will be entitled to appraisal
rights in connection with the Merger under Section 262 of the DGCL.
The following discussion only applies to Ovation stockholders who wish
to dissent from the Merger. Only a holder of record of Ovation shares may
exercise appraisal rights.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING TO
APPRAISAL RIGHTS UNDER THE DGCL AND IS QUALIFIED IN ITS ENTIRETY BY THE FULL
TEXT OF SECTION 262 WHICH IS ATTACHED AS APPENDIX B TO THIS PROSPECTUS AND PROXY
STATEMENT. ALL REFERENCES IN SECTION 262 AND IN THIS SUMMARY TO A "STOCKHOLDER"
ARE TO THE RECORD HOLDER OF THE SHARES AS TO WHICH APPRAISAL RIGHTS ARE
ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES HELD OF RECORD IN THE
NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE
THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW IN A PROPER AND TIMELY
MANNER TO PERFECT APPRAISAL RIGHTS.
Under the DGCL, if you follow the procedures set forth in Section 262,
you will be entitled to have your Ovation shares appraised by the Delaware Court
of Chancery and to receive payment of the "fair value" of your shares, exclusive
of any element of value arising from the accomplishment or expectation of the
Merger, together with a fair rate of interest, as determined by the Court. The
Merger Agreement provides that, to the extent permissible under the DGCL, no
such consideration will be paid until you have surrendered to the Exchange Agent
(as defined below) certificates for such shares.
Under Section 262, where a merger is to be submitted for approval at a
meeting of stockholders, as in the case of the Special Meeting, the corporation,
not less than 20 days prior to the meeting, must notify each of its stockholders
entitled to appraisal rights that appraisal rights are available and include in
the notice a copy of Section 262. This Prospectus and Proxy Statement will
constitute such notice to the stockholders, and the applicable statutory
provisions are attached as Appendix B to this Prospectus and Proxy Statement.
If you wish to exercise appraisal rights or to preserve your right to do so, you
should review the following discussion and Appendix B carefully. If you fail to
timely and properly comply with the procedures specified, you will lose your
appraisal rights.
If you wish to exercise appraisal rights, you must:
(1) deliver to Ovation, before the vote on the Merger at the Special
Meeting, a written demand for appraisal
(2) not vote in favor of the Merger
(3) continuously hold of record your shares from the date of
delivering a demand for appraisal through the Effective Time
34
<PAGE>
To not vote in favor of the Merger, you can either (a) vote "no" in
person or by proxy, (b) fail to vote or (c) abstain from voting. However, if
you vote in favor of the Merger Agreement, by proxy or in person, or return a
signed proxy that does not contain voting instructions and do not revoke it, you
will waive your right of appraisal and nullify any previously filed written
demand for appraisal. A vote against the Merger, in person or by proxy, will
not in and of itself constitute a written demand for appraisal satisfying the
requirements of Section 262. If you fail to comply with any of these conditions
and the Merger becomes effective, you will lose your appraisal rights and
receive instead the Merger consideration you are entitled to in accordance with
the Merger Agreement.
Only a holder of record of Ovation shares may assert appraisal rights
for the shares registered in his name. A demand for appraisal should be
executed by or on behalf of the holder of record, fully and correctly, as the
holder of record's name appears on his stock certificates. It must also state
that the holder of record intends to demand appraisal of his shares in
connection with the Merger. If the shares are owned of record in a fiduciary
capacity, such as by a trustee, guardian or custodian, execution of the demand
should be made in that capacity. If the shares are owned of record by more than
one person, as in a joint tenancy and tenancy in common, the demand should be
executed by or on behalf of all joint owners. An authorized agent, including
two or more joint owners, may execute a demand for appraisal on behalf of a
holder of record. However, the agent must identify the record owner or owners
and expressly disclose the fact that, in executing the demand, the agent is
agent for such owner or owners. A record holder such as a broker who holds
shares as nominee for several beneficial owners may exercise appraisal rights
with respect to the shares held for one or more beneficial owners without
exercising appraisal rights with respect to the shares held for other beneficial
owners. If you hold your shares in brokerage accounts or other nominee forms
and wish to exercise appraisal rights, you should consult your broker to
determine the appropriate procedures for making a demand for appraisal.
All written demands for appraisal pursuant to Section 262 should be
sent or delivered to Ovation Communications, Inc., 400 South Highway 169, Suite
750, Minneapolis, Minnesota 55426, Attention: Corporate Secretary.
Within 10 days after the Effective Time, the Surviving Corporation
must notify each holder of shares who has complied with Section 262 and has not
voted in favor of or consented to the Merger of the date that the Merger has
become effective. At any time within 60 days after the Effective Time, you have
the right to withdraw your demand for appraisal and to accept the consideration
offered in the Merger. Within 120 days after the Effective Time, but not after
that time, the Surviving Corporation or any holder of shares who is entitled to
appraisal rights may file a petition in the Delaware Court of Chancery demanding
a determination of the fair value of the dissenting shares. The Surviving
Corporation is under no obligation to file this petition and McLeodUSA has no
present intention to cause the Surviving Corporation to do so. Accordingly, it
is the obligation of the holders of shares to initiate all necessary action to
perfect appraisal rights within the time prescribed in Section 262.
Within 120 days after the Effective Time, if you have complied with
the requirements for exercise of appraisal rights, you will be entitled, upon
written request, to receive from the Surviving Corporation a statement setting
forth the aggregate number of shares not voted in favor of the Merger as to
which demands for appraisal have been received and the aggregate number of
holders of those shares. The Surviving Corporation must mail this statement to
you within 10 days after the Surviving Corporation receives a written request
from you or within 10 days after the expiration of the period for delivery of
demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares
and a copy is served upon the Surviving Corporation, the Surviving Corporation
will then be obligated within 20 days to file with the Delaware Register in
Chancery a duly verified list containing the names and addresses of all holders
of shares who have demanded an appraisal of their shares and with whom
agreements as to the value of their shares have not been reached. After notice
to these stockholders as required by the Court, the Delaware Court of Chancery
may conduct a hearing on this petition to determine
35
<PAGE>
those holders of shares who have complied with Section 262 and who have become
entitled to appraisal rights. The Delaware Court of Chancery may require the
holders of shares who demanded appraisal to submit their stock certificates to
the Register in Chancery for notation of the pendency of the appraisal
proceeding. If you fail to comply with this direction, the Court of Chancery may
dismiss the proceedings as to you.
After determining the holders of shares entitled to appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their shares,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. You should be aware that the fair
value of your shares as determined by Section 262 could be more than, the same
as or less than the consideration you would receive in the Merger if you did not
seek appraisal of your shares.
Section 262 provides that "fair value" is to be "exclusive of any
element of value arising from the accomplishment or expectation of the merger."
The Delaware Supreme Court has stated, in Cede & Co. v. Technicolor, Inc., 684
A.2d 289, 299 (Del. 1996), that this "narrow exclusion does not encompass known
elements of value, including those which exist on the date of the merger because
of a majority acquiror's interim acquisition in a two-step cash-out
transaction." In Weinberger v. Uop, Inc., 457 A.2d 701 (Del. 1983), the
Delaware Supreme Court held that "elements of future value, including the nature
of the enterprise, which are known or susceptible of proof as of the date of the
merger and not the product of speculation, may be considered." The Delaware
Supreme Court has stated that "proof of value by any techniques or methods which
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in the appraisal proceedings. In
addition, Delaware courts have decided that the statutory appraisal remedy,
depending on factual circumstances, may or may not be a dissenter's exclusive
remedy. The Court of Chancery will also determine the amount of interest, if
any, to be paid upon the amounts to be received by persons whose shares have
been appraised. The costs of the action may be determined by the Court and
taxed upon the parties as the Court deems equitable. The Court may also order
that all or a portion of the expenses incurred by any stockholder in connection
with an appraisal, including, without limitation, reasonable attorneys' fees and
the fees and expenses of experts utilized in the appraisal proceeding, be
charged pro rata against the value of all the shares entitled to be appraised.
If you have duly demanded an appraisal in compliance with Section 262,
you will not, after the Effective Time, be entitled to vote your shares for any
purpose or be entitled to the payment of dividends or other distributions on
those shares, except dividends or other distributions payable to holders of
record of shares as of a date prior to the Effective Time.
If you demand appraisal of your shares under Section 262 but fail to
perfect, or effectively withdraw or lose, your right to appraisal, your shares
will be converted into the right to receive the Merger consideration you are
entitled to pursuant to the Merger Agreement, without interest. You will fail
to perfect, or effectively lose or withdraw, your right to appraisal if no
petition for appraisal is filed within 120 days after the Effective Time, or if
you deliver to Ovation or the Surviving Corporation a written withdrawal of your
demand for appraisal and an acceptance of the Merger. However, any attempt to
withdraw made more than 60 days after the Effective Time will require the
written approval of the Surviving Corporation and, once a petition for appraisal
is filed, the appraisal proceeding may not be dismissed as to any holder absent
court approval. It is not necessary that each holder of shares properly
demanding appraisal file a petition for appraisal in the Delaware Court of
Chancery. Rather, a single valid petition suffices for the petitioning and non-
petitioning holders of shares who have properly demanded appraisal.
IF YOU FAIL TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS, YOU MAY LOSE THESE RIGHTS. IN THAT CASE, YOU WILL
RECEIVE THE MERGER CONSIDERATION YOU ARE ENTITLED TO IN ACCORDANCE WITH THE
MERGER AGREEMENT.
36
<PAGE>
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following summary of the material terms and provisions of the Merger
Agreement is qualified in its entirety by reference to the Merger Agreement.
The Merger Agreement is attached as Appendix A to this Prospectus and Proxy
Statement and is incorporated herein by reference.
General
The Merger Agreement provides that Ovation will be merged with and into
Merger Sub at the Effective Time. Pursuant to the Merger Agreement, Ovation
will become a wholly owned subsidiary of McLeodUSA. The Ovation Board has
unanimously approved the Merger Agreement and the Merger. Each share of Ovation
Preferred Stock outstanding at the Effective Time will be converted into the
right to receive cash and each share of Ovation Common Stock outstanding at the
Effective Time will be converted, at the election of the holder thereof, into
the right to receive cash (subject to certain adjustments) or McLeodUSA Common
Stock, all as more fully described below.
This section of the Prospectus and Proxy Statement describes certain
aspects of the Merger, including the material provisions of the Merger
Agreement. Certain capitalized terms used but not defined herein shall have the
meanings ascribed to them in the Merger Agreement.
Structure of the Merger
Subject to the terms and conditions of the Merger Agreement and in
accordance with the DGCL, at the Effective Time Ovation will merge with and into
Merger Sub. Merger Sub will continue its corporate existence under the laws of
the State of Delaware under the name "Ovation Communications, Inc." At the
Effective Time, the separate corporate existence of Ovation will terminate. The
certificate of incorporation of Merger Sub will become the certificate of
incorporation of the Surviving Corporation, except that Article 1 will be
amended to change Merger Sub's name to "Ovation Communications, Inc." The
bylaws of Merger Sub will become the bylaws of the Surviving Corporation.
Management After the Merger
As discussed in "The Merger--Interests of Certain Persons in the Merger" on
page ___, it is expected that at the Effective Time, McLeodUSA would enter into
employment arrangements with Messrs. Devine, Lenoci, Osborne, Rediger, Kirley
and Thibeau. Mr. Devine would become an officer of McLeodUSA after the Merger.
The following sets forth certain biographical information concerning Mr. Devine:
Mr. Devine (age 39) founded Ovation in March 1997 and has been its
President, Chief Executive Officer and a director since that date. Mr. Devine
has nearly two decades of telecommunications industry experience including his
work with MFS Communications Company, Inc. ("MFS"), a competitive local exchange
carrier, Sprint, and Contel Corporation's local telephone group. Before
founding Ovation, Mr. Devine was Assistant Vice President of External and
Regulatory Affairs for MFS's southern region from October 1996 to January 1997.
From September 1995 to October 1996, he was Senior Director of External and
Regulatory Affairs for MFS's southern region. From August 1994 to September
1995, Mr. Devine was Director of External and Regulatory Affairs for MFS's
northeast region. From December 1993 to August 1994, Mr. Devine served as
Director of Business Planning for MFS. While at MFS, Mr. Devine developed the
industry's first local broadband LAN Internet-working services and competitive
local dial-tone services. In addition, Mr. Devine managed over 100 of MFS's
collocation sites with local exchange carriers beginning in 1989 and negotiated
the industry's first two interconnection agreements in January and April of
37
<PAGE>
1995. Mr. Devine also negotiated interconnection agreements with NYNEX in New
York and Massachusetts; Southern New England Telephone in Connecticut; Rochester
Telephone in New York; Bell South in Florida and Georgia; Sprint/United in
Florida; Southwestern Bell in Missouri and Texas; and GTE in Florida, Texas and
Virginia. Mr. Devine also testified for MFS as an expert witness in over 20
local exchange service proceedings at the public utilities commissions of New
York, Connecticut, Massachusetts, Georgia, Florida and Texas.
Mr. Devine has a Master of Arts degree in Telecommunications Policy from
George Washington University and a Bachelor of Science degree in Political
Science from Arizona State University.
Conversion of Ovation Preferred Stock and Ovation
Common Stock; Treatment of Options
At the Effective Time, (1) each issued and outstanding share of Ovation
Preferred Stock, other than shares held in the treasury of Ovation, held by
McLeodUSA or held by any direct or indirect wholly owned subsidiary of McLeodUSA
or Ovation, will be converted into the right to receive an amount of cash,
without interest, equal to the liquidation preference of the Ovation Preferred
Stock ($100 plus accrued and unpaid dividends on the Ovation Preferred Stock as
of the Effective Time), and (2) each issued and outstanding share of Ovation
Common Stock, other than shares held in the treasury of Ovation, held by
McLeodUSA or held by any direct or indirect wholly owned subsidiary of McLeodUSA
or Ovation, will be converted into the right to receive, at the election of the
holder thereof and subject to adjustment in certain cases as described in "--
Election Procedures; Certain Adjustments" below, either:
(a) an amount of cash, without interest, equal to the quotient (the
"Common Stock Cash Amount") of:
(i) $289 million minus the amount required to payoff the subordinated
-----
debt owed by Ovation to M/C ($8.8 million as of February 1,
1999), minus the amount to be paid on conversion of the Ovation
-----
Preferred Stock ($25.5 million as of February 1, 1999), minus the
-----
costs incurred by Ovation in connection with the transactions
contemplated by the Merger Agreement ($5 million as of February
1, 1999)
divided by:
----------
(ii) the number of shares of Ovation Common Stock validly issued and
outstanding and fully paid and nonassessable at the close of
business on the business day before the day on which the
Effective Time occurs (the "Closing Date") (23,971,756 as of
February 1, 1999); or
(b) a number of shares of McLeodUSA Common Stock equal to the quotient
(the "Common Stock Exchange Ratio") of:
(i) $289 million minus the amount required to pay off the
-----
subordinated debt owed by Ovation to M/C ($8.8 million as of
February 1, 1999), minus the amount to be paid on conversion of
-----
the Ovation Preferred Stock ($25.5 million as of February 1,
1999), minus the costs incurred by Ovation in connection with the
-----
transactions contemplated by the Merger Agreement ($5 million as
of February 1, 1999)
divided by:
----------
(ii) $29.00
38
<PAGE>
divided by:
----------
(iii) the number of shares of Ovation Common Stock validly issued and
outstanding and fully paid and nonassessable at the close of
business on the business day before the Closing Date
(23,971,756 as of February 1, 1999).
For example, if the Merger had occurred on February 1, 1999 and you owned
1,000 shares of Ovation Preferred Stock and 10,000 shares of Ovation Common
Stock, after the Merger you would receive (1) $100,000 plus accrued and unpaid
dividends on your Ovation Preferred Stock in exchange for your Ovation Preferred
Stock and (2) either $104,164 or 3,592 shares of McLeodUSA Common Stock (or a
combination of cash and McLeodUSA Common Stock) in exchange for your Ovation
Common Stock.
Each share of Ovation Preferred Stock and each share of Ovation Common
Stock held in the treasury of Ovation, held by McLeodUSA or held by any direct
or indirect wholly owned subsidiary of McLeodUSA or of Ovation will be canceled
and extinguished at the Effective Time without the payment of any consideration.
Each share of common stock of Merger Sub issued and outstanding immediately
prior to the Effective Time will continue to be one share of common stock of the
Surviving Corporation, all of which will continue to be held by McLeodUSA.
If, prior to the Effective Time, the outstanding shares of McLeodUSA Common
Stock are changed into or exchanged for a different number of shares or a
different class as a result of any stock dividend, subdivision,
reclassification, recapitalization, split, combination or exchange of shares,
the Common Stock Exchange Ratio and the Common Stock Cash Amount will be
appropriately and correspondingly adjusted.
Each stock option to acquire Ovation Common Stock (collectively, the
"Ovation Stock Options") granted under Ovation's 1997 Stock Option Plan (the
"Ovation Stock Plan") that is outstanding and unexercised immediately prior to
the Effective Time will be assumed by McLeodUSA and at the Effective Time will
become or be replaced by a stock option to purchase McLeodUSA Common Stock. In
each case, the number of shares of McLeodUSA Common Stock subject to the new
McLeodUSA option will be equal to the number of shares of Ovation Common Stock
subject to the Ovation Stock Option (assuming full vesting) multiplied by the
Common Stock Exchange Ratio (and rounding any fractional share up to the nearest
whole share) and the option price per share of McLeodUSA Common Stock will be
equal to the aggregate exercise price for the shares of Ovation Common Stock
subject to the Ovation Stock Option divided by the number of shares of McLeodUSA
Common Stock subject to the new McLeodUSA option. The duration and other terms
of each such McLeodUSA option (including the vesting schedule) will be the same
as the prior Ovation Stock Option.
Election Procedures; Certain Adjustments
Each record holder of shares of Ovation Common Stock immediately prior to
the Effective Time will be entitled to elect to receive either cash pursuant to
the Common Stock Cash Amount or McLeodUSA Common Stock pursuant to the Common
Stock Exchange Ratio for each such share of Ovation Common Stock, subject to
adjustment in certain cases as described below. All such elections must be made
on a Form of Election to be delivered to the holders of record of the Ovation
Common Stock as of the Record Date. Ovation stockholders may obtain a copy of
the Form of Election by requesting it in writing or by telephone from McLeodUSA
at the following address:
39
<PAGE>
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 364-0000
To be effective, a Form of Election must be properly completed, signed and
delivered to McLeodUSA after the effectiveness of the Registration Statement,
unless otherwise permitted by SEC staff interpretations, and prior to the third
business day preceding the Scheduled Closing Date (as defined below) (the
"Election Deadline"). If McLeodUSA does not receive a properly completed and
signed Form of Election from a holder of shares of Ovation Common Stock prior to
the Election Deadline, such holder will be deemed to have elected to receive
McLeodUSA Common Stock for all shares of Ovation Common Stock owned by such
holder. Holders of record of shares of Ovation Common Stock who hold such
shares as nominees, trustees or in other representative capacities (a
"Representative") may submit multiple Forms of Election, provided such
Representative certifies that each such Form of Election covers all the shares
of Ovation Common Stock held by such Representative for a particular beneficial
owner.
If any holder of shares of Ovation Common Stock who demands appraisal of
his shares fails to perfect, or effectively withdraws or loses, his right to
appraisal, as provided in the DGCL, and does not deliver to McLeodUSA a properly
completed and signed Form of Election prior to the Election Deadline, such
holder will be deemed to have elected to receive McLeodUSA Common Stock for all
shares of Ovation Common Stock owned by such holder. See "The Merger--Appraisal
Rights."
An election may be revoked or otherwise modified, but only by written
notice of revocation received by McLeodUSA prior to the Election Deadline.
In making your election, you should consider the market value of the
McLeodUSA Common Stock that you may receive in the Merger for each share of your
Ovation Common Stock. This market value may be less than, equal to, or greater
than the amount of cash that you would receive if you elect cash because the
formula for stock elections uses a fixed value of $29.00 per share of McLeodUSA
Common Stock while the actual market price of McLeodUSA Common Stock is subject
to fluctuation. In addition, because of such fluctuations in market price, the
market value of the shares of McLeodUSA Common Stock you may receive in the
Merger could increase or decrease after the Merger.
To the extent that the value of the McLeodUSA Common Stock forming part of
the Merger Consideration (as defined in the Merger Agreement) as of the
Effective Time, based upon the closing price of the McLeodUSA Common Stock on
The Nasdaq Stock Market's National Market System on the last trading day
immediately prior to the Closing Date (the "McLeodUSA Common Stock Closing
Price"), would be less than 50% (or such lesser percentage, not below 40%, as
Ovation may reasonably determine in connection with the qualification of the
Merger as a tax-free reorganization under Section 368(a) of the Code) of the sum
of (1) the aggregate value of the Merger Consideration (with McLeodUSA Common
Stock being valued for this purpose at the McLeodUSA Common Stock Closing
Price), (2) any amounts paid directly or indirectly by Ovation or McLeodUSA to
purchase or redeem shares of Ovation's capital stock on or after December 1,
1998 and (3) an amount equal to the number of Company Dissenting Shares (as
defined in the Merger Agreement) multiplied by the Common Stock Cash Amount,
then (1) the McLeodUSA Common Stock portion of the Merger Consideration will be
increased by a number of shares of McLeodUSA Common Stock equal to the amount of
such deficit in value divided by the McLeodUSA Common Stock Closing Price
(rounded to the nearest whole share) (the "Stock Adjustment Amount"), (2) the
aggregate Common Stock Cash Amount will be correspondingly reduced by an amount
equal to the product of the Stock Adjustment Amount multiplied by the McLeodUSA
Common Stock Closing Price (the "Cash Adjustment Amount"), and (3) each Cash
Election Share (as defined in the Merger Agreement) will be converted
40
<PAGE>
into the right to receive (a) a number of shares of McLeodUSA Common Stock equal
to the Stock Adjustment Amount divided by the Cash Election Shares and (b) an
amount in cash equal to the Common Stock Cash Amount minus the quotient of the
Cash Adjustment Amount divided by the Cash Election Shares.
As a result of these adjustment provisions, a cash election may not be
honored with respect to all shares of Ovation Common Stock that you own.
Accordingly, you may not receive any or all of the Merger Consideration in the
form you requested.
Exchange of Certificates; Fractional Shares
McLeodUSA has agreed to deposit with Norwest Bank Minnesota, N.A., or
another bank or trust company selected by McLeodUSA (the "Exchange Agent"), as
of the Effective Time, for the benefit of the holders of issued and outstanding
shares of Ovation Preferred Stock and Ovation Common Stock, certificates
representing the shares of McLeodUSA Common Stock and cash, including cash in
lieu of any fractional shares (such certificates, together with any dividends or
distributions with respect thereto, and cash being referred to herein as the
"Exchange Fund"), to be issued or paid pursuant to the Merger Agreement in
exchange for such outstanding shares of Ovation Preferred Stock and Ovation
Common Stock.
At the earliest practicable date prior to the Effective Time, McLeodUSA
will mail a letter of transmittal to each holder of Ovation Preferred Stock or
Ovation Common Stock. The letter of transmittal will contain instructions with
respect to the surrender to the Exchange Agent of certificates representing
Ovation Preferred Stock and Ovation Common Stock. Ovation stockholders entitled
to receive cash in exchange for shares Ovation Preferred Stock and Ovation
stockholders who elect to receive cash in exchange for their shares of Ovation
Common Stock will receive such cash amount by check or, if requested, in
immediately available funds by wire transfer.
You should not return Ovation Preferred Stock or Ovation Common Stock
certificates with the enclosed proxy nor should you forward them to the Exchange
Agent unless and until you receive the letter of transmittal, at which time you
should forward them only in accordance with the instructions specified therein.
Until the certificates representing Ovation Common Stock to be converted
into McLeodUSA Common Stock in the Merger are surrendered for exchange at or
after the Effective Time, holders of such certificates will accrue but will not
be paid dividends or other distributions declared after the Effective Time with
respect to McLeodUSA Common Stock into which their Ovation Common Stock has been
converted. When such certificates are surrendered, any unpaid dividends or
other distributions will be paid, without interest. Certificates representing
shares of Ovation Preferred Stock or Ovation Common Stock presented after the
Effective Time will be canceled and exchanged for the applicable amount of cash
and/or relevant certificate representing the applicable number of shares of
McLeodUSA Common Stock.
No fractional shares of McLeodUSA Common Stock will be issued to any holder
of Ovation Common Stock to be converted into McLeodUSA Common Stock in the
Merger. For each fractional share that would otherwise be issued, the Exchange
Agent will pay cash in an amount equal to such fractional share multiplied by
the average closing price of McLeodUSA Common Stock on The Nasdaq Stock Market
for the 10 trading days immediately preceding the Closing Date. No interest
will be paid or accrue on the cash in lieu of fractional shares payable to such
holders.
Any portion of the Exchange Fund that remains undistributed six months
after the Effective Time will be delivered to McLeodUSA upon demand.
Certificates representing Ovation Preferred Stock or Ovation Common Stock must
thereafter be surrendered for exchange to McLeodUSA. None of McLeodUSA, Merger
Sub, Ovation, the Surviving Corporation or the Exchange Agent will be liable
41
<PAGE>
for any shares of McLeodUSA Common Stock, dividends or distributions with
respect thereto, or cash delivered to a public official pursuant to any
abandoned property, escheat or similar laws.
If a certificate representing Ovation Preferred Stock or Ovation Common
Stock has been lost, stolen or destroyed, the Exchange Agent will issue the
consideration properly payable in accordance with the Merger Agreement upon the
making of an affidavit of such loss, theft or destruction by the claimant, and,
if required by McLeodUSA, the posting of a bond as indemnity against any claim
that may be made against McLeodUSA, the Surviving Corporation or the Exchange
Agent with respect to such certificate.
For a description of the McLeodUSA Common Stock and a description of the
differences between the rights of the holders of Ovation Common Stock, on the
one hand, and holders of McLeodUSA Common Stock, on the other, see "McLeodUSA
Capital Stock and Comparison of Stockholder Rights."
Effective Time
The Effective Time will be the date and time of the filing of the articles
of merger to be filed with the Secretary of State of the State of Delaware on
the Closing Date. The Closing Date will occur after the satisfaction or waiver
of all of the conditions precedent to the Merger set forth in Article VII of the
Merger Agreement. However, no later than the first business day following the
tenth day after the satisfaction or waiver of the conditions to the obligations
of all parties to effect the Merger contained in Section 7.01 of the Merger
Agreement, the parties will hold a scheduled closing (the date of such scheduled
closing being referred to herein as the "Scheduled Closing Date"). If the
Merger is not consummated by the earlier of the Scheduled Closing Date or May 1,
1999, the Merger Agreement may be terminated by either McLeodUSA or Ovation,
unless the failure to consummate the Merger by such date is due to the willful
failure of the party seeking to terminate the Merger Agreement to fulfill any of
its obligations thereunder. See "--Conditions to Consummation of the Merger."
Ovation and McLeodUSA each anticipate that, if the Merger is approved at the
Special Meeting, the Merger will be consummated during the fiscal quarter ending
March 31, 1999. However, the consummation of the Merger could be delayed if
there is a delay in obtaining certain governmental consents required prior to
consummation of the transactions contemplated in the Merger Agreement. There
can be no assurances as to if or when such governmental consents will be
obtained or that the Merger will be consummated.
Representations and Warranties
The Merger Agreement contains various representations of Ovation, the
Principal Company Stockholders, McLeodUSA and Merger Sub.
Representations and Warranties of Ovation. The Merger Agreement
contains representations and warranties of Ovation as to, among other things:
(1) the corporate organization and existence of Ovation and its subsidiaries
(including that each is duly organized, validly existing and in good standing
with the corporate power and authority to own, operate and lease its properties
and to carry on its business as currently conducted); (2) ownership by Ovation
of all outstanding shares of capital stock of its subsidiaries; (3) the
certificate or articles of incorporation and bylaws or other organizational
documents of Ovation and its subsidiaries; (4) the capitalization of Ovation
(including the number of shares of capital stock authorized, the number of
shares and rights to acquire shares outstanding and the number of shares
reserved for issuance); (5) the corporate power and authority of Ovation to
execute and deliver the Merger Agreement and related documents and to consummate
the transactions contemplated thereby; (6) the compliance of the Merger
Agreement and related documents with (a) the Ovation Certificate of
Incorporation, the Ovation Bylaws and the certificate or articles of
incorporation and bylaws of Ovation's subsidiaries, (b) applicable laws, and (c)
certain material agreements of Ovation and its subsidiaries, including the
absence of events of default or
42
<PAGE>
acceleration thereunder; (7) the required governmental and third-party consents;
(8) the possession and validity of all required licenses, timely filing of
required regulatory reports and compliance with applicable laws by Ovation and
its subsidiaries; (9) Ovation's financial statements (including that such
information is a fair presentation of the financial condition and results of
operations of Ovation and its subsidiaries and is in compliance with GAAP); (10)
the absence of material undisclosed liabilities; (11) the absence of certain
changes in Ovation's business since December 31, 1997; (12) the absence of
material legal proceedings, injunctions and disputes; (13) the validity of and
absence of defaults under, certain debt instruments, leases and other agreements
of Ovation and its subsidiaries; (14) compliance with laws relating to employees
or the workplace, and the absence of material disputes with employees; (15)
Ovation's employee benefit plans and related matters (including operation and
administration of such plans in accordance with applicable law); (16) the filing
and accuracy of Ovation's tax returns; (17) significant customers of Ovation and
its subsidiaries; (18) the absence of certain business practices of Ovation and
its subsidiaries; (19) insurance; (20) the absence of certain potential
conflicts of interests with employees, directors, officers and significant
stockholders; (21) the collectability of accounts receivable of Ovation and its
subsidiaries; (22) the ownership and condition of the real property owned by
Ovation or any of its subsidiaries; (23) complete and correct books and records;
(24) the title to and condition of material assets owned by Ovation and its
subsidiaries; (25) the absence of intellectual property infringement or
contests; (26) the adoption by the Ovation Board of a resolution approving the
Merger Agreement and the Merger and recommending adoption of the Merger
Agreement and approval of the Merger by the stockholders of Ovation; (27) the
vote required to approve the Merger; (28) Ovation's and its subsidiaries' banks
and powers of attorney; (29) the absence of brokers; (30) compliance with
environmental laws and the absence of environmental liabilities; (31) the
absence of material misstatements or omissions in the information furnished by
Ovation; (32) compensation and benefits of all directors and officers of Ovation
and its subsidiaries; (33) true and complete copies of all documents; (34) the
condition and operation of Ovation's telecommunications system; (35) the
qualification of the Merger as a reorganization under Section 368(a) or Section
368(a)(2)(D) of the Code; (36) the exemption of the Merger from Section 203 of
the DGCL; (37) Ovation's "Year 2000" risk management plans and condition; and
(38) the intention of the executive officers, directors and certain stockholders
of Ovation to enter into affiliate agreements.
McLeodUSA and certain other indemnified persons may make a claim for
indemnification for breach of any of the foregoing representations and
warranties until the end of the eighteenth month after the Effective Time,
except that claims pertaining to pension and benefit plans, taxes and
environmental matters may be brought until the expiration of the applicable
statute of limitations for such matters. See "--Indemnification."
The Merger Agreement permits Ovation to update, correct or otherwise modify
its representations up to 10 days prior to the Closing Date to reflect changes
or corrections so long as the changes or corrections do not disclose any
information that would have a Company Material Adverse Effect.
Representations and Warranties of the Principal Company Stockholders. The
Merger Agreement contains representations and warranties of each of the
Principal Company Stockholders as to, among other things, (1) the corporate,
partnership or limited liability company power and authority (if an entity) or
legal capacity, power and authority (if an individual) of such Principal Company
Stockholder to execute and deliver the Merger Agreement and related documents
and to consummate the transactions contemplated thereby; (2) the due execution
and delivery of the Merger Agreement by such Principal Company Stockholder and
the enforceability of the Merger Agreement against such Principal Company
Stockholder; and (3) such Principal Company Stockholder's ownership of Ovation
Preferred Stock and Ovation Common Stock.
McLeodUSA and certain other indemnified persons may make a claim for
indemnification for breach of any of the foregoing representations and
warranties until the end of the eighteenth month after the Effective Time. See
"--Indemnification."
43
<PAGE>
Representations and Warranties of McLeodUSA and Merger Sub. The Merger
Agreement contains representations and warranties of McLeodUSA and Merger Sub as
to, among other things: (1) the corporate organization and existence of
McLeodUSA, Merger Sub and McLeodUSA's significant subsidiaries (including that
each is duly organized, validly existing and in good standing with the corporate
power and authority to own, operate and lease its properties and to carry on its
business as currently conducted); (2) the McLeodUSA Certificate of Incorporation
and the McLeodUSA Bylaws and the certificate of incorporation and bylaws of
Merger Sub; (3) the corporate power and authority of McLeodUSA and Merger Sub to
execute and deliver the Merger Agreement and related documents and to consummate
the transactions contemplated thereby; (4) the compliance of the Merger
Agreement and related documents with (a) the McLeodUSA Certificate of
Incorporation and the McLeodUSA Bylaws and the certificate of incorporation and
bylaws of Merger Sub, (b) applicable laws, and (c) certain material agreements
of McLeodUSA, Merger Sub and McLeodUSA's significant subsidiaries, including the
absence of events of default or acceleration thereunder; (5) the required
governmental and third-party consents; (6) the absence of prior activities of
Merger Sub; (7) the absence of brokers (other than Solomon Smith Barney Inc.);
(8) McLeodUSA's financial statements and filings with the SEC (including that
such information is a fair representation of the financial condition and results
of operations of McLeodUSA and its consolidated subsidiaries and is in
compliance with GAAP); (9) the authorization and approval for listing on The
Nasdaq Stock Market of the McLeodUSA Common Stock to be issued pursuant to the
Merger; (10) the capitalization of McLeodUSA (including the number of shares of
capital stock authorized, the number of shares and the right to acquire shares
outstanding and the numbers of shares reserved for issuance); (11) the
qualification of the Merger as a reorganization under Section 368(a) or Section
368(a)(2)(D) of the Code; (12) the absence of any fact that could be expected to
delay obtaining required governmental consents; and (13) the absence of material
misstatements or omissions in the information furnished by McLeodUSA and Merger
Sub.
The foregoing representations and warranties will survive until the end of
the eighteenth month after the Effective Time, provided that after the Effective
Time, the maximum liability of McLeodUSA following the closing of the Merger
(the "Closing") for any breach of representation, warranty, covenant or
agreement will be limited to $37 million.
Business of Ovation Pending the Merger; Certain Other Agreements
Pursuant to the Merger Agreement, Ovation has agreed to, and to cause
each of its subsidiaries to, (1) conduct its business in the ordinary course
consistent with past practice or as contemplated by its 1999 capital budget or
expansion plans, and (2) use reasonable efforts to maintain and preserve intact
its business organization, assets and business relationships and retain the
services of its officers and employees. In addition, Ovation has agreed that,
except as expressly contemplated by the Merger Agreement, specified in a
schedule thereto, or contemplated by Ovation's 1999 capital budget or expansion
plans, without McLeodUSA's prior consent, it will not, and will cause each of
its subsidiaries not to, among other things:
(1) (a) increase in any manner the compensation or fringe benefits of,
or pay any bonus to, any director, officer or employee, except for
increases or bonuses in the ordinary course of business consistent with
past practice to employees who are not directors or officers; (b) grant any
severance or termination pay (other than pursuant to the normal severance
practices or existing agreements in effect on the date of the Merger
Agreement) to, or enter into any severance agreement with, any director,
officer or employee, or enter into any employment agreement with any
director, officer or employee; (c) establish, adopt, enter into or amend
any benefit plan or arrangement, except as may be required to comply with
applicable law; (d) pay any benefit not provided for under any benefit plan
or arrangement; (e) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or benefit plan or
arrangement (including the grant of stock options, stock appreciation
rights, stock-based or stock-related awards, performance units or
restricted stock, or the removal of existing restrictions in any benefit
plan or arrangement or
44
<PAGE>
agreement or awards made thereunder), except for grants in the ordinary
course of business consistent with past practice or as required under
certain existing agreements, or (f) take any action to fund or in any other
way secure the payment of compensation or benefits under any agreement,
except as required under certain existing agreements;
(2) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock other than
capital stock repurchased from departing employees in the ordinary course
of business consistent with past practice;
(3) (a) redeem, purchase or otherwise acquire any shares of capital
stock of Ovation or any of its subsidiaries or any securities or
obligations convertible into or exchangeable for any shares of capital
stock of Ovation or any of its subsidiaries, or any options, warrants or
conversion or other rights to acquire any shares of capital stock of
Ovation or any of its subsidiaries or any such securities or obligations,
or any other securities thereof, other than redemptions and purchases from
departing employees in the ordinary course of business consistent with past
practice; (b) effect any reorganization or recapitalization; or (c) split,
combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of, or
in substitution for, shares of its capital stock;
(4) except upon the exercise of Ovation Stock Options in accordance
with their terms, issue, deliver, award, grant or sell, or authorize the
issuance, delivery, award, grant or sale (including the grant of any
limitations in voting rights or other encumbrances) of, any shares of any
class of its capital stock (including shares held in treasury), any
securities convertible into or exercisable or exchangeable for any such
shares, or any rights, warrants or options to acquire, any such shares, or
amend or otherwise modify the terms of any such rights, warrants or options
the effect of which shall be to make such terms more favorable to the
holders thereof;
(5) except as contemplated by certain existing agreements, acquire or
agree to acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire
any assets of any other person (other than the purchase of assets from
suppliers or vendors in the ordinary course of business consistent with
past practice);
(6) sell, lease, exchange, mortgage, pledge, transfer or otherwise
subject to any encumbrance or dispose of, or agree to sell, lease,
exchange, mortgage, pledge, transfer or otherwise subject to any
encumbrance or dispose of, any of its assets, except for sales,
dispositions or transfers in the ordinary course of business consistent
with past practice;
(7) adopt any amendments to its articles or certificate of
incorporation, bylaws or other comparable charter or organizational
documents;
(8) make or rescind any express or deemed election relating to taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ended December 31, 1997, except in
either case as may be required by law, the IRS or GAAP;
(9) make or agree to make any new capital expenditure or expenditures
which are not included in Ovation's 1999 capital budget;
(10) (a) incur any indebtedness for borrowed money or guarantee any
such indebtedness of another person, issue or sell any debt securities or
warrants or other rights
45
<PAGE>
to acquire any debt securities of Ovation or any of its subsidiaries,
guarantee any debt securities of another person, enter into any "keep well"
or other agreement to maintain any financial statement condition of another
person, or enter into any agreement having the economic effect of any of
the foregoing, except for borrowings incurred in the ordinary course of
business consistent with past practice, or (b) make any loans, advances or
capital contributions to, or investments in, any other person other than
intra-group loans, advances, capital contributions or investments between
or among Ovation and any of its wholly owned subsidiaries other than in the
ordinary course of business consistent with past practice;
(11) except for costs incurred by Ovation in connection with the
transactions contemplated by the Merger Agreement, but only to the extent
such costs are deducted in calculating the cash and shares of McLeodUSA
Common Stock to be paid or issued in the Merger, pay, discharge, settle or
satisfy any claims, liabilities or obligations (whether absolute or
contingent, matured or unmatured, known or unknown), other than the
payment, discharge or satisfaction, in the ordinary course of business
consistent with past practice or in accordance with their terms, of
liabilities reflected or reserved against in, or contemplated by, Ovation's
most recent financial statements or incurred in the ordinary course of
business consistent with past practice, or waive any material benefits of,
or agree to modify in any material respect, any confidentiality, standstill
or similar agreements to which Ovation or any of its subsidiaries is a
party;
(12) except in the ordinary course of business consistent with past
practice, waive, release or assign any rights or claims, or modify, amend
or terminate any agreement to which Ovation or any of its subsidiaries is a
party;
(13) make any change in any method of accounting or accounting
practice or policy other than those required by GAAP or a governmental
entity;
(14) take any action or fail to take any action that would have a
Company Material Adverse Effect (as defined in the Merger Agreement) prior
to or after the Effective Time or an Acquiror Material Adverse Effect (as
defined in the Merger Agreement) after the Effective Time, or that would
adversely affect the ability of Ovation or any of its subsidiaries prior to
the Effective Time, or McLeodUSA or any of its subsidiaries after the
Effective Time, to obtain consents of third parties or approvals of
governmental entities required to consummate the transactions contemplated
in the Merger Agreement; or
(15) authorize, or commit or agree to do any of the foregoing.
Ovation has also agreed promptly to take all action necessary in accordance
with the DGCL and the Ovation Certificate of Incorporation and the Ovation
Bylaws to solicit from the stockholders of Ovation proxies or consents to adopt
the Merger Agreement and approve the Merger. Ovation has further agreed to mail
this Prospectus and Proxy Statement to its stockholders promptly after the
Registration Statement becomes effective, and to comply with the proxy
solicitation rules and regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in connection with the solicitation of proxies
from such persons. Ovation has agreed to, and to cause each of its subsidiaries
to, give McLeodUSA access to all of its properties, agreements, books, records
and personnel and Ovation has agreed to furnish McLeodUSA with monthly unaudited
consolidated financial statements and other information concerning its business,
operations, prospects, conditions, assets, liabilities and personnel.
Pursuant to the Merger Agreement, Ovation and McLeodUSA have agreed not to,
and not to permit any of their subsidiaries to, take any action that could
result in any of their respective representations and warranties becoming untrue
or any of the conditions to the Merger not being satisfied. Ovation and
McLeodUSA have also agreed to use their reasonable best efforts promptly to make
all filings under applicable laws and to obtain all material authorizations,
permits, consents and approvals of all third parties and governmental entities
necessary or advisable to consummate
46
<PAGE>
the transactions contemplated by the Merger Agreement. Ovation and McLeodUSA
have agreed to use their reasonable best efforts to take all necessary, proper
or appropriate actions to consummate the transactions contemplated by the Merger
Agreement.
No Solicitation by Ovation and the Principal Company Stockholders
Ovation has agreed to, and to cause its directors, officers, employees,
representatives, agents and subsidiaries and their respective directors,
officers, employees, representatives and agents to, and the Principal Company
Stockholders have agreed to, and to cause their respective representatives and
agents to, immediately cease as of the date of the Merger Agreement any
discussions or negotiations with any person with respect to a Competing
Transaction (as defined below). Ovation and the Principal Company Stockholders
have agreed not to, and Ovation has agreed to cause its subsidiaries not to,
initiate, solicit or encourage (including by way of furnishing information or
assistance), or take any other action to facilitate, any inquiries or the making
of any proposal that constitutes, or may reasonably be expected to lead to, any
Competing Transaction, or enter into discussions or furnish any information or
negotiate with any person or otherwise cooperate in any way in furtherance of
such inquiries or to obtain a Competing Transaction, or agree to or endorse any
Competing Transaction, or authorize any of its directors, officers, employees,
agents or representatives to take any such action. Ovation and the Principal
Company Stockholders have agreed (1) promptly to notify McLeodUSA if any
inquiries or proposals that constitute, or may reasonably be expected to lead
to, a Competing Transaction are received by Ovation, any of its subsidiaries, or
the applicable Principal Company Stockholders, as the case may be, or any of its
or their respective directors, officers, employees, agents, investment bankers,
financial advisors, attorneys, accountants or other representatives, (2)
promptly to inform McLeodUSA as to the material terms of such inquiry or
proposal and, if in writing, promptly to deliver or cause to be delivered to
McLeodUSA a copy of such inquiry or proposal, and (3) to keep McLeodUSA
informed, on a current basis, of the nature of any such inquiries and the status
and terms of any such proposals. Ovation and the Principal Company Stockholders
have also agreed that neither the Ovation Board nor any committee thereof nor
any Principal Company Stockholder will (1) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to McLeodUSA or Merger Sub, the approval
or recommendation by the Ovation Board or any such committee or Principal
Company Stockholder of the Merger Agreement or the Merger, (2) approve or
recommend, or propose to approve or recommend, any Competing Transaction or (3)
enter into any agreement with respect to any Competing Transaction. For
purposes of the Merger Agreement, "Competing Transaction" means any of the
following involving Ovation or its subsidiaries (other than the transactions
contemplated by the Merger Agreement): (1) any merger, consolidation, share
exchange, business combination, or other similar transaction; (2) any sale,
lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more
of the assets of Ovation and its subsidiaries, taken as a whole, or issuance of
10% or more of the outstanding voting securities of Ovation or any of its
subsidiaries in a single transaction or series of transactions; (3) any tender
offer or exchange offer for 10% or more of the outstanding shares of capital
stock of Ovation or any of its subsidiaries or the filing of a registration
statement under the Securities Act in connection therewith; (4) any solicitation
of proxies in opposition to approval by the stockholders of Ovation of the
Merger; (5) any person shall have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any "group" (as such term is defined under
Section 13(d) of the Exchange Act) shall have been formed after the date of the
Merger Agreement which beneficially owns or has the right to acquire beneficial
ownership of, 10% or more of the then outstanding shares of capital stock of
Ovation or any of its subsidiaries; or (6) any agreement or public announcement
by Ovation or any other person of a proposal, plan or intention to do any of the
foregoing.
Additional Agreements of McLeodUSA
McLeodUSA has agreed to infuse Ovation, concurrently with the Closing, with
a sufficient amount of cash and otherwise cause Ovation and its subsidiaries to
pay and satisfy in full all of their
47
<PAGE>
indebtedness for borrowed money owed to (1) AT&T Commercial Finance Corporation
("ATT CFC") ($95.7 million as of February 1, 1999) and (2) M/C ($8.8 million as
of February 1, 1999). McLeodUSA has also agreed (1) to include the shares of
McLeodUSA Common Stock issuable upon exercise of the Ovation Stock Options
assumed or converted in the Merger on McLeodUSA's registration statement on Form
S-8 relating to McLeodUSA's 1996 Employee Stock Option Plan or to file a
registration statement on Form S-8 or another appropriate form, effective as of
the Effective Time, registering such shares, (2) to use its reasonable best
efforts to maintain the effectiveness of such registration statement or
registration statements for so long as such stock options remain outstanding,
and (3) to administer such stock options in a manner that complies with
Rule 16b-3 under the Exchange Act with respect to those individuals who will be
subject to the reporting requirements under Section 16 of the Exchange Act after
the Merger.
Concurrently with the execution of the Merger Agreement, McLeodUSA and
Ovation entered into a revolving credit agreement (the "Revolving Credit
Agreement") pursuant to which McLeodUSA agreed to lend to Ovation up to $20
million on a senior subordinated unsecured basis. In connection with the
Revolving Credit Agreement, McLeodUSA agreed to enter into a subordination
agreement with Ovation and ATT CFC (the "Subordination Agreement"). Pursuant to
the Subordination Agreement, McLeodUSA will agree to subordinate the Revolving
Credit Agreement to the prior payment in full of all of Ovation's obligations
owing to ATT CFC. McLeodUSA's obligation to execute the Subordination Agreement
is subject to and conditioned upon McLeodUSA's receipt of a subordination
agreement executed by Ovation and M/C pursuant to which Ovation and M/C
subordinate all indebtedness of Ovation owed to M/C to the prior payment in full
of all of Ovation's obligations owing to McLeodUSA to the same extent that
McLeodUSA subordinates its obligations to ATT CFC.
Indemnification
If the Merger Agreement is approved, all holders of Ovation Common Stock,
by their receipt of the Merger Consideration, will be deemed to have agreed
severally to indemnify McLeodUSA, the Surviving Corporation and certain persons
related to McLeodUSA or the Surviving Corporation ("Indemnified Persons") for
any and all losses, costs, damages, liabilities and expenses (including
reasonable attorneys' fees and expenses) ("Damages") actually suffered and
arising out of the breach of the representations, warranties, covenants and
agreements given or made by Ovation. The maximum liability of the holders of
Ovation Common Stock for such indemnification will be limited to $37 million,
except to the extent any claim for indemnification is based on common law fraud,
and the obligation of holders of Ovation Common Stock to indemnify the
Indemnified Persons will apply only to Damages to the extent they exceed
$1,750,000 in the aggregate. Furthermore, each holder of Ovation Common Stock
will be liable only for a fraction of such Damages, the numerator of which is
the number of shares of Ovation Common Stock (computed on a fully diluted basis
after giving pro forma effect to the exercise of all options, warrants and
rights to acquire Ovation Common Stock) held by such stockholder immediately
prior to the Effective Time and the denominator of which is equal to the
aggregate number of shares of Ovation Common Stock outstanding immediately prior
to the Effective Time (computed on a fully diluted basis and after giving pro
forma effect to the exercise of all options, warrants and rights to acquire
Ovation Common Stock).
In addition to the foregoing indemnification, each Principal Company
Stockholder has agreed severally to indemnify the Indemnified Persons for
Damages actually suffered and arising out of the breach of the representations,
warranties, covenants and agreements given or made by such Principal Company
Stockholder on its own behalf and only with respect to itself or this Merger
Agreement. Such indemnification, if provided with respect to a representation
or warranty, will apply to all such Damages without regard to amount and without
limitation on the maximum liability for indemnification. No Principal Company
Stockholder will have any liability for any breach of representation, warranty
or covenant by any other Principal Company Stockholder.
48
<PAGE>
Any payment to be made to an Indemnified Person by a holder of Ovation
Common Stock or a Principal Company Stockholder pursuant to these
indemnification obligations may be made in cash or, in whole or in part, in
McLeodUSA Common Stock having a value per share equal to the average of the
daily closing price, on The Nasdaq Stock Market's National Market System as
reported by Bloomberg, L.P., for the 10 trading days immediately preceding the
date of such payment.
The Principal Company Stockholders have entered into a cross
indemnification agreement dated as of January 7, 1999 pursuant to which each
Principal Company Stockholder has agreed to indemnify and hold harmless each of
the other Principal Company Stockholders for their pro rata portion of damages
and other amounts for which each other Principal Company Stockholder becomes
liable under the Merger Agreement.
Director's and Officers' Insurance and Indemnification
McLeodUSA has agreed that for the period from the Effective Time until at
least six years after the Effective Time, (1) it will cause the Surviving
Corporation to maintain Ovation's current directors' and officers' insurance and
indemnification policy and related arrangements, or an equivalent policy and
related arrangements, for all present and former directors and officers of
Ovation, covering claims made and insurable events occurring prior to or within
six years after the Effective Time (provided that the Surviving Corporation will
not be required to maintain such policy except to the extent that the aggregate
annual cost of maintaining such policy is not in excess of 200% of the current
annual cost, in which case the Surviving Corporation shall maintain such
policies up to an annual cost of 200% of the current annual cost); and (2) it
will cause the Surviving Corporation to maintain indemnification provisions,
including, without limitation, provisions for expense advances, for present and
former officers and directors in the Surviving Corporation's certificate of
incorporation and bylaws to the fullest extent permitted by the DGCL. McLeodUSA
has also agreed to, or to cause the Surviving Corporation to, indemnify and hold
harmless, from and after the Effective Time, to the full extent that the
Surviving Corporation would be permitted by applicable law (and as to matters
arising from or relating to the Merger Agreement and the possible change in
control of Ovation, to the full extent that McLeodUSA would be permitted under
applicable law), each present or former officer or director of Ovation against
any losses, claims, damages, liabilities, costs, expenses (including reasonable
attorneys' fees), judgments, fines and amounts paid in settlement in connection
with any claim, action, suit, proceeding or investigation to which such person
is, or is threatened to be made, a party by reason of the fact that such person
is or was a director, officer, employee or agent of Ovation, or is or was
serving at the request of Ovation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other entity, except
that neither McLeodUSA nor the Surviving Corporation will be liable for any
settlement effected without its prior written consent (which consent may not be
unreasonably withheld).
Conditions to Consummation of the Merger
Conditions to Each Party's Obligation to Effect the Merger. Each
party's obligation to effect the Merger is subject to the satisfaction or
waiver, where permissible, of the following conditions at or prior to the
Effective Time:
(1) the Merger Agreement and the Merger shall have been adopted and
approved by the requisite vote of the stockholders of Ovation;
(2) no governmental entity or court shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, judgment, injunction or other order which is in effect and
prevents or prohibits consummation of the Merger, provided that the failure
to obtain a required consent or approval of a governmental
49
<PAGE>
entity (other than those specified in paragraphs (3) and (4) below) shall
not form the basis for an assertion that this condition is not satisfied;
(3) the applicable waiting period under the HSR Act shall have expired
or been terminated;
(4) all consents, waivers, approvals and authorizations required to be
obtained, and all filings or notices required to be made, by McLeodUSA or
Ovation prior to consummation of the transactions contemplated in the
Merger Agreement (other than the filing of the articles of merger in
accordance with the DGCL) shall have been obtained from and made with the
FCC and each of the public utility commissions of the states of Illinois,
Michigan, Minnesota and Wisconsin;
(5) other than (a) 23,971,756 shares of Ovation Common Stock (which
number of shares may be increased between the date of the Merger Agreement
and the Closing in connection with the exercise of Ovation Stock Options
described in clause (c) below in accordance with their terms), (b) 240,000
shares of Ovation Preferred Stock, and (c) Ovation Stock Options
exercisable for 806,845 shares of Ovation Common Stock (which number of
Ovation Stock Options may be decreased between the date of the Merger
Agreement and the Closing in connection with the exercise of Ovation Stock
Options in accordance with their terms), there shall be no other
outstanding securities of Ovation convertible into or exchangeable for
Ovation Common Stock or any other equity securities of Ovation and no
outstanding options, rights (preemptive or otherwise), or warrants to
purchase or to subscribe for any shares of such stock or other equity
securities of Ovation.
(6) the Registration Statement shall have become effective and no stop
order suspending its effectiveness shall have been issued and no
proceedings for that purpose shall have been initiated or threatened by the
SEC;
(7) McLeodUSA shall have received all federal or state securities
permits and other authorizations necessary to issue McLeodUSA Common Stock
in the Merger; and
(8) McLeodUSA shall have received from Ovation "cold comfort" letters
of Ernst & Young LLP dated the date on which the Registration Statement
becomes effective and the Effective Time, respectively, reasonably
customary in scope and substance for letters delivered by independent
public accountants in connection with similar transactions.
Conditions to the Obligation of McLeodUSA and Merger Sub to Effect the
Merger. The obligation of McLeodUSA and Merger Sub to effect the Merger is
subject to the satisfaction or waiver, where permissible, of the following
conditions at or prior to the Effective Time:
(1) the representations and warranties of Ovation and the Principal
Company Stockholders shall be true and correct as of the date of the Merger
Agreement and shall be true and correct in all material respects (except
that where any statement in a representation expressly includes a standard
of materiality, such statement shall be true and correct in all respects
giving effect to such standard) as of the Effective Time as though made as
of the Effective Time, except in a representation or warranty that does not
expressly include a standard of a Company Material Adverse Effect, any
untrue or incorrect statements therein that, considered in the aggregate,
do not indicate a Company Material Adverse Effect, and McLeodUSA shall have
received a certificate of the chief executive officer or chief financial
officer of Ovation to that effect;
(2) any revised versions of the disclosures by Ovation delivered to
McLeodUSA shall not disclose any Company Material Adverse Effect as
compared with the comparable disclosures as of the date of the Merger
Agreement;
50
<PAGE>
(3) Ovation and the Principal Company Stockholders shall have
performed or complied in all respects with all agreements required to be
performed or complied with by them under the Merger Agreement at or prior
to the Effective Time except for such noncompliance that does not have a
Company Material Adverse Effect, and McLeodUSA shall have received a
certificate of each Principal Company Stockholder and the chief executive
officer or chief financial officer of Ovation (as to Ovation) to that
effect;
(4) McLeodUSA shall have received an opinion of Edwards & Angell, LLP
which is reasonable and customary for similar transactions;
(5) there shall not be pending any enforcement action or similar
proceeding by any governmental entity that is likely to place limitations
on the ownership of shares of Ovation Preferred Stock or Ovation Common
Stock (or shares of common stock of the Surviving Corporation) by McLeodUSA
or Merger Sub such that consummation of the Merger would violate any
provisions of McLeodUSA's indentures relating to its outstanding public
indebtedness, and there shall not be pending any enforcement action or
similar proceeding by any state or federal governmental entity that is
likely to have a Company Material Adverse Effect or, if such action arises
in connection with the transactions contemplated by the Merger Agreement,
an Acquiror Material Adverse Effect;
(6) since December 31, 1997, there shall not have occurred a Company
Material Adverse Effect (or any development that, insofar as reasonably can
be foreseen, is reasonably likely to result in any Company Material Adverse
Effect) not disclosed by Ovation in the disclosure schedules to the Merger
Agreement;
(7) McLeodUSA shall have received the opinion of Hogan & Hartson
L.L.P. to the effect that the Merger will not result in taxation to
McLeodUSA or Merger Sub under the Code;
(8) any environmental reports prepared at the request of McLeodUSA
shall indicate that the real property owned by Ovation does not contain any
hazardous materials and is not subject to any risk of contamination from
any off-site hazardous materials, except to the extent that the presence of
any such hazardous materials or the risk of such contamination would not
have a Company Material Adverse Effect or an Acquiror Material Adverse
Effect and except that this condition will be deemed waived by McLeodUSA
and Merger Sub (a) if Phase I environmental reports have not been prepared
within 15 days following the date of the Merger Agreement and the Phase II
environmental reports, if requested by McLeodUSA, have not been prepared
within 35 days following the date of the Merger Agreement, or (b) if
McLeodUSA does not notify Ovation of certain identified environmental
problems in accordance with the Merger Agreement;
(9) Ovation shall have delivered to McLeodUSA and Merger Sub a
certificate signed by a duly authorized officer stating that (a) to its
knowledge, except as specified in such certificate in reasonable detail,
Ovation is aware of no breach of any representation, warranty or covenant
by McLeodUSA or Merger Sub that could be reasonably expected to result in a
claim for indemnification and (b) Ovation and the Principal Company
Stockholders irrevocably waive any and all rights to indemnification
against McLeodUSA and Merger Sub to the extent any Damages arising from the
matters described in such certificate or any other matters of which Ovation
then has knowledge exceed $5 million in the aggregate; and
(10) McLeodUSA shall have received a signed Affiliate Agreement from
each "affiliate" of Ovation (under Rule 145 of the Securities Act).
51
<PAGE>
Conditions to the Obligation of Ovation to Effect the Merger. The obligation
of Ovation to effect the Merger is subject to the satisfaction or waiver, where
permissible, of the following conditions at or prior to the Effective Time:
(1) the representations and warranties of McLeodUSA and Merger Sub
shall be true and correct as of the date of the Merger Agreement and shall
be true and correct in all material respects (except that where any
statement in a representation expressly includes a standard of materiality,
such statement shall be true and correct in all respects giving effect to
such standard) as of the Effective Time as though made as of the Effective
Time, except in a representation or warranty that does not expressly
include a standard of an Acquiror Material Adverse Effect, any untrue or
incorrect statements therein that, considered in the aggregate, do not
indicate an Acquiror Material Adverse Effect, and Ovation shall have
received a certificate of the chief executive officer or chief financial
officer of McLeodUSA to that effect;
(2) McLeodUSA and Merger Sub shall have performed or complied in all
respects with all agreements required to be performed or complied with by
them under the Merger Agreement on or prior to the Effective Time except
for such noncompliance that does not have an Acquiror Material Adverse
Effect, and Ovation shall have received a certificate of the chief
executive officer or chief financial officer of McLeodUSA and Merger Sub to
that effect;
(3) Ovation shall have received an opinion of Hogan & Hartson L.L.P.
which is reasonable and customary for similar transactions;
(4) Ovation shall have received the opinion of Edwards & Angell, LLP
to the effect that the Merger will not result in taxation to Ovation or the
stockholders of Ovation under the Code;
(5) since December 31, 1997, there shall not have occurred an Acquiror
Material Adverse Effect (or any development that, insofar as reasonably can
be foreseen, is reasonably likely to result in any Acquiror Material
Adverse Effect) not disclosed by Acquiror in the disclosure schedules to
the Merger Agreement;
(6) McLeodUSA and Merger Sub shall have delivered to Ovation a
certificate signed by a duly authorized officer stating that (a) to their
knowledge, except as specified in such certificate in reasonable detail,
McLeodUSA and Merger Sub are aware of no breach of any representation,
warranty or covenant by Ovation or any Principal Company Stockholder that
could be reasonably expected to result in a claim for indemnification and
(b) McLeodUSA and Merger Sub irrevocably waive any and all rights to
indemnification against the stockholders of Ovation to the extent any
Damages arising from the matters described in such certificate or any other
matters of which McLeodUSA or Merger Sub then has knowledge exceed $5
million in the aggregate; and
(7) there shall not be pending any enforcement action or similar
proceeding by any governmental entity that is likely to place limitations
on the ownership of shares of Ovation Preferred Stock or Ovation Common
Stock (or shares of common stock of the Surviving Corporation) by McLeodUSA
or Merger Sub such that consummation of the Merger would violate any
provisions of McLeodUSA's indentures relating to its outstanding public
indebtedness, and there shall not be pending any enforcement action or
similar proceeding by any state or federal governmental entity that is
likely to have an Acquiror Material Adverse Effect or, if such action
arises in connection with the transactions contemplated by the Merger
Agreement, a Company Material Adverse Effect.
52
<PAGE>
Termination of the Merger Agreement
The Merger Agreement may be terminated at any time (except where
otherwise indicated) prior to the Effective Time, whether before or after
approval by the stockholders of Ovation:
(1) by mutual written consent of Ovation and McLeodUSA;
(2) by McLeodUSA, if there has been a breach by Ovation of any of its
representations, warranties, covenants or agreements contained in the
Merger Agreement, or any such representation and warranty shall have become
untrue, in any such case such that the conditions to Closing will not be
satisfied and such breach or condition has not been cured such that those
conditions will be satisfied within 20 business days following receipt by
Ovation of written notice of such breach;
(3) by Ovation, if there has been a breach by McLeodUSA or Merger Sub
of any of its representations, warranties, covenants or agreements
contained in the Merger Agreement, or any such representation and warranty
shall have become untrue, in any such case such that the conditions to
Closing will not be satisfied and such breach or condition has not been
cured such that those conditions will be satisfied within 20 business days
following receipt by McLeodUSA of written notice of such breach;
(4) by either McLeodUSA or Ovation if any decree, permanent
injunction, judgment, order or other action by any court of competent
jurisdiction or any other federal or state (but not county or municipal)
governmental entity preventing or prohibiting consummation of the Merger
shall have become final and non-appealable;
(5) by either McLeodUSA or Ovation if the adoption of the Merger
Agreement shall fail to receive the requisite vote by the stockholders of
Ovation;
(6) by either McLeodUSA or Ovation if the Merger shall not have been
consummated by the earlier to occur of the Scheduled Closing Date or May 1,
1999, except that this right to terminate the Merger Agreement will not be
available to any party whose willful failure to fulfill any obligation
under the Merger Agreement has been the cause of, or resulted in, the
failure of the Effective Time to occur on or before such date;
(7) by either Ovation or McLeodUSA upon written notice to the other
party if (a) McLeodUSA causes a Phase I environmental report with respect
to any parcel of real property owned by Ovation to be prepared within 15
days following the date of the Merger Agreement and causes any Phase II
environmental reports on such real property to be prepared within 35 days
following the date of the Merger Agreement, (b) McLeodUSA reasonably
concludes that the real property owned by Ovation contains hazardous
materials or is subject to a risk of contamination from off site hazardous
materials that, in either case, would be reasonably expected to have a
Company Material Adverse Effect, and (c) McLeodUSA notifies Ovation of such
conclusion in writing within two business days following the completion of
such environmental reports; provided that this termination right will be
deemed waived by McLeodUSA if stockholders of Ovation representing at least
85% of the Merger Consideration agree in writing to indemnify and hold
harmless the Indemnified Persons from and against any and all Damages
actually suffered and arising out of the existence of any hazardous
materials on such real property or the contamination of such real property
from any off-site hazardous materials (without regard to any deductibles or
caps on liability);
(8) by McLeodUSA, upon written notice to Ovation, if it does not
receive the certificate containing the information specified in clause (a)
of paragraph (9) under the caption "--Conditions to Consummation of the
Merger--Conditions to the Obligation of McLeodUSA and Merger Sub to Effect
the Merger;"
53
<PAGE>
(9) by Ovation, upon written notice to McLeodUSA, if it does not
receive the certificate containing the information specified in clause (a)
of paragraph (6) under the caption "--Conditions to Consummation of the
Merger--Conditions to the Obligation of Ovation to Effect the Merger;"
(10) by McLeodUSA, upon written notice to Ovation, if it does not
receive the certificate containing the waiver specified in clause (b) of
paragraph (9) under the caption "--Conditions to Consummation of the
Merger--Conditions to the Obligation of McLeodUSA and Merger Sub to Effect
the Merger;" or
(11) by Ovation, upon written notice to McLeodUSA, if it does not
receive the certificate containing the waiver specified in clause (b) of
paragraph (6) under the caption "--Conditions to Consummation of the
Merger--Conditions to the Obligation of Ovation to Effect the Merger."
In the event of termination of the Merger Agreement, the Merger Agreement
will become void and there will be no liability or obligation (except for
liability for breach of the Merger Agreement and except for the obligation of
each party to pay its own expenses incurred in connection with the Merger
Agreement) on the part of McLeodUSA, Merger Sub or Ovation or any of their
respective directors or officers, except that each of Ovation, on the one hand,
and McLeodUSA and Merger Sub, on the other hand, will have the right to seek
specific performance of the obligations under the Merger Agreement, and provided
that if the Merger Agreement is terminated pursuant to (x) the provision
described in paragraph (7) above, then Ovation will have no liability to
McLeodUSA and Merger Sub for breach of its representation and warranty regarding
environmental matters, (y) the provision described in paragraph (8) or paragraph
(9) above, then neither Ovation, on the one hand, nor McLeodUSA and Merger Sub,
on the other hand, will have any liability under the Merger Agreement, or (z)
the provision described in paragraph (10) or paragraph (11) above, then neither
Ovation, on the one hand, nor McLeodUSA and Merger Sub, on the other hand, will
be entitled to any recovery for such liability in excess of $750,000.
General Exclusion for Industry-Specific Events
Exclusion for Ovation. The Merger Agreement provides that in no event
will it constitute a breach of any representation, warranty or covenant of
Ovation, or a failure of any condition to McLeodUSA's or Merger Sub's
obligations if any fact, matter or thing referred to in the Merger Agreement
changes or results in the failure of any condition to McLeodUSA's or Merger
Sub's obligations to the extent that such change or failure of condition results
from (1) changes that are applicable to the competitive local exchange carrier
industry generally in the states in which Ovation or its subsidiaries operate
(including, without limitation, changes in federal or state law) or (2) any act
or omission following the date of the Merger Agreement on the part of any
incumbent local exchange carrier with which Ovation or any of its subsidiaries
has an agreement, against or affecting Ovation or its subsidiaries, whether (a)
in connection with an effective or anticipated change in law (such as the
cessation of reciprocal compensation payments), (b) as a result of the
transactions contemplated in the Merger Agreement or (c) otherwise, provided
that Ovation or the subsidiaries are otherwise materially in compliance with
their agreement with such incumbent local exchange carrier.
Exclusion for McLeodUSA and Merger Sub. The Merger Agreement provides
that in no event will it constitute a breach of any representation, warranty or
covenant of McLeodUSA or Merger Sub, or a failure of any condition to Ovation's
obligations if any fact, matter or thing referred to in the Merger Agreement
changes or results in the failure of any condition to Ovation's obligations to
the extent that such change or failure of condition results from (1) changes
that are applicable to the telecommunications or directory publishing industries
generally (including, without limitation, changes in federal or state law), (2)
any act or omission following the date of the Merger Agreement
54
<PAGE>
on the part of any incumbent local exchange carrier with which McLeodUSA or any
of its subsidiaries has an agreement, against or affecting McLeodUSA or its
subsidiaries, whether (a) in connection with an effective or anticipated change
in law (such as the cessation of reciprocal compensation payments), (b) as a
result of the transactions contemplated in the Merger Agreement or (c)
otherwise, provided that McLeodUSA or its subsidiaries are otherwise materially
in compliance with their agreement with such incumbent local exchange carrier,
or (3) any decrease in the trading price of McLeodUSA Common Stock on The Nasdaq
Stock Market's National Market System as reported by Nasdaq.
Waiver and Amendment of the Merger Agreement
Waiver. At any time prior to the Effective Time, the parties to the
Merger Agreement may agree to (1) extend the time for the performance of any
obligation or other act required to be performed under the Merger Agreement, (2)
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant thereto, and (3) waive
compliance with any of the agreements or conditions contained in the Merger
Agreement.
Amendment. The Merger Agreement may be amended by the parties thereto
at any time prior to the Effective Time, subject to applicable law.
Expenses
The Merger Agreement provides that each party will pay its own costs and
expenses incurred in connection with the Merger Agreement and the transactions
contemplated thereby.
Voting Agreements
Certain directors, executive officers and stockholders of Ovation have
entered into voting agreements with McLeodUSA and Merger Sub. Under the terms
of these voting agreements, until the date on which the Merger is consummated or
the Merger Agreement is terminated in accordance with its terms, each such
person has agreed, among other things:
(1) to cast all votes attributable to the capital stock of Ovation
beneficially owned by such person at any annual or special meeting of
stockholders of Ovation in favor of the approval and adoption of the Merger
Agreement and approval of the Merger, and against any Competing
Transaction;
(2) to grant to the persons designated by the Ovation Board as
attorneys-in-fact or proxies with respect to such meeting, a specific
written proxy to vote all capital stock of Ovation which such person is
entitled to vote in favor of the approval and adoption of the Merger
Agreement and approval of the Merger, and against any Competing
Transaction;
(3) not to sell, transfer, pledge, encumber, assign or otherwise
dispose of, or enter into any contract, option or other arrangement or
understanding with respect to the sale, transfer, pledge, encumbrance,
assignment or other disposition of, any shares of capital stock of Ovation
except for existing pledges disclosed in the disclosures of Ovation
delivered to McLeodUSA or to the extent such transfer is otherwise approved
in advance in writing by McLeodUSA and Merger Sub;
(4) not to grant any proxies, deposit any shares of capital stock of
Ovation into a voting trust or enter into a voting agreement with respect
to any such shares except for existing proxies in connection with pledges
and voting agreements disclosed in the disclosures of Ovation delivered to
McLeodUSA; or
55
<PAGE>
(5) not to take any action which would have the effect of preventing
or inhibiting such person from performing his obligations under the voting
agreement.
Pursuant to these voting agreements, the holders of approximately 94% of
the voting power attributable to the shares of Ovation Common Stock and Ovation
Preferred Stock entitled to vote at the Special Meeting have agreed to vote in
favor of the Merger Agreement.
Ovation Stockholders' Agreement
M/C has entered into a Stockholders' Agreement (the "Ovation Stockholders'
Agreement") with McLeodUSA, IES, Clark E. and Mary E. McLeod, Richard A. and
Gail G. Lumpkin and certain other parties affiliated or related thereto
(collectively, the "Lumpkins," and together with IES and Clark E. and Mary E.
McLeod, the "Principal Stockholders") with respect to the shares of McLeodUSA
Common Stock that M/C will receive in the Merger.
The Ovation Stockholders' Agreement provides that until December 31, 2001,
M/C will not offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of, directly or indirectly, ("Transfer"), any equity
securities of McLeodUSA or any other securities convertible into or exercisable
for such equity securities, beneficially owned by M/C as a result of the Merger
without receiving the prior written consent of the McLeodUSA Board, except for
certain permitted transfers as provided in the Ovation Stockholders' Agreement.
The Ovation Stockholders' Agreement further provides that the McLeodUSA Board
shall determine on a quarterly basis commencing with the quarter ending December
31, 1999 and ending on December 31, 2001, the aggregate number, if any, of
shares of McLeodUSA Common Stock (not to exceed in the aggregate 50,000 shares
per quarter) that M/C may Transfer during certain designated trading periods
following the release of McLeodUSA's quarterly or annual financial results.
The Ovation Stockholders' Agreement provides that the McLeodUSA Board shall
determine on an annual basis for each of the years ending December 31, 2000 and
December 31, 2001, the aggregate number, if any, of shares of McLeodUSA Common
Stock (not to exceed in the aggregate on an annual basis a number of shares
equal to 15% of the total number of shares of McLeodUSA Common Stock
beneficially owned by M/C as of the Closing), to be registered by McLeodUSA
under the Securities Act, for Transfer by M/C. The Ovation Stockholders'
Agreement also provides that in any underwritten primary offering (other than
pursuant to a registration statement on Form S-4 or Form S-8 or any successor
forms thereto or other form which would not permit the inclusion of shares of
McLeodUSA Common Stock of M/C) during the period commencing on January 1, 2000
and ending on December 31, 2001, McLeodUSA will give written notice of such
offering to M/C and will undertake to register the number of shares of McLeodUSA
Common Stock of M/C (subject to the limitation specified above), if any, as
determined by the McLeodUSA Board. The Ovation Stockholders' Agreement provides
that McLeodUSA may subsequently determine not to register any shares of M/C
under the Securities Act and may either not file a registration statement or
otherwise withdraw or abandon a registration statement previously filed.
The Ovation Stockholders' Agreement also contains various provisions
intended to insure that M/C is generally treated on a similar basis to the
Principal Stockholders in connection with any Transfer of securities of
McLeodUSA permitted by McLeodUSA with respect to any of the Principal
Stockholders or any registration rights granted by McLeodUSA to any of the
Principal Stockholders under the November 1998 Stockholders' Agreement (as
defined below) for the period commencing on January 1, 2000 and ending on
December 31, 2001. Similar protective rights are also granted in the Ovation
Stockholders' Agreement to each of the Principal Stockholders with respect to
any Transfer or registration of securities of McLeodUSA permitted by McLeodUSA
with respect to M/C under the Ovation Stockholders' Agreement. In addition,
during the year ending December 31, 1999, to the extent McLeodUSA participates
in a strategic transaction with an outside investor pursuant to which such
investor acquires securities of McLeodUSA at a premium to the then average
trading price of
56
<PAGE>
McLeodUSA's securities, and after McLeodUSA has been paid or otherwise received
its consideration or proceeds from such transaction as determined by McLeodUSA,
the Principal Stockholders and M/C may be entitled to participate in such
transaction on a pro rata basis as determined by the McLeodUSA Board.
Pursuant to the Ovation Stockholders' Agreement, the Principal Stockholders
have agreed, for so long as each such Principal Stockholder owns at least four
million shares of McLeodUSA Common Stock, to (i) establish the size of the
McLeodUSA Board at up to 11 directors and (ii) cause to be elected to the
McLeodUSA Board one director designated by M/C (for so long as M/C owns at least
2.5 million shares of McLeodUSA Common Stock). The Ovation Stockholders'
Agreement also contains provisions pursuant to which M/C agrees to vote its
shares of McLeodUSA Common Stock to establish the size of the McLeodUSA Board at
up to 11 directors and to cause to be elected to the McLeodUSA Board certain
directors designated by the Principal Stockholders as set forth therein.
The Ovation Stockholders' Agreement terminates on the earlier to occur of
the termination of the Merger Agreement in accordance with the terms thereof and
December 31, 2001. In addition, if (i) during each of the years ending
December 31, 2000 and December 31, 2001, McLeodUSA has not provided M/C a
reasonable opportunity to Transfer pursuant to the registration of securities
under the Securities Act an aggregate number of shares of McLeodUSA Common Stock
equal to not less than 15% of the total number of shares of McLeodUSA Common
Stock beneficially owned by M/C as of the Closing or (ii) after January 1, 2000,
the November 1998 Stockholders' Agreement to which McLeodUSA and the Principal
Stockholders are a party has been terminated by all parties thereto, then M/C
may terminate the Ovation Stockholders' Agreement by providing written notice of
termination to all other parties (x) in the case of clause (i) above, no later
than 30 days following the end of such year and (y) in the case of clause (ii)
above, at any time after January 1, 2000. Lastly, the Ovation Stockholders'
Agreement shall be terminated with respect to the Principal Stockholders (and
not as to McLeodUSA and M/C) at such time as the November 1998 Stockholders'
Agreement shall have terminated.
See "McLeodUSA Capital Stock and Comparison of Stockholder Rights --
Investor Agreement and Stockholders' Agreements" for a description of the
November 1998 Stockholders' Agreement and certain other stockholder and investor
agreements to which McLeodUSA and certain other stockholders of McLeodUSA are a
party.
57
<PAGE>
INFORMATION ABOUT McLEODUSA AND MERGER SUB
General
McLeodUSA. McLeodUSA provides integrated communications services to business
and residential customers in the Midwestern and Rocky Mountain regions of the
United States. McLeodUSA's integrated communications services include local,
long distance, Internet access, data, voice mail and paging, all from a single
company on a single bill. McLeodUSA believes it is the first communications
provider in most of its markets to offer ``one-stop shopping'' for
communications services tailored to customers' specific needs.
McLeodUSA's approach makes it easier for both its business and its
residential customers to satisfy their telecommunications needs. It also allows
businesses to receive customized services, such as competitive long distance
pricing and enhanced calling features, that might not otherwise be directly
available on a cost-effective basis. As of December 31, 1998, McLeodUSA served
over 397,600 local lines in 269 cities and towns.
In addition to McLeodUSA's core business of providing competitive local,
long distance and related communications services, it also derives revenue from:
. the sale of advertising space in telephone directories
. incumbent local exchange services in east central Illinois
. communications network maintenance services
. telephone equipment sales, service and installation
. video services
. special access, private line and data services
. telemarketing services
. other communications services, including cellular, operator, payphone and
paging services
In most of its markets, McLeodUSA competes with the incumbent local phone
company by leasing their lines and switches. This allows customers to select
McLeodUSA's local service without changing their existing telephone numbers. In
other markets, primarily in east central Illinois, McLeodUSA operates its own
lines and switches. McLeodUSA provides long distance services by using its own
facilities and leasing capacity from long-haul and local providers. McLeodUSA
is constructing fiber optic networks in Iowa, Illinois, Wisconsin, Indiana,
Missouri, Minnesota, South Dakota and North Dakota to carry additional
communications traffic on its own network.
McLeodUSA wants to be the leading and most admired provider of integrated
communications services in its markets. McLeodUSA is:
. aggressively capturing customer share and generating revenue using leased
network capacity
. concurrently constructing its own network
. migrating customers to its network to provide enhanced services and reduce
operating costs
The principal elements of McLeodUSA's business strategy are to:
Provide integrated communications services. McLeodUSA believes it can
rapidly penetrate its target markets and build customer loyalty by
providing a "bundled" product offering. McLeodUSA intends to add personal
communications services to its current array of integrated communications
services over the next several years.
Build customer share through branding. McLeodUSA believes it will create
and strengthen brand awareness in its target markets by branding its
communications services with the
58
<PAGE>
trade name McLeodUSA in combination with the distinctive black-and-yellow
motif of its telephone directories.
Provide outstanding customer service. McLeodUSA customer service
representatives are available 24 hours a day, seven days a week, to answer
customer calls. McLeodUSA's customer-focused software and systems allow
its representatives immediate access to its customer and network data,
enabling a rapid and effective response to customer requests.
Focus on small and mid-sized markets. McLeodUSA primarily targets small and
mid-sized markets because it believes it can rapidly capture customer share
by providing face-to-face business sales and strong service support to its
customers before intense competition develops.
Expand its fiber optic network. McLeodUSA is building a state-of-the-art
digital fiber optic network to deliver multiple services and reduce
operating costs.
Expand intra-city fiber network build. Within selected cities, McLeodUSA
plans to extend its network directly to its customers' locations. This
will allow McLeodUSA to provide expanded services and reduce the expense of
leasing facilities from the local exchange carrier.
Explore acquisitions and strategic alliances. McLeodUSA plans to pursue
acquisitions, joint ventures and strategic alliances to expand or
complement its business.
Leverage proven management team. McLeodUSA's executive management team
consists of veteran telecommunications managers who successfully
implemented similar customer-focused telecommunications strategies in the
past.
____________________
As of September 30, 1998, McLeodUSA estimated, based on its business plan
and projections as of that date, its aggregate capital requirements through 2001
would be $1.1 billion. McLeodUSA's estimated capital requirements include the
projected cost of:
. building its fiber optic network, including intra-city fiber optic networks
. expanding operations in existing and new markets
. developing a PCS system
. funding general corporate purposes
Since September 30, 1998, McLeodUSA has entered into agreements to acquire
DTG, TDI and Info America, in addition to the transaction described in this
Prospectus and Proxy Statement. These transactions, if consummated, would
result in changes to McLeodUSA's business plan and growth projections. McLeodUSA
anticipates that it will need additional capital to continue to expand its
markets, operations, facilities, network and services if these transactions are
consummated.
McLeodUSA expects to use the following to address its capital needs:
. approximately $591.7 million of cash and investments on hand at
December 31, 1998
. additional issuances of debt or equity securities
. a proposed $100.0 million revolving credit facility
. projected operating cash flows of McLeodUSA
The actual amount and timing of McLeodUSA's future capital requirements is
subject to risks and uncertainties and may differ materially from its estimates.
See "Risk Factors--Significant Capital Requirements."
____________________
59
<PAGE>
McLeodUSA'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.
Merger Sub. Merger Sub is a Delaware corporation and a wholly owned subsidiary
of McLeodUSA. McLeodUSA formed Merger Sub in December 1998 to facilitate the
Merger. Merger Sub has not transacted any business other than that incident to
its formation and the completion of the Merger.
Additional Information
A detailed description of McLeodUSA's business, executive compensation,
various benefit plans (including stock option plans), voting securities and the
principal holders thereof, certain relationships and related transactions,
financial statements and other matters related to McLeodUSA is incorporated by
reference or set forth in McLeodUSA's Annual Report on Form 10-K for the year
ended December 31, 1997 or on Form 10-Q for the quarter ended September 30,
1998, incorporated herein by reference. Stockholders desiring copies of such
documents may contact McLeodUSA at its address or telephone number indicated
under "Where You Can Find More Information."
Recent Developments
The DTG Merger Agreement. On October 27, 1998, McLeodUSA entered into an
Agreement and Plan of Merger with DTG pursuant to which a newly formed wholly
owned subsidiary of McLeodUSA will be merged with and into DTG. As a result of
the DTG Merger, each share of DTG's common stock will be converted into the
right to receive 0.4328 of a share of McLeodUSA Common Stock. The maximum number
of shares of McLeodUSA Common Stock issuable pursuant to the DTG Merger
(assuming the exercise of all outstanding options to purchase DTG common stock
and including shares to be issued to certain executive officers of DTG who are
entering into employment agreements with McLeodUSA) is expected to be
approximately 1,375,000. In addition, under the terms of the DTG Merger
Agreement, each option to purchase DTG common stock will become or be replaced
by an option to purchase a number of shares of McLeodUSA Common Stock equal to
the number of shares of DTG common stock that could have been purchased
(assuming full vesting) under the DTG stock option multiplied by the DTG
Exchange Ratio.
Consummation of the DTG Merger is subject to the satisfaction of certain
conditions, including (i) approval of the DTG Merger Agreement and the DTG
Merger by the stockholders of DTG, (ii) receipt of required regulatory approvals
and (iii) certain other customary conditions. Each director and certain
executive officers of DTG have entered into voting agreements pursuant to which,
among other things, they have agreed to vote their shares of DTG common stock in
favor of the DTG Merger at a meeting of the stockholders of DTG.
DTG is a diversified communications services company, headquartered in
Irene, South Dakota. DTG offers local, long distance, operator,
telecommunications equipment sale and leasing, cable television, computer
networking, Internet access, mobile radio, paging and other communications
services to business and residential customers in southeastern South Dakota and
neighboring areas. As of December 31, 1998, DTG operated 13 telephone exchanges
and 26 cable television systems, incorporating over 2,240 miles of copper plant,
300 miles of coaxial cable and approximately 9,100 fiber miles of fiber optic
lines, serving approximately 7,350 local access lines, 5,930 cable television
subscribers, 7,200 Internet users, and over 2,000 active computer networking
business customers. DTG had pro forma revenues of $24.2 million for the nine
months ended September 30, 1998. DTG has 188 employees.
60
<PAGE>
The TDI and Info America Merger Agreements. On January 7, 1999, McLeodUSA and
its indirect wholly owned subsidiary, Pubco, entered into an Agreement and Plan
of Merger with TDI and the stockholders of TDI pursuant to which McLeodUSA will
acquire TDI by merger. As a result of the TDI Merger, each share of TDI common
stock will be converted into the right to receive a number of shares of
McLeodUSA Common Stock determined in accordance with a formula contained in the
TDI Merger Agreement. The maximum number of shares of McLeodUSA Common Stock
issuable pursuant to the TDI Merger is expected to be approximately 2,556,391.
McLeodUSA will also assume approximately $15.6 million of TDI debt.
Consummation of the TDI Merger is subject to the satisfaction of certain
conditions, including (i) approval of the TDI Merger Agreement and the TDI
Merger by the stockholders of TDI, (ii) compliance with all applicable
provisions of the HSR Act and the expiration of all applicable waiting periods
thereunder, (iii) receipt of required regulatory approvals, and (iv) certain
other customary conditions. Both Pubco and TDI may terminate the TDI Merger
Agreement if the TDI Merger has not been consummated by February 15, 1999.
In a related transaction, on January 7, 1999, McLeodUSA and Pubco entered
into an Agreement and Plan of Merger with Info America and certain stockholders
of Info America pursuant to which McLeodUSA will acquire Info America by merger.
As a result of the Info America Merger, each share of Info America's common
stock will be converted into the right to receive a number of shares of
McLeodUSA Common Stock determined in accordance with a formula contained in the
Info America Merger Agreement. The maximum number of shares of McLeodUSA Common
Stock issuable pursuant to the Info America Merger is expected to be
approximately 1,203,007.
Consummation of the Info America Merger is subject to the satisfaction of
certain conditions, including (i) approval of the Info America Merger Agreement
and the Info America Merger by the stockholders of Info America, (ii) compliance
with all applicable provisions of the HSR Act and the expiration of all
applicable waiting periods thereunder, (iii) receipt of required regulatory
approvals, and (iv) certain other customary conditions. Both Pubco and Info
America may terminate the Info America Merger Agreement if the Info America
Merger has not been consummated by February 15, 1999.
TDI and Info America are related companies, headquartered in Grand Rapids,
Michigan, that together publish and distribute proprietary "white page" and
"yellow page" telephone directories primarily in Michigan and northwestern Ohio.
In 1998, TDI and Info America collectively published and distributed
approximately 2.6 million copies of 19 telephone directories. As of December 31,
1998, TDI had 257 employees and Info America had no employees. McLeodUSA
expects to consummate the TDI Merger and the Info America Merger in February
1999.
61
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
(unaudited)
The information in the following unaudited table is based on historical
financial information included in McLeodUSA's prior SEC filings. This summary
financial information should be read in connection with such historical
financial information including the notes which accompany such financial
information. This historical financial information has also been incorporated
into this document by reference. See "Where You Can Find More Information" on
page ___. McLeodUSA's audited historical financial statements as of
December 31, 1997 and 1996, and for each of the three years ended December 31,
1997 were audited by Arthur Andersen LLP, independent public accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------------------
Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5)(8) 1997(6)(7)(15)
------- -------- -------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 1,550 $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 466,154
------- -------- -------- -------- ------------- ----------
Operating expenses:
Cost of service...... 1,528 6,212 19,667 52,624 155,430 258,537
Selling, general and
administrative...... 2,390 12,373 18,054 46,044 143,918 212,993
Depreciation and
amortization........ 235 772 1,835 8,485 33,275 81,594
Other................ -- -- -- 2,380 4,632 10,191
------- -------- -------- -------- ------------- ----------
Total operating
expenses............. 4,153 19,357 39,556 109,533 337,255 563,315
------- -------- -------- -------- ------------- ----------
Operating loss........ (2,603) (11,343) (10,558) (28,210) (69,369) (97,161)
Interest income
(expense), net....... 163 (73) (771) 5,369 (11,967) (49,529)
Other income.......... -- -- -- 495 1,426 2,508
Income taxes.......... -- -- -- -- -- --
------- -------- -------- -------- ------------- ----------
Net loss.............. $(2,440) $(11,416) $(11,329) $(22,346) $ (79,910) $ (144,182)
======= ======== ======== ======== ============= ==========
Loss per common
share................ $ (.17) $ (.53) $ (.40) $ (.55) $ (1.45) $ (2.18)
======= ======== ======== ======== ============= ==========
Weighted average
common shares
outstanding.......... 14,761 21,464 28,004 40,506 54,974 66,287
======= ======== ======== ======== ============= ==========
<CAPTION>
Nine Months
Ended September 30,
---------------------------------------------
Pro Forma
1997(1)(5) 1998(9) 1998(7)(10)(15)
-------- ----------- --------------
<S> <C> <C> <C>
Operations Statement
Data:
Revenue................. $131,595 $438,642 $ 460,418
-------- -------- ---------
Operating expenses:
Cost of service....... 77,745 239,195 245,912
Selling, general and
administrative....... 86,363 189,579 201,199
Depreciation and
amortization......... 15,708 63,663 80,646
Other................. 2,689 5,575 5,575
-------- -------- ---------
Total operating
expenses.............. 182,505 498,012 533,332
-------- -------- ---------
Operating loss......... (50,910) (59,370) (72,914)
Interest income
(expense), net........ (2,686) (35,519) (51,093)
Other income........... 40 1,789 1,789
Income taxes........... -- -- --
-------- -------- ---------
Net loss............... $(53,556) $(93,100) $(122,218)
======== ======== =========
Loss per common
share................. $ (1.02) $ (1.49) $ (1.80)
======== ======== =========
Weighted average
common shares
outstanding........... 52,752 62,620 67,723
======== ======== =========
<CAPTION>
December 31, September 30,1998
---------------------------------------------------- ----------------------------
Pro
1993 1994 1995(1) 1996(1)(11) 1997(1)(5)(12) Actual(9) Forma (13)(15)
------ ------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets....................... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869 $ 570,784 $ 737,093
Working capital (deficit)............ $5,962 $ 1,659 $(1,208) $185,968 $ 378,617 $ 409,266 $ 545,457
Property and equipment, net.......... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804 $ 559,317 $ 615,555
Total assets......................... $9,051 $10,687 $28,986 $452,994 $1,345,652 $1,621,564 $2,191,584
Long-term debt....................... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384 $ 939,102 $1,306,734
Stockholders' equity................. $7,936 $ 3,291 $14,958 $403,429 $ 559,379 $ 483,745 $ 656,015
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
----------------------------------------------------------------- -----------------------------------
Pro Forma Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7)(15) 1997(1) 1998(9) 1998(7)(10)(15)
------- -------- ------- -------- ---------- ---------- -------- -------- --------------
<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 $ 955,782 $547,345 $251,253 $597,711
EBITDA(14)............... $(2,368) $(10,571) $(8,723) $(17,345) $ (31,462) $ (5,376) $(32,513) $ 9,868 $ 13,307
</TABLE>
(footnotes are located on the following page)
62
<PAGE>
_________________
(1) The acquisitions of MWR, 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 1997 Senior Discount Note Offering and the 1997 Senior Note
Offering.
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997, pro
forma operations of Ovation from January 1, 1997 to December 31, 1997 and
certain adjustments attributable to these acquisitions. Also reflects
certain adjustments attributable to the 1997 Senior Discount Notes, the
1997 Senior Notes, the March 1998 Senior Notes and the October 1998 Senior
Notes computed as if the 1997 Senior Discount Notes, the 1997 Senior Notes,
the March 1998 Senior Notes and the October 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 CCI Acquisition, the issuance of
the March 1998 Senior Notes in March 1998, the issuance of the October 1998
Senior Notes in October 1998 and the Merger 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 March 1998 Senior Notes on March 16, 1998.
(10) Includes pro forma operations of Ovation from January 1, 1998 to September
30, 1998 and certain adjustments attributable to the March 1998 Senior Note
Offering and the October 1998 Senior Note Offering as if each had occurred
on January 1, 1998.
(11) Includes Ruffalo Cody and McLeodUSA Publishing, which McLeodUSA acquired on
July 15, 1996 and September 20, 1996, respectively.
(12) Includes CCI, which McLeodUSA acquired on September 24, 1997.
(13) Reflects the net proceeds of the October 1998 Senior Note Offering and
includes Ovation on a pro forma basis. McLeodUSA agreed to acquire Ovation
pursuant to the Merger Agreement on January 7, 1999.
(14) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA 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.
(15) Other pending acquisitions described in "Recent Developments" on page __
are not reflected in pro forma data.
63
<PAGE>
Pro Forma Financial Data
The following unaudited pro forma financial information has been prepared to
give effect to (i) the Merger, (ii) the CCI Acquisition, (iii) the 1997 Senior
Discount Note Offering in March 1997, (iv) the 1997 Senior Note Offering in July
1997, (v) the March 1998 Senior Note Offering in March 1998, and (vi) the
October 1998 Senior Note Offering in October 1998. The Unaudited Pro Forma
Condensed Consolidated Balance Sheet assumes that the Merger and the October
1998 Senior Note Offering were consummated on September 30, 1998. The Unaudited
Pro Forma Condensed Consolidated Statements of Operations reflects the Merger
and the CCI Acquisition using the purchase method of accounting, and assumes
that the Merger and the CCI Acquisition, the 1997 Senior Discount Note Offering,
the 1997 Senior Note Offering, the March 1998 Senior Note Offering, and the
October 1998 Senior Note 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 McLeodUSA and CCI and the related notes thereto incorporated by
reference in this Prospectus and Proxy Statement. The pro forma adjustments are
based upon available information and certain assumptions that management
believes to be reasonable. For purposes of this pro forma presentation, the
1997 Senior Discount Note Offering, the 1997 Senior Note Offering, the March
1998 Senior Note Offering, and the October 1998 Senior Note Offering are
collectively referred to as the "Notes Offerings" and the March 1998 Senior Note
Offering and the October 1998 Senior Note Offering are collectively referred to
as the "1998 Notes Offerings." Certain pending acquisitions described in
"Recent Developments" on page __ are not reflected in this Pro Forma Financial
Data.
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 Merger and the CCI Acquisition been consummated at
the beginning of the periods presented, nor is it necessarily indicative of
future operating results or financial position.
64
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheets
(In thousands)
As of September 30, 1998
<TABLE>
<CAPTION>
Pro Adjustments Pro Forma
Pro Forma Adjustments Forma for the October for the October
for for the for the 1998 Senior Notes 1998 Senior Notes
McLeodUSA Ovation Merger (1) Merger Offering Offering
---------- --------- -------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........... $ 230,991 $ 2,831 $(141,000) $ 92,822 $291,875 $ 384,697
Other current assets .............. 339,793 12,603 -- 352,396 -- 352,396
---------- -------- --------- ---------- -------- ----------
Total Current Assets ............. 570,784 15,434 (141,000) 445,218 291,875 737,093
Property and Equipment ............ 559,317 56,238 -- 615,555 -- 615,555
Intangible assets ................. 398,971 57,359 281,892 738,222 -- 738,222
Other assets........................ 92,492 97 -- 92,589 8,125 100,714
---------- -------- --------- ---------- -------- ----------
Total Assets ..................... $1,621,564 $129,128 $ 140,892 $1,891,584 $300,000 $2,191,584
========== ======== ========= ========== ======== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities................. $ 161,518 $ 20,118 $ 10,000 $ 191,636 $ -- $ 191,636
Long-term debt, less current
liabilities............... 939,102 67,632 -- 1,006,734 300,000 1,306,734
Other long-term liabilities ....... 37,199 -- -- 37,199 -- 37,199
---------- -------- --------- ---------- -------- ----------
Total Liabilities.................. 1,137,819 87,750 10,000 1,235,569 300,000 1,535,569
---------- -------- --------- ---------- -------- ----------
Stockholders' Equity:
Preferred stock.................... -- 880 (880) -- -- --
Common stock....................... 631 240 (189) 682 -- 682
Additional paid-in capital......... 707,022 44,108 128,111 879,241 -- 879,241
Deferred compensation.............. -- (567) 567 -- -- --
Retained earnings (deficit)........ (220,835) (3,283) 3,283 (220,835) -- (220,835)
Accumulated other comprehensive
income............................ (3,073) -- -- (3,073) -- (3,073)
---------- -------- --------- ---------- -------- ----------
Total stockholders' equity....... 483,745 41,378 130,892 656,015 -- 656,015
---------- -------- --------- ---------- -------- ----------
Total liabilities and
stockholders' equity....... $1,621,564 $129,128 $ 140,892 $1,891,584 $300,000 $2,191,584
========== ======== ========= ========== ======== ==========
</TABLE>
____________
(1) Reflects the preliminary allocation of the net purchase price of Ovation to
the assets of Ovation that are to be acquired including intangible assets,
and records the payment of $141 million in cash and the issuance of
5,103,448 shares of McLeodUSA Common Stock valued at $33.76 per share (the
average closing price of McLeodUSA Common Stock on The Nasdaq Stock Market
for the eleven trading days beginning five days prior to the date the Merger
Agreement was announced, January 7, 1999, and ending five days after such
announcement). The actual amount of cash paid and McLeodUSA Common Stock
issued may vary depending on the elections of the holders of Ovation Common
Stock to receive either cash or McLeodUSA Common Stock in exchange for their
shares of Ovation Common Stock as described in "Terms of the Merger
Agreement and Related Transactions--Conversion of Ovation Preferred Stock
and Ovation Common Stock; Treatment of Options." For purposes of allocating
the net purchase price among the various assets to be acquired, McLeodUSA
has tentatively considered the carrying value of the acquired assets to
approximate their fair value, with all of the excess of the net purchase
price being attributed to intangible assets. McLeodUSA intends to more
fully evaluate the acquired assets following consummation of the Merger and,
as a result, the allocation of the net purchase price among the acquired
tangible and intangible assets may change. The adjustments include the
elimination of the Ovation equity components, including common stock,
treasury stock, other capital and retained deficit.
65
<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 Consolidated Adjustments
for the Notes for the Notes Communi- for CCI
McLeodUSA Offerings Offerings cations Inc.(1) Acquisition
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue.......................... $267,886 $ -- $ 267,886 $194,305 $ --
-------- --------- --------- -------- --------
Operating expenses:
Cost of service................. 155,430 -- 155,430 100,364 --
Selling, general and
administrative................. 143,918 -- 143,918 65,063 --
Depreciation and amortization... 33,275 -- 33,275 17,913 10,728(3)
Other........................... 4,632 -- 4,632 -- 5,559(4)
-------- --------- --------- -------- --------
Total operating expenses....... 337,255 -- 337,255 183,340 16,287
-------- --------- --------- -------- --------
Operating income (loss)......... (69,369) -- (69,369) 10,965 (16,287)
Interest expense, net........... (11,967) (34,045)(5) (46,012) (2,972) --
Other non-operating income...... 1,426 -- 1,426 1,082 --
Income taxes.................... -- -- -- (3,477) 3,477(6)
-------- --------- --------- -------- --------
Net income (loss)............... $(79,910) $ (34,045) $(113,955) $ 5,598 (12,810)
======== ========= ========= ======== ========
Loss per common share........... $(1.45) $(2.07)
======== =========
Weighted average common
shares outstanding............. 54,974 54,974
======== =========
Other Financial Data:
EBITDA(7)........................ $(31,462) -- $ (31,462) $ 28,878 $ --
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------------
Pro Forma Pro Forma Adjustments Pro Forma
for CCI for for the for the
Acquisition Ovation(2) Merger Merger
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Operations Statement Data:
Revenue.......................... $ 462,191 $ 3,963 $ -- $ 466,154
--------- ---------- --------- ---------
Operating expenses:
Cost of service................. 255,794 2,743 -- 258,537
Selling, general and
administrative................. 208,981 4,012 -- 212,993
Depreciation and amortization... 61,916 4,250 15,428 81,594
Other........................... 10,191 -- -- 10,191
--------- ---------- -------- ---------
Total operating expenses....... 536,882 11,005 15,428 563,315
--------- ---------- -------- ---------
Operating income (loss)......... (74,691) (7,042) (15,428) (97,161)
Interest expense, net........... (48,984) (545) -- (49,529)
Other non-operating income...... 2,508 -- -- 2,508
Income taxes.................... -- -- -- --
--------- ---------- -------- ---------
Net income (loss)............... $(121,167) (7,587) $(15,428) $(144,182)
========= ========== ======== =========
Loss per common share........... $ (1.98) $ (2.18)
========= =========
Weighted average common
shares outstanding............. 61,184 66,287
========= =========
Other Financial Data:
EBITDA(7)........................ $ (2,584) $ (2,792) $ -- $ (5,376)
</TABLE>
(table continued on following page)
66
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
---------------------------------------------------------------------------------
Pro
Adjustments Forma Pro
for the 1998 for the 1998 Forma Adjustments
Notes Notes for the for the
McLeodUSA Offerings Offerings Merger(8) Merger Total
---------- --------- --------- --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue...................................... $438,642 $ -- $ 438,642 $ 21,776 $ -- $ 460,418
-------- -------- --------- -------- -------- ---------
Operating expenses:
Cost of service............................. 239,195 -- 239,195 6,717 -- 245,912
Selling, general and administrative......... 189,579 -- 189,579 11,620 -- 201,199
Depreciation and amortization............... 63,663 -- 63,663 5,401 11,582(9) 80,646
Other....................................... 5,575 -- 5,575 -- -- 5,575
-------- -------- --------- -------- -------- ---------
Total operating expenses................... 498,012 -- 498,012 23,738 11,582 533,332
-------- -------- --------- -------- -------- ---------
Operating loss.............................. (59,370) -- (59,370) ( 1,962) (11,582) (72,914)
Interest expense, net....................... (35,519) (13,374)(10) (48,893) ( 2,200) -- (51,093)
Other non-operating income.................. 1,789 -- 1,789 -- -- 1,789
Income taxes................................ -- -- -- -- -- --
-------- -------- --------- -------- -------- ---------
Net loss.................................... $(93,100) $(13,374) $(106,474) $ (4,162) $(11,582) $(122,218)
======== ======== ========= ======== ======== =========
Loss per common share....................... $(1.49) $(1.70) $(1.80)
======== ========= =========
Weighted average common..................... 62,620 62,620 67,723
shares outstanding......................... ======== ========= =========
Other Financial Data:
EBITDA(7).................................... $ 9,868 $ -- $ 9,868 $ 3,439 $ -- $ 13,307
</TABLE>
_______________
(1) Includes operations of CCI from January 1, 1997 to September 24, 1997.
(2) Includes pro forma operations of Ovation from January 1, 1997 to
December 31, 1997.
(3) To adjust depreciation and amortization to include amortization of
intangibles acquired in the CCI Acquisition and the Merger. The acquired
intangibles will be amortized over periods ranging from 3 to 30 years.
(4) To recognize the costs associated with the directories in progress at the
time of the CCI Acquisition.
(5) To record the interest expense on the 1997 Senior Discount Notes at
10 1/2%, the 1997 Senior Notes at 9 1/4%, the March 1998 Senior Notes at
83/8% and the October 1998 Senior Notes at 9% all reduced by an estimated
annual yield of approximately 5% on the net proceeds from these offerings.
(6) Net income (loss) includes pro forma adjustments for income taxes due to
the availability of net operating loss carryforwards and a valuation
allowance.
(7) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA 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) Includes pro forma operations of Ovation from January 1, 1998 to
September 30, 1998.
(9) To adjust depreciation and amortization to include amortization of
intangibles acquired in the Merger. The acquired intangibles will be
amortized over periods ranging from 3 to 30 years.
(10) To record interest expense on the March 1998 Senior Notes at 83/8% and the
October 1998 Senior Notes at 9% reduced by an estimated annual yield of
approximately 5% on the net proceeds from these offerings
67
<PAGE>
INFORMATION ABOUT OVATION
General
Ovation is a Delaware corporation that was organized in the first quarter
of 1997 under its prior name of OCI Communications, Inc. The mailing address of
Ovation's principal executive office is 400 South Highway 169, Suite 750,
Minneapolis, Minnesota 55426, and the phone number is (612) 252-5000.
Ovation Overview
Ovation, headquartered in Minneapolis, Minnesota, was incorporated as a
privately owned facilities-based competitive local exchange carrier ("CLEC").
Ovation is pursuing a facilities-based strategy whereby Ovation owns and
operates its own switches and fiber optic network. In addition, Ovation has
established collocation agreements at multiple incumbent local exchange carrier
("ILEC") central offices. Ovation currently owns and operates fiber optic
networks in the Minneapolis/St. Paul, Minnesota metropolitan area and in
Michigan. In addition, Ovation completed the construction of telecommunications
networks in Chicago, Illinois and Milwaukee, Wisconsin in January 1999 and
expects to expand its Michigan service into Detroit by March 1999.
Ovation targets business customers located in "Tier One" cities
(populations greater than one million) in the Midwest. Ovation offers basic
dial-tone, local and long distance telephone service, and other communications
services, including Centrex-based services, private line/special access service,
and Integrated Services Digital Network ("ISDN") services. Ovation also offers
voice mail, teleconferencing, calling card services and other consumer and
business services. In addition, Ovation provides services to Internet Service
Providers ("ISPs").
On October 1, 1998, Ovation closed the acquisition of BRE Communications,
L.L.C. d/b/a Phone Michigan ("Phone Michigan") and increased its existing credit
facility with ATT CFC to $95 million to fund the purchase and expansion into
other markets. Phone Michigan is a CLEC which targets small to medium-sized
business customers as well as residential customers in smaller cities throughout
Michigan (populations of 100,000 to 250,000). Phone Michigan currently provides
local, long distance and enhanced services to customers in Flint, Saginaw, Bay
City, and Midland, Michigan.
Ovation History
Mr. Devine incorporated Ovation during the first quarter of 1997, and began
construction of a 66-mile fiber optic network in downtown Minneapolis and
southwest suburbs. To support the capital expenditures required for the
construction of the network, ATT CFC agreed to lend Ovation $24 million under a
senior secured facility. By late December 1997, Ovation had deployed its Lucent
Technologies Series 5ESS 2000 ("Lucent 5ESS") switch and fiber optic network and
launched commercial service. Ovation has continued its expansion in the
Minneapolis/St. Paul metropolitan area, with approximately 11,702 access lines
in operation as of October 31, 1998.
After making its initial installations in Minnesota, Ovation began
expanding into Milwaukee, Wisconsin, and Chicago, Illinois. In addition,
Ovation plans to use the newly acquired Phone Michigan operations as a platform
for expanding into Detroit. Ovation plans to provide dial-tone service in
Milwaukee and Chicago during the first quarter of 1999 and in Detroit during the
second quarter of 1999.
68
<PAGE>
Phone Michigan
Phone Michigan is a facilities-based CLEC formed in November 1996. Like
Ovation, Phone Michigan has deployed its own fiber optic network. Phone Michigan
funded part of the construction of its network by selling a portion of the fiber
it lays to various school districts in Michigan on a "condo" basis and keeping
the unused portion of the fiber for its own use. Phone Michigan is able to use
the unsold, unleased portion of the fiber to pursue its CLEC strategy.
Business Strategy
Ovation's goal is to be a facilities-based provider of local dial tone and
long distance services for businesses and residences located in Midwestern
cities. Ovation's primary target markets are areas that are not heavily
penetrated by other CLECs with a significant fiber backbone and a large number
of ILEC collocations. In each of its markets, Ovation intends to build a
digital fiber optic network deploying Lucent 5ESS switches. Because Ovation has
its own fiber optic network, it is able to lease transmission services (i.e.,
DS-1, DS-3, synchronous optical network ("SONET")) capacity to other CLECs and
to long distance carriers, providing Ovation with additional revenue.
Ovation employs a facilities-based strategy, building and owning a complete
network in each of its markets. Although this strategy requires significantly
higher capital expenditures on the front-end, over time Ovation believes that
the facilities-based strategy generates higher gross network margins than can be
obtained through simple reselling of retail service from ILECs or a "smart-
build" strategy of owning switches but leasing unbundled network elements
("UNEs") from the ILEC. Also, Ovation has greater flexibility from an
operational perspective because, by owning a complete fiber optic network,
Ovation is not as susceptible to changes in leased fiber or UNE rates.
Ovation's strategy is to build fiber networks near business corridors,
leasing bandwidth to other central offices to increase overall addressable
market. In essence, Ovation leases what is known in the industry as "the last
mile" of network from the ILEC's central office to the end-user in order to
complete the transmission. While leasing the network is more costly than using
Ovation's own fiber, it provides Ovation with the ability to access a larger
portion of local business without having to construct a network to each one. In
addition, Ovation will build directly to a customer's building in situations
that meet minimum profitability criteria. The following table provides data on
the number of Ovation's current and planned collocation sites in its target
markets:
Operational Collocation Sites
<TABLE>
<CAPTION>
Market End of 1998 End of 1999
------ ----------- -----------
(Projected)
<S> <C> <C>
Minnesota 12 27
Illinois 16 45
Wisconsin 1 13
Michigan 7 58
----------- ----------
Totals 36 143
</TABLE>
Services
Ovation currently offers local and long-distance service. While the
majority of Ovation's service is to business customers, Ovation is currently
offering residential service through Phone Michigan. Ovation also plans to
offer data and video services based on market demand.
69
<PAGE>
Local Phone Services
In addition to standard local business and residential phone service,
Ovation offers many customized local line features.
Ovation also offers a variety of specific local products, including
business lines, Centrex service, analog and digital trunks, ISDN and special
access and private line services. These services are explained in greater
detail below.
. Business Line. Business line is a calling service that provides a business
access line to the telephone network. It provides local calling features as
well as the following features.
Customized Calling Features
Calling Number Delivery Blocking* 900/976 Blocking
Hunting Toll Blocking
*Only available for qualifying business customers
Basic business line service is offered for a flat monthly charge or for a
lower monthly rate plus usage charges. A local directory listing is
provided as part of the business package, and long distance service is
provided at an additional charge.
. Centrex Service. Centrex service includes features similar to those of a
private branch exchange ("PBX"), except the equipment is located at
Ovation's central office and not at the premises of the customer. Like the
PBX service, Centrex allows business customers to (i) make intra-office
calls by way of four-digit extensions; (ii) direct dial calls within a
given phone system; and (iii) identify inbound calls.
. Trunking Services. There are two types of trunking services: analog and
digital. Trunking services enable businesses to realize cost savings over
individual line if they have a key system or PBX.
Analog Trunks. Analog trunking is the basic trunk service which
provides a customer with a single, voice-grade telephonic
communications channel that can be used to place or receive one call
at a time. Basic trunks are provided for connection of customer-
provided private branch exchanges to the public switched
telecommunications network. Each basic trunk is provided with touch
tone signaling.
Digital Trunks. Digital trunking is more advanced and provides a
customer with a digital connection which operates at 1.544 megabits
per second, which is a measurement of speed for digital signal
transmission expressed in millions of bits per second ("Mbps"), and
can be multiplexed into 24 individual voice-grade channels. Each of
these channels can be used to place or receive one call at a time.
Digital trunks are provided for connection of compatible customer-
provided PBXs to the public switched telecommunications network. Each
digital trunk is provided with dual tone multi-frequency (DTMF) or
multi-frequency (MF) signaling as specified by the customer. Digital
trunks are offered via the following three options. Option 2 and 3
offer direct inward dialing and direct outward dialing.
Option 1: DS1 Usage Rate Service provides a full digital trunk
charge at a monthly recurring rate plus usage charges.
70
<PAGE>
Option 2: DS1-19 Digital DS0 Service provides individual voice-
grade channels charged at a monthly recurring rate that includes
usage. A minimum of 19 channels must be purchased. Direct
outward dialing is also available with this service.
Option 3: DS1-12 Digital DS0 Service provides individual voice
grade channels charged at a monthly recurring rate that includes
usage. A minimum of 12 channels must be purchased. Direct
outward dialing is available with this service.
. ISDN. Integrated Services Digital Network is an internationally agreed upon
standard which, through special equipment, allows two-way, simultaneous
voice and data transmission in digital formats over the same transmission
line. This service targets sophisticated business customers who need to
carry out functions such as videoconferencing. ISDN permits
videoconferencing over a single line, for example, and also supports a
multitude of networking capabilities.
ISDN enables one specific channel to carry signaling information, freeing
up Ovation's other channels to use full bandwidth for voice or data
transmissions. In essence, ISDN gives Ovation additional capacity to carry
out operations. Ovation offers two types of ISDNs: Primary Rate Interface
("PRI") and Basic Rate Interface ("BRI"). BRI provides the customer with
three channels for transmitting information (two channels for transmitting
voice and/or data and one channel for signaling). PRI is the ISDN
equivalent of a DS1 circuit and thus has the capacity of 1.54 Mbps or 24
voice grade equivalents.
. Special Access and Private Line. Ovation offers special access and private
line services. Special access services are switchless services that were
traditionally offered by competitive access providers. Ovation's special
access services allow its business customers to bypass the ILEC's switch by
providing special access to their long distance carrier of choice. Private
line services exist when Ovation links two locations of the same business
together. In essence, Ovation provides its largest business customers with
a private pipe connecting the customer's sites.
Long Distance Phone Service
Ovation offers long distance service on a resale basis and offers related
services. Ovation buys wholesale long distance minutes from several carriers,
including Frontier and Wiltel. It then sells the long distance service under
plans with pricing generally lower than what the larger long distance carriers
charge.
Long Distance Features
Dial "1" IntraLATA and InterLATA Inbound Calling 800/888 Services
Calling Cards International Calling
Directory and Operator Assistance Easy billing for local & long
distance
Collocation Service
Ovation offers a variety of "collocation" services that permit customers to
interface directly, or "collocate," their equipment with Ovation's network.
71
<PAGE>
Collocation Services
Private Secured Space Battery & Generator UPS Systems
Equipment housing support Complete environmental back-ups
24-hour access Network Engineering Support
Full climate control Maintenance Options
AC/DC Power
Ovation is continually evaluating new products. Some potential new
products include asynchronous transfer mode ("ATM")/frame relay, digital
subscriber lines ("DSL") and Internet protocol telephony. Ovation has recently
completed a trial for ATM and DSL services and is expected to begin an Internet
protocol telephony trial with Lucent Technologies in March 1999. Ovation
anticipates implementing these services, which include placing long distance
calls through the Internet, by the end of 1999.
Customers
Ovation sells its telecommunications service to all segments of the
telephony market, including business, residential and data service customers.
The following table shows Ovation's estimated sources of revenue for 1998:
<TABLE>
<CAPTION>
Estimated Percent of
Source of Revenue Total Revenue
----------------- --------------
<S> <C>
Terminations 60
Residential 18
Business 16
Miscellaneous 6
</TABLE>
Network
Ovation offers its customers a newly designed and constructed fiber optic
network, "self-healing" SONET rings and digital switches.
In each of its markets, Ovation establishes fiber optic networks and
digital switches. In addition, Ovation is often approached by equipment
manufacturers as a "beta test" site, allowing Ovation to use their new products
and upgrades in return for Ovation testing them.
Sales and Marketing
Ovation concentrates on building its fiber optic network near large
corporate users, but also focuses on building directly to many local exchange
carrier ("LEC") central offices. Once Ovation has built fiber into these
central offices, Ovation can offer local business lines (from one line to
thousands of lines) to customers currently served out of that central office, as
well as to every residential customer served by that central office. Although
Ovation has not historically focused on residential services, Ovation believes
that construction of fiber linking the central offices makes offering
residential service financially viable.
Sales. The typical Ovation sales force is divided into four groups to best
serve these customer segments: general business, major/national business, ISP
and agent accounts.
. General Business Accounts
72
<PAGE>
Ovation typically employs one general business manager for every 10 general
business account executives. These managers direct the general business
sales force. The sales force is comprised of between 10 to 20 general
business sales representatives who sell to small-end businesses (24
business lines or less). These representatives concentrate on customers
that typically receive no special attention from the ILEC and are price
conscious.
. Major/National Accounts
Depending on market size, Ovation will usually have one business manager
for its major/national account sales representatives. The sales force is
comprised of between 5 to 10 representatives. These sales representatives
sell to customers who have 24 business lines or more. They develop
customized packages which may include, private line, special access, local
and long distance service.
Ovation's major/national customers range from a regional subsidiary of a
national organization to a Fortune 100 company.
. ISP Accounts
Ovation is a beneficiary of the growing demand from ISPs. ISPs
traditionally have put a great constraint on ILECs' switching capabilities
because ILECs were not built on 1:1 trunking for traditional voice calls.
Because of the number of ISPs in the marketplace, Ovation uses one account
executive per market to penetrate accounts. However, this one ISP account
executive can typically sell more local access lines than other account
executives each month because ISPs typically need multiple DS1s or PRIs
(ISDN).
. Agent Accounts
Ovation generally uses agency arrangements with entities that own phone or
telephone equipment vendor companies or market other types of
telecommunications services. Although sales are done by an agent, Ovation
bills the customer.
Sales Force Compensation. Ovation's sales force is compensated on a per
line basis, with the general managers, major managers and ISP managers all
operating under different sales expectations. General business sales
representatives are given incentives to sell at least 65 lines each month while
major/national account sales representatives are given incentives to sell 100
lines and ISP sales representatives between 240 and 1,000 lines per month.
Pricing. When Ovation begins service in a new market, it generally offers
several incentive pricing plans including the following:
. up to 10% off LEC/long distance carrier toll services
. free installation of service on existing service
. up to three months of free service for extended-term contracts
. collocation incentives
Advertising. In July 1998, Ovation launched a new marketing campaign to
make potential customers aware that Ovation has the capacity to serve over 80%
of the business lines in the Minneapolis/St. Paul metropolitan area. Ovation
advertises via magazines, billboards and radio.
73
<PAGE>
Customer Service
Ovation staffs customer service care groups, available through automated
call distribution centers ("ACDs"). Separate ACDs are available for residential
and small business customers and medium to large business customers. Ovation
tries to make full customer service available as close to the customer as
possible and provides local personnel in each of its markets, with sales staff,
billing analysts, operations technicians and engineers and single point-of-
contact provisioning coordinators available for customer support.
Information Technology Systems
Ovation believes that the successful CLECs of the future will have
automated information systems allowing them to cost-effectively process orders
from sale through installation and billing, manage trouble reports, and manage
network infrastructure. To this end, Ovation plans to build an information
technology infrastructure utilizing the "best-of-breed" systems available in the
industry and building interfaces between these systems for a seamless process
flow. A major focus of this plan is to provide all employees of Ovation,
regardless of location, with access to Ovation processes and procedures as well
as the actual systems.
Ovation has entered into contracts with vendors in order
management/provisioning, billing, and network management. These systems are
currently in implementation and interfaces are being designed to ensure minimal
duplication of data and efficient order process flow.
Ovation also believes that customers, employees and vendors want access to
data utilizing the Internet and plans to incorporate this capability into the
information technology infrastructure being built.
Operational Support Solution. Ovation has recently agreed to purchase an
operating support system from MetaSolv Software, Inc.
The software consists of a set of integrated modules, as follows:
. Order Management. This subsystem allows the user to create and manage
multiple order types and transactions within both the user's organization
as well as other service providers, such as ILECs. The software's worksheet
function prompts the user to enter the appropriate data and automatically
creates the appropriate service request(s).
. Service Provisioning. The service provisioning subsystem enables the user
to develop an end-to-end circuit design based on the customer's request
initiated by the Order Management subsystem. Service Provisioning provides
an engineer with the tools to design a system delivering either on-net or
off-net service for a specified customer. In addition, the system
automatically generates additional service requests that may be necessary
to complete the circuitry designed.
. Network Design. This subsystem tracks the installation and configuration of
the equipment that forms the hardware platform of a user's network. As a
result, the Network Design module is able to provide an accurate equipment
inventory as well as facility capacity. In addition, this subsystem gives
the user the ability to design networks prior to committing to equipment
purchases or network configurations.
. Customer Care. Individuals working with a customer are able to see the
services provided to the customer, as well as technical details such as
installed circuits, design details and pertinent "trouble" history for that
customer or architecture which help customer service representatives see
the "big picture" from a customer's point-of-view.
74
<PAGE>
. Trouble Management. The Trouble Management subsystem captures and manages
service assurance activities, including the origination of trouble tickets
and the monitoring of system alarms. The subsystem is able to create
resolution plans to ensure work is completed.
. Work Management. The Work Management subsystem provides the capability to
maintain provisioning plans which are groups of tasks needed to manage the
flow of work and information. The subsystem generates provisioning plans
which detail how each task is assigned, what the dependencies between tasks
are and when the tasks are expected to be completed.
. Data Management. As a result of this module, all groups within an
organization are able to view the same information. In addition, the Data
Management section also stores reference data about the organization and
its structure, helping to maintain the organization's quality and integrity
throughout the process.
Ovation anticipates that the software will be fully operational in Chicago
and Milwaukee during the first quarter of 1999 and in Michigan and Minneapolis
by the end of 1999.
Competition
The Telecommunications Act is specifically intended to increase competition
in the local telecommunications business. As a result, CLECs compete against
other CLECs as well as ILECs such as RBOCs.
ILECs. ILECs are generally the CLECs' most formidable competitors due to
their large size, market presence and access to capital resources. Ovation
competes with the ILECs in its markets for local exchange services on the basis
of product offerings, reliability, state-of-the-art technology, price, route
diversity, ease of ordering and customer service. However, the ILECs have long-
standing relationships with their customers and provide those customers with
various transmission and switching services that Ovation, in many cases, does
not currently offer. Ovation has sought, and will continue to seek, to achieve
parity with the ILECs in order to be able to provide a full range of local
telecommunications services.
CLECs. CLECs also compete against other CLECs. The following is a list of
some CLEC competitors.
. Allegiance (ILEC leases)
. NEXTLINK
. Teligent (wireless)
. Winstar (wireless)
. Focal (ILEC leases)
. Teleport (AT&T)
. MFS (MCI/WorldCom)
. ICG
. Intermedia
. KMC
. MGC
. US Exchange
MCI WorldCom and AT&T have also emerged as competitors in the CLEC market
as a result their respective acquisitions of MFS, Brooks Fiber and MCI Metro by
MCI WorldCom and Teleport Communications Group by AT&T.
Other Competitors. Ovation also faces, and expects to continue to face,
competition from other potential competitors in certain of the markets in which
Ovation offers its services. In addition
75
<PAGE>
to the ILECs, potential competitors capable of offering switched local and long
distance services include long distance carriers such as AT&T, MCI WorldCom and
Sprint, cable television companies such as TeleCommunications, Inc. and Time
Warner, Inc., electric utilities, microwave carriers, wireless telephone system
operators and private networks built by large end users.
In some cases, cable television companies are upgrading their networks with
fiber optics and installing facilities to provide fully interactive transmission
of broadband voice, video and data communications. In addition, under the
Telecommunications Act, electric utilities may install fiber optic
telecommunications cable and may facilitate provision of telecommunications
services by electric utilities over those networks if granted regulatory
authority to do so. Cellular and PCS providers may also be a source of
competitive local telephone service.
Ovation also competes with equipment vendors and installers, and
telecommunications management companies, with respect to certain portions of its
business.
A continuing trend towards business combinations and alliances in the
telecommunications industry may create significant new competitors to Ovation.
In addition, many of Ovation's existing and potential competitors have
financial, personnel and other resources, including name recognition,
significantly greater than those of Ovation.
Ovation also competes with long distance carriers in the provision of long
distance services. Although the long distance market is dominated by three
major competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies
also compete in the long distance marketplace.
Regulation
Introduction
Ovation's services are subject to varying degrees of federal, state and
local regulation. The FCC exercises jurisdiction over telecommunications
carriers which provide, originate or terminate local, intrastate, interstate or
international communications. In addition, state regulatory commissions retain
jurisdiction over carriers which originate or terminate intrastate
communications and local governments typically impose franchise or licensing
requirements on CLECs.
Federal Regulation
Ovation is regulated at the federal level as a non-dominant common carrier
subject to minimal regulation under Title II of the Communications Act of 1934.
The Communications Act of 1934 was substantially amended by the
Telecommunications Act which was signed into law by President Clinton on
February 8, 1996. The Telecommunications Act removes several state and local
entry barriers including the following:
. requires ILECs to provide interconnections to their facilities
. allows end-users to choose their own switched service providers
. requires access to rights-of-way
The Telecommunications Act is also designed to enhance the competitive
position of the CLECs and increase local competition by newer competitors such
as long distance carriers, cable television and public utility companies.
76
<PAGE>
Specifically, the Telecommunications Act requires all telecommunications
carriers, including both ILECs and CLECs, to permit resale of their services.
It also mandates that local carriers provide dialing parity, number portability
and nondiscriminatory access to telephone numbers, operator services, directory
assistance and directory listings and it establishes reciprocal compensation
arrangements for the transport and termination of telecommunications traffic
between a CLEC and an ILEC. Under the Telecommunications Act, ILECs are also
required to provide nondiscriminatory access to network elements on an unbundled
basis, to offer their local telephone services for resale at wholesale rates,
and to facilitate collocation of equipment necessary for competitors to
interconnect with or access the unbundled network elements.
The Telecommunications Act also supplanted most of the restrictions that
resulted from the divestiture of the RBOCs from AT&T in 1984. The
Telecommunications Act establishes procedures under which an RBOC can enter the
market for "in-region" inter-LATA services, defined as the area where the RBOC
provides local exchange service. As a result of the Telecommunications Act,
RBOCs must satisfy, among other things, a 14-point "checklist" of competitive
requirements before they can engage in inter-LATA long distance services. RBOCs
can provide intra-LATA long distance services without satisfying the checklist.
Interconnection Decision. On August 8, 1996, the FCC released the First
Report and Order and Second Report and Order and Memorandum (the
"Interconnection Decision") regarding local exchange competition, which
established a framework of minimum national rules enabling state Public Service
Commissions ("PSCs" or "PUCs") and the FCC to begin implementing many of the
local competition provisions of the Telecommunications Act. The Interconnection
Decision outlined a number of specific rules about interconnection.
On July 18, 1997, the U.S. Eighth Circuit Court of Appeals vacated certain
portions of the Interconnection Decision deciding that the FCC overstepped its
boundaries by establishing rules to govern, among other things, the prices that
the ILECs may charge for interconnection.
In a companion hearing, the court ruled that the term "interconnection," as
used in the Telecommunications Act, relates to physical access, and does not
include transmission and routing services as well.
On October 14, 1997, the U.S. Eighth Circuit Court of Appeals issued a
decision clarifying that the ILECs are not obligated to offer bundled elements.
In January 1999, the United States Supreme Court reversed major portions of the
decision of the Eight Circuit Court of Appeals and remanded the case for further
proceedings.
Unbundled Network Elements. On August 10, 1998, the Eighth Circuit of
Appeals issued a ruling in favor of CLECs which requires ILECs to sell "shared
transport" as UNEs to CLECs. The ruling reaffirms that ILECs must make their
transport networks available to CLECs. The ILECs have filed a petition for
rehearing of that decision before the Eighth Circuit.
SBC Decision. On December 31, 1997, the U.S. District Court for the
Northern District of Texas issued the SBC Decision finding that Sections 271 to
275 of the Telecommunications Act are unconstitutional. These sections of the
Telecommunications Act impose restrictions on the lines of business in which the
RBOCs may engage, including establishing the conditions the RBOCs must satisfy
before they may provide inter-LATA long distance telecommunications services.
Under the SBC Decision, the RBOCs would be able to provide inter-LATA long
distance telecommunications services immediately without satisfying the 14-point
conditions. The SBC Decision was stayed pending its review by the U.S. Fifth
Circuit Court of Appeals. The Fifth Circuit subsequently reversed the District
Court decision. SBC may seek rehearing of that decision by the Fifth Circuit or
review in the Supreme Court.
Other Regulation. In general, the FCC has a policy of encouraging the
entry of new competitors, such as Ovation, in the telecommunications industry
and preventing anti-competitive
77
<PAGE>
practices. Therefore, the FCC has established different levels of regulation for
dominant carriers and non-dominant carriers. For domestic common carrier
telecommunications regulation, large ILECs such as GTE and the RBOCs are
currently considered dominant carriers, while CLECs such as Ovation are
considered non-dominant carriers. As a non-dominant carrier, Ovation is subject
to relatively minimal FCC regulation.
ILEC Price Cap Reform. In 1991, the FCC replaced traditional rate of
return regulation for large ILECs with price cap regulation. Under price caps,
ILECs can charge prices for certain services, including interconnection services
provided to CLECs, only within certain parameters. On September 14, 1995, the
FCC proposed a three-stage plan that would substantially reduce ILEC price cap
regulation as local markets become increasingly competitive and ultimately would
result in granting ILECs non-dominant status.
The FCC released an order on December 24, 1996, which adopted certain of
these proposals, including the elimination of the lower service band index
limits on price reductions within the access service category. The FCC's
December 1996 order also eased the requirements necessary for the introduction
of new services. On May 7, 1997, the FCC took further action in its CC Docket
No. 94-1 updating and reforming its price cap plan for ILECs. The changes
require price cap ILECs to reduce their price cap indices by 6.5% annually, less
an adjustment for inflation. The FCC also eliminated rules that require ILECs
earning more than certain specified rates of return to "share" portions of the
excess with their access customers during the next year in the form of lower
access rates. These actions could have a significant effect on the interstate
access prices charged by the ILECs with which Ovation competes. Review of these
FCC decisions is currently pending before the U.S. Court of Appeals.
Access Charges. The FCC has granted ILECs significant flexibility in
pricing the interstate special and switched access services on a specific
central office by central office basis. Under this pricing scheme, ILECs may
establish pricing zones based on access traffic density and charge different
prices for each zone.
On May 16, 1997, the FCC took action in its CC Docket No. 96-262 to reform
the current interstate access charge system. These new FCC rules are designed
to reform the existing rate structure by moving access charges to more cost-
based rate levels and structures. Over the course of several years, Ovation
expects that these changes will reduce access charges and will shift charges
currently based on minutes to flat-rate, monthly per line charges. As a result,
the total amount of access charges paid by long distance carriers to access
providers in the United States may decrease. The FCC also announced that it
intends in the future to issue a Report and Order providing detailed rules for
implementing a market-based approach to further access charge reform. That
process will give ILECs progressively greater flexibility in setting rates as
competition develops, gradually replacing regulation with competition as the
primary means of setting prices. The FCC also adopted a "prescriptive
safeguard" to bring access rates to competitive levels in the absence of
competition.
This series of decisions is likely to have a significant effect on the
operations, expenses, pricing and revenue of Ovation. On June 18, 1997, the FCC
denied petitions filed by several ILECs asking the FCC to stay the effectiveness
of its access charge reform decision. The access charge order was affirmed by
the U.S. Eighth Circuit Court of Appeals on August 19, 1998. On October 6,
1998, the FCC issued a Public Notice asking parties to refresh the record on
access charge reform. It specifically requested comment on pricing flexibility
proposals submitted by two RBOCs and on changing the 6.5% X-factor adjustment
for price cap indices.
Universal Service Reform. On May 8, 1997, the FCC issued an order to
implement the provisions of the Telecommunications Act relating to the
preservation and advancement of universal telephone service. The Universal
Service order provides that everyone must be granted quality service, affordable
rates, access to advanced services, access in rural and high-cost areas,
equitable and nondiscriminatory contributions, specific and predictable support
mechanisms and access to advanced telecommunications services for schools,
health care providers and libraries. The order
78
<PAGE>
provided that universal service rules should not unfairly advantage or
disadvantage one provider or technology over another. All telecommunications
carriers providing interstate telecommunications services, including Ovation,
must contribute to the universal service support fund. Several parties have
appealed the May 8th order and the outcome is still pending.
State Regulation
Ovation believes that most, if not all, states in which it proposes to
operate will require a certification or other authorization to offer intrastate
services. These certifications generally require proof that the carrier has
adequate financial, managerial and technical resources to offer the proposed
services. Ovation will also be subject to tariff filing requirements.
In addition to obtaining state certifications, Ovation must negotiate terms
of interconnection with the ILEC before it can begin providing switched
services. Under the Telecommunications Act, if Ovation and the negotiating ILEC
are unable to reach an agreement 135 days after submitting a request for
interconnection to the ILEC, the negotiations may be submitted to arbitration
under the supervision of the state public utility commission.
The following chart shows the interconnection rates and unbundled loop
rates that the states in which Ovation operates charge:
<TABLE>
<CAPTION>
Interconnection Rate Minnesota Illinois Wisconsin Michigan
<S> <C> <C> <C> <C>
End Office (per MOU) $0.0026 $0.0090 $0.0090 $0.0150
Tandem Switch (per MOU) 0.0082 0.0090 0.0090 0.0150
Unbundled Loop $ 13.50 $ 7.16 $ 11.78 $ 11.43
Access Area A N/A 2.7 8.30 8.60
Access Area B N/A 7.21 13.00 11.10
Access Area C N/A 11.54 14.04 14.60
</TABLE>
Minnesota. The Minnesota Arbitration Order, filed on January 3, 1997,
clearly defined the competitive parameters as to how new entrants and ILECs will
inter-operate and mandated the following points:
. interconnection at a single point
. a symmetrical interconnection rate of $.0082 per minute of use
. unbundled voice-grade loops at $13.50
. competitively neutral cost recovery of interim number portability ("INP")
. switched access revenue flowing to end office providers for INP calls
. physical and virtual collocation cost-based rates
Illinois. The Illinois legislature enacted the two following laws,
effective January 1, 1998: the Infrastructure Maintenance Fee Act and Right of
Condemnation.
The Infrastructure Maintenance Fee Act eliminated any existing franchise
requirements for telephone companies. In exchange, the Infrastructure
Maintenance Fee Act allowed the state and municipal government to charge an
infrastructure fee of 2% of gross revenue or 1% of gross revenue if the
population is 500,000 or less. This municipal fee is the only charge that a
city can levy against a telephone company in connection with the placement and
operation of a telecommunications network, including the use of public rights-
of-way.
79
<PAGE>
Under the Right of Condemnation, a telephone company may enter and damage
private property to build its facility provided that it pays for the damage. In
addition, this law provides that a telephone company can place its facilities
along any highway, street alley or public right-of-way dedicated or commonly
used for utility purposes.
The mandated interconnection and unbundled loop rates are as follows:
. a symmetrical interconnection rate of $.009 per minute of use
. unbundled voice-grade loops at $3.72 in Access Area A, near Chicago; $10.02
in Access Area B, near the suburbs; and $11.53 in Access Area C, the outer
suburbs
Wisconsin. The Wisconsin legislature is considering enacting a
comprehensive statute like those which have already been adopted in Illinois and
Minnesota regarding the use of public rights-of-way by telecommunications
providers. Currently, Wisconsin law allows municipalities to impose "reasonable
regulations" on telecommunications providers in connection with the construction
and placement of facilities within the public right-of-way. Ovation, therefore,
has entered into separate agreements with each of the Wisconsin municipalities
whose public rights-of-way they intend to use.
On February 25, 1998, the State of Wisconsin granted Ovation's subsidiary,
Ovation Communications of Wisconsin, Inc., certification as a CLEC and
alternative telecommunications utility.
The mandated interconnection and unbundled loop rates are as follows:
. A symmetrical interconnection rate of $.009 per minute of use.
. Unbundled voice-grade loops at $8.10 in Access Area A; $12.80 in Access
Area B; and $13.84 in Access Area C.
Michigan. Michigan's constitution currently provides that no public
utility has the right to use the highways, streets, or other public places
without the consent of the local government. The next section of the
constitution provides that no franchise or license shall be granted by any city
for a period longer than 30 years. The Michigan Telecommunications Act requires
local governments to grant permits for access to use rights of way to provide
telecommunications services but the local government retains the right to review
that access so as to protect the welfare of the public. Section 253 of the
Telecommunications Act allows the FCC to preempt enforcement of state or local
actions that hinder competition but the FCC has historically been cautious in
using this power. It is more difficult for a CLEC to enter the market in
Michigan than in Chicago and Minnesota, but Phone Michigan has already obtained
the necessary interconnection agreements. Ovation has negotiated an
interconnection rate of $0.015 per minute of use and an unbundled loops rate of
$8.60 in Access Area A; $11.10 in Access Area B; and $14.60 in Access Area C.
Regulatory Status of Reciprocal Compensation
Current legislation requires ILECs to pay CLECs reciprocal compensation for
all local calls that originate from an ILEC customer and terminate at a CLEC
customer. At issue has been reciprocal compensation payable when an ILEC
customer makes use of an ISP that has collocated at a CLEC's facility. ILEC's
have argued that such calls do not constitute a local call since the call is
likely to terminate at Internet web sites in other states or countries and, as
such, ILECs feel they should not have to pay reciprocal compensation for these
calls. However, twenty four states have ruled that such calls are indeed local
calls and therefore are subject to reciprocal compensation provisions in local
network interconnection agreements.
On November 2, 1998, the FCC ruled that dedicated services provided through
digital subscriber line ("DSL") technology, which create a single dedicated
channel between an individual subscriber and a single pre-designated location
(typically an ISP), should be regulated as interstate
80
<PAGE>
services. However, the FCC noted that its ruling doesn't affect current
reciprocal compensation agreements between ILECs and CLECs. In addition, the FCC
decision does not directly affect dial-up calls to ISPs, which, according to the
FCC, should continue to be treated as local calls where dictated in local
interconnection agreements.
Management believes that the determination as to whether or not dial-up ISP
calls are local calls will ultimately be determined by a Supreme Court decision
and expects an intermediate decision by the FCC in the near future. Such a
decision could potentially reduce or eliminate Ovation's ISP reciprocal
compensation-based revenues.
Employees
As of December 31, 1998, Ovation had 378 employees, all of whom were full-
time employees and none of whom was subject to any collective bargaining
agreement.
Environmental and Other Matters
The United States Environmental Protection Agency ("EPA") and other
agencies regulate a number of chemicals and substances that may be present in
facilities used in the provision of telecommunications services. These include
preservatives which may be present in certain wood poles, asbestos which may be
present in certain underground duct systems and lead which may be present in
certain cable sheathing. Components of Ovation's network may include one or more
of these chemicals or substances. Ovation believes that in their present uses,
none of its facilities poses any significant environmental or health risk from
EPA regulated substances. If EPA regulation of any such substance is increased,
or if any facilities are disturbed or modified in such a way as to require
removal of the substance(s), special handling, storage and disposal may be
required for any such facilities removed from use.
Recent Developments
On January 4, 1999, the Company issued 388,750 options to purchase Ovation
Common Stock at $8 per share to its employees and employees of its subsidiaries.
Properties
The tangible assets of Ovation include a substantial investment in
telecommunications and cable equipment. The net book value of Ovation's fixed
assets, including Phone Michigan on a pro forma basis, were approximately $56
million as of September 30, 1998. No single property represents 10% or more of
Ovation's total assets.
The principal properties of Ovation do not lend themselves to simple
description by character and location. Ovation's investment in property, plant
and equipment consisted of the following at December 31, 1997 and September 30,
1998:
81
<PAGE>
Ovation Communications, Inc.
(numbers shown are pro forma to
include the properties of Phone Michigan)
(in thousands)
<TABLE>
<CAPTION>
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
<S> <C> <C>
Fixed Assets:
Telecommunication Plants $46,323,577 $21,613,756
Other Equipment $ 2,969,543 $ 1,147,456
Land and Buildings $ 1,173,259 $ 794,860
Construction in Progress $ 5,771,903 $ 1,947,874
</TABLE>
Telecommunications plants consist of switching equipment, transmission
equipment and related facilities, aerial cable, underground cable, conduit and
wiring. Other equipment consists of public telephone instruments and telephone
equipment (including PBXs) used or leased by Ovation in its operations, poles,
furniture, office equipment, vehicles and other work equipment. Land and
buildings consist of land owned in fee and improvements thereto, principally
central office buildings. Other property consists primarily of plant under
construction, capital leases and leasehold improvements.
Ovation's rights-of-way for its telecommunications transmissions systems
are typically held under leases, easements, licenses or governmental permits.
All other major equipment and physical facilities are owned in fee and are
operated, constructed and maintained pursuant to rights-of-way, easements,
permits, licenses or consents on or across properties owned by others.
Ovation owns or leases, in its operating territories, telephone property
which includes: fiber optic backbone and distribution network facilities; point-
to-point distribution capacity; central office switching equipment; connecting
lines between customers' premises and the central offices; and customer premise
equipment.
The fiber optic backbone and distribution network and connecting lines
include aerial and underground cable, conduit, and poles and wires. These
facilities are located on public streets and highways or on privately owned
land. Ovation has permission to use these lands pursuant to consent or lease,
permit, easement, or other agreements. The central office switching equipment
includes electronic switches and peripheral equipment.
With the exception of Ovation's South Linden Road location in Flint,
Michigan, Ovation and its subsidiaries lease facilities for their administrative
and sales offices, network nodes and warehouse space. The various leases expire
in years ranging from 1999 to 2008. Most have renewal options. Additional
office space and equipment rooms will be leased as Ovation's operations and
networks are expanded and as new networks are constructed.
Ovation currently leases all of these properties with the exception of
Ovation's South Linden Road location in Flint, Michigan. The following chart
summarizes Ovation's facilities:
<TABLE>
<CAPTION>
Facility Description Sq. ft.
- -------- ----------- -------
<S> <C> <C>
Minnesota
Suite 900-Minneapolis Switch Collocation and Operations 15,931
Interchange South-Minneapolis Corporate and Executive Offices 14,245
Suite LL-5-Minneapolis Storage 3,909
Suite 1036-Minneapolis Sales and Operations 2,582
Suite 1050-Minneapolis Network Management Center 2,984
Illinois
427 South LaSalle-Chicago Switch Site & Chicago Region Offices 22,000
Wisconsin
731 North Jackson St.-Milwaukee Switch Site & Chicago Region Offices 18,500
Michigan
4074 S. Linden Rd. Switch Site and Chicago Region Offices 12,900
Oak Creek Office Park Call Center 7,178
Miler Road Office Sales & Customer Service 8,743
Saginaw Office Sales Office 2,300
Farmington Hills Switch Office Sales Office & Future Switch Site 18,000
</TABLE>
82
<PAGE>
All properties owned by Ovation are subject to liens for loans obtained in
the ordinary course of business. Ovation does not ordinarily acquire or hold as
investments real estate, interests in real estate, real estate mortgages or
securities of companies primarily engaged in real estate activities.
Legal Proceedings
Ovation and its subsidiaries are parties, as plaintiff or defendant, to a
number of legal proceedings. These proceedings are considered to be routine
litigation incidental to Ovation's business and none is considered to be a
material pending legal proceeding.
83
<PAGE>
Pro Forma Financial Data
The following unaudited pro forma financial information has been prepared to
give effect to the acquisition of Phone Michigan on October 1, 1998. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations reflects the
acquisition of Phone Michigan using the purchase method of accounting. The
unaudited pro forma financial information should be read in conjunction with the
financial statements of Ovation and Phone Michigan and the related notes
included in this Prospectus and Proxy Statement. 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 Phone Michigan acquisition been consummated at the
beginning of the periods presented, nor is it necessarily indicative of future
operating results or financial position.
84
<PAGE>
Ovation
Unaudited Pro Forma Condensed Consolidated Balance Sheet
(In thousands)
As of September 30, 1998
<TABLE>
<CAPTION>
Adjustments Pro
for the Forma
Phone Phone Michigan for
Ovation Michigan Acquisition(1) Ovation
------- -------- -------------- -------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................ $ 4,022 $ 309 $(1,500) $ 2,831
Other current assets ................... 4,051 8,552 -- 12,603
------- ------- ------- --------
Total Current Assets ................ 8,073 8,861 (1,500) 15,434
Property and Equipment ................. 35,398 20,840 -- 56,238
Intangible assets ...................... 377 1,304 55,678 57,359
Other assets............................. 97 -- -- 97
------- ------- ------- --------
Total Assets.......................... $43,945 $31,005 $54,178 $129,128
======= ======= ======= ========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities...................... $10,524 $ 9,094 $ 500 $ 20,118
Long-term debt, less current
liabilities.......................... 19,762 23,507 24,363 67,632
Other long-term liabilities.............. -- -- -- --
------- ------- ------- --------
Total Liabilities..................... 30,286 32,601 24,863 87,750
------- ------- ------- --------
Stockholders' Equity:
Preferred stock......................... 880 -- -- 880
Common stock............................ 188 -- 52 240
Additional paid-in capital.............. 16,441 1,270 26,397 44,108
Deferred compensation................... (567) -- -- (567)
Retained earnings (deficit)............. (3,283) (2,866) 2,866 (3,283)
------- ------- ------- --------
Total stockholders' equity............ 13,659 (1,596) 29,315 41,378
------- ------- ------- --------
Total liabilities and
stockholders' equity................ $43,945 $31,005 $54,178 $129,128
======= ======= ======= ========
</TABLE>
____________
(1) Reflects the preliminary allocation of the net purchase price of Phone
Michigan to the assets of Phone Michigan that are to be acquired including
intangible assets, and records the issuance of 5,163,414 shares of Ovation
Common Stock. For purposes of allocating the net purchase price among the
various assets to be acquired, Ovation has tentatively considered the
carrying value of the acquired assets to approximate their fair value, with
all of the excess of the net purchase price being attributed to intangible
assets. Ovation has begun to more fully evaluate the acquired assets
following consummation of the acquisition and, as a result, the allocation
of the net purchase price among the acquired tangible and intangible assets
may change. The adjustments include the elimination of the Phone Michigan
equity components, including members' capital and accumulated deficit.
85
<PAGE>
Ovation
Unaudited Pro Forma Condensed Consolidated Statement of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------------------------------
Adjustments
for the
Phone
Phone Michigan Pro Forma
Ovation(1) Michigan(2) Acquisition(3) for Ovation
----------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Operations Statement Data:
Revenue............................. $ 40 $ 3,923 $ -- $ 3,963
------- ------- ------- -------
Operating expenses:
Cost of service.................... 61 2,682 -- 2,743
Selling, general and
administrative.................... 1,278 2,734 -- 4,012
Depreciation and amortization...... -- 503 3,747 4,250
Total operating expenses.......... 1,339 5,919 3,747 11,005
------- ------- ------- -------
Operating income (loss)............ (1,299) (1,996) (3,747) (7,042)
Interest expense, net.............. (1) (544) -- (545)
Other non-operating income......... -- -- -- --
Income taxes....................... -- -- -- --
------- ------- ------- -------
Net income (loss).................. $(1,300) $(2,540) $(3,747) $(7,587)
------- ------- ------- -------
Less preferred stock dividends..... (240) (240)
------- -------- -------- -------
Net loss per share applicable
to common stockholders............ $(1,540) $(2,540) $(3,747) $(7,827)
======= ======= ======= =======
Loss per common share.............. $(0.15) $(0.52)
======= =======
Weighted average common
shares outstanding................ 10,008 15,171
======= =======
Other Financial Data:
EBITDA(6) ......................... $(1,299) $(1,493) $(2,792)
<CAPTION>
Nine Months Ended
September 30, 1998
----------------------------------------------------------
Adjustments for Pro Forma
Phone Phone Michigan for
Ovation(4) Michigan(5) Acquisition(3) Ovation
---------- ----------- -------------- -------
<S> <C> <C> <C> <C>
Operations Statement Data:
Revenue . $ 8,174 $13,602 $ -- $21,776
------- ------- ------- -------
Operating expenses:
Cost of service.................... 1,584 5,133 -- 6,717
Selling, general and
administrative.................... 5,344 6,276 -- 11,620
Depreciation and amortization...... 1,186 1,405 2,810 5,401
Total operating expenses.......... 8,114 12,814 2,810 23,738
------- ------- ------- -------
Operating income (loss)............ 60 788 (2,810) (1,962)
Interest expense, net.............. (1,165) (1,035) (2,200)
Other non-operating income......... -- -- -- --
Income taxes....................... -- -- -- --
------- ------- ------- -------
Net income (loss).................. $(1,105) $ (247) $(2,810) $(4,162)
------- ------- ------- -------
Less preferred stock dividends..... (639) (639)
------- ------- ------- -------
Net loss per share applicable
to common stockholders............ $(1,744) $ (247) $(2,810) $(4,801)
======= ======= ======= =======
Loss per common share.............. $(0.16) $(0.30)
======= =======
Weighted average common
shares outstanding................ 10,996 =======
======= 16,159
=======
Other Financial Data:
EBITDA(6) ......................... $ 1,246 $ 2,193 $ 5,639
</TABLE>
- ------------
(1) Includes operations of Ovation from March 27, 1997 to September 30, 1997.
(2) Includes operations of Phone Michigan from January 1, 1997 to December 31,
1997.
(3) To adjust depreciation and amortization of intangibles acquired in
connection with the acquisition of Phone Michigan.
(4) Includes operations of Ovation from January 1, 1998 to September 30, 1998.
(5) Includes operations of Phone Michigan from January 1, 1998 to September 30,
1998.
(6) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. Ovation 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.
86
<PAGE>
OVATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Ovation provides telecommunications services through its own facilities and
those of other carriers. Ovation was incorporated in the State of Delaware on
March 27, 1997 as OCI Communications, Inc. Ovation changed its name to Ovation
Communications, Inc. in May 1998.
Ovation completed the construction of a 66 mile fiber optic SONET ring
network in the Minneapolis/St. Paul metropolitan area in December 1997. In
December 1997 Ovation began marketing local telephone exchange services,
intrastate inter-exchange services, high-capacity dedicated private line
services, and special and switched access services.
Results of Operations
Ovation was in its development stage until the end of December 1997.
Accordingly, there are no operations to compare to the nine months ended
September 30, 1998.
September 30, 1998 Compared to December 31, 1997
Cash and Cash Equivalents increased from $663,277 at December 31, 1997 to
$4,022,000 at September 30, 1998, an increase of $3,358,723. The increase was
used for capital expenditures, funding operating expenses and for investment in
acquisitions.
Other Current Assets consisted mostly of Net Accounts Receivable. The
Other Current Assets increased from $140,752 at December 31, 1997, to $4,051,000
at September 30, 1998, an increase of $3,910,248. This increase was primarily
due to the growth in Revenue from terminating access charges collected from U S
WEST, other LECs and long distance carriers.
Net fixed assets increased from $15,927,354 at December 31, 1997, to
$35,398,000 at September 30, 1998, a net increase of $19,470,646. This increase
primarily represents additional telecommunications plant assets constructed by
Ovation in 1998. Ovation currently plans to make substantial additional
investments in new telecommunications facilities and accordingly expects net
fixed assets to significantly increase in future years as these facilities are
constructed.
Current Liabilities increased from $2,640,371 at December 31, 1997 to
$10,525,000 at September 30, 1998, a net increase of $7,884,629. The increase
is primarily related to an increase in trade payables and accrued liabilities
for Ovation.
Long-Term Debt increased from $9,309,276 at December 31, 1997 to
$19,762,000 at September 30, 1998, an increase of $10,452,724. This increase is
the result of advances made under a $23,600,000 credit agreement with ATT CFC.
The advances were used to fund Ovation's 1998 construction projects and for
funding operating expenses.
Total Shareholders' Equity increased from $5,253,149 at December 31, 1997
to $13,658,000 at September 30, 1998, an increase of $8,404,851. This increase
was caused by Ovation's operating losses of $1,672,000 during the first nine
months of 1998 offset by additional equity raised by Ovation from the sale of
additional common and preferred stock to Ovation's existing stockholders.
January 1, 1998 through September 30, 1998
Total Operating Revenues were $8,174,000. The Cost of Service for this
period was $1,584,000 (or 19% of Total Operating Revenues), reflecting expenses
associated with Ovation's
87
<PAGE>
operations. The Selling, General and Administrative Expenses during the first
nine months of operations were $5,911,000 (or 72% of Total Operating Revenues),
reflecting the large start-up and operating expenses incurred by Ovation. The
Depreciation and Amortization Expense for this period was $1,186,000 (or 15% of
Total Operating Revenues).
Interest Expense was equal to $1,165,000 for the nine months ended
September 30, 1998. The expense was due to the advances of long-term debt under
the ATT CFC credit agreement, incurred to fund capital expenditures and
operating expenses.
Liquidity and Capital Resources
Ovation believes that it has adequate resources available to finance its
current operating requirements. Ovation maintains a $23.6 million development
line of credit with ATT CFC, $3.8 million of which was available as of
September 30, 1998. In addition, Ovation has had discussions with several
financial institutions to obtain a $190 million credit facility.
Ovation's 1998 expansion plans will require it to substantially expand its
employee base, resulting in additional employee expenses which will likely cause
Ovation to experience negative monthly operating cash flows until its new
development projects are completed and new subscribers are added in 1999 and
beyond. In addition, Ovation currently anticipates investing between $55 and
$60 million in new capital expenditures in 1999 in connection with its new
development projects. Ovation currently plans to fund these requirements with
the additional long-term debt discussed above.
Ovation's long-term lender is ATT CFC, which provided the funds for
Ovation's 1997 and 1998 construction projects. On October 1, 1998, ATT CFC
agreed to additional long-term financing in the amount of $71,400,000.
Year 2000 Readiness Disclosure
An Introduction to the Year 2000 Problem
Ovation is highly dependent upon advanced computer systems and specialized
software for the conduct of its business. These systems include switching and
network operations, billing and customer care, accounting and reporting and
Internet operating systems, as well as a wide assortment of personal computer
productivity software. Ovation's switching, network and major information
technologies have already been tested and accepted as Year 2000 ready. Upgrades
are already in process for some of Ovation's peripheral systems. In early 1999,
Ovation plans to perform readiness testing for the Year 2000 and the leap year.
By testing its switching, network and major information technologies,
Ovation is addressing an issue that is facing all users of automated information
systems. The issue is that many computer systems that process date sensitive
information based on two digits representing the year of the event may recognize
a date using "00" as the year 1900 rather than the Year 2000. The inability to
correctly recognize "00" as the Year 2000 could affect a wide variety of
automated information systems, such as mainframe applications, invoicing and
receivables tracking systems, event scheduling systems, personal computers and
telecommunication systems, in the form of software failure, errors or
miscalculations.
The discussion below describes Ovation's efforts to address this problem.
This Year 2000 readiness disclosure is based upon and partially repeats
information provided by Ovation's outside consultants, vendors and others
regarding the Year 2000 readiness of Ovation and its customers, vendors and
other parties. Although Ovation believes this information to be accurate, it has
not in each case independently verified such information.
88
<PAGE>
This Year 2000 readiness disclosure is a "forward-looking statement" within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Costs, results, performance and effects of Year 2000
activities described in those forward-looking statements may differ materially
from actual costs, results, performance and effects in the future due to the
interrelationship and interdependence of Ovation's computer systems and those of
its vendors, material service providers, customers and other third parties.
Readers are cautioned not to place undue reliance on the following forward-
looking statements. Furthermore, Ovation undertakes no obligation to update,
amend or clarify these forward-looking statements, whether as a result of new
information, future events or otherwise.
Year 2000 Readiness Program
It is difficult to predict with certainty what will happen to Ovation's
operations when the Year 2000 date is triggered. Ovation has tested its
switching, network and major information technologies. Given the complexity of
the specialized software used by Ovation, there can be no assurance that
unanticipated operating problems will not occur in Ovation's systems. Further,
like all telecommunications companies, Ovation relies on the continuing
operations of other telecommunications companies to provide worldwide
communications services. Ovation must be concerned not only with its own
internal systems, but also with the inter-related systems of many other
companies over which it exercises no control. Given these circumstances, Ovation
believes that it is likely that certain of its services will be adversely
affected by this problem, although the extent and impact of these service
disruptions are virtually impossible to estimate at this time.
Ovation is reviewing its information technology ("IT") and non-IT computer
systems to determine which are not capable of recognizing the Year 2000 and to
verify system readiness for the millennium date. The review covers all material
operations and is centrally managed. In reviewing the Year 2000 issue, Ovation
management has initiated the following steps:
1. increasing employee awareness and communication of Year 2000 issues
2 inventorying hardware, software and data interfaces and confirming
Year 2000 readiness of key vendors
3. identifying mission-critical components for internal systems, vendor
relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. correcting/remediating any identified problems
7. replacing systems or components that cannot be made Year 2000 ready
8. testing and verifying systems
9. implementing the remediation plan
Ovation is in the initial stages of performing these Year 2000 procedures
required to complete the remaining steps and has begun to develop contingency
plans to handle its most reasonably likely worst case Year 2000 scenarios.
A component of assessing Ovation's Year 2000 readiness includes an
assessment and survey of Year 2000 readiness of key business partners because
Ovation's network relies significantly on the provisioning and switching
capabilities of the other CLECs in those markets in which Ovation
89
<PAGE>
provides services. Ovation has not received certification from these carriers
indicating that they are Year 2000 ready, but has been notified that some of the
carriers have initiated programs to mitigate their Year 2000 issues in 1999.
However, there can be no assurance that the systems of the carriers will become
Year 2000 compliant before January 1, 2000.
Year 2000 Readiness Costs
To date, Ovation's primary costs for its Year 2000 compliance program are
employee costs associated with Ovation's internal management information systems
employees and other personnel, which Ovation expenses as part of its General and
Administrative Expense. Such costs to date have not been material. Ovation
currently estimates that most of the total cost to make Ovation's internal
systems Year 2000 ready will be expensed by Ovation as the costs are incurred.
The estimated cost of Ovation's Year 2000 readiness program is $47,500.
Ovation's estimate of its Year 2000 readiness costs is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Costs, results and effects of Year
2000 activities described in this forward-looking statement may differ
materially from actual costs, results and effects in the future due to the
interrelationship and interdependence of Ovation's computer systems and those of
its vendors, material service providers, customers and other third parties.
Contingency Plans
Ovation believes that the design of its network and support systems could
provide Ovation with certain operating contingencies in the event material
external systems fail. Ovation's major network operating facilities and systems
are backed up with auxiliary power generators that Ovation believes are capable
of operating all equipment and systems for indeterminate periods should power
supplies fail. Certain ancillary systems are backed up by emergency battery
systems. In addition, contingency plans are currently being developed to address
other problem areas. Because of the inability of Ovation's contingency plans to
eliminate the negative impact that disruptions in other carriers' services would
create, there can be no assurance that Ovation will not experience disruptions
in its services.
Ovation believes that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose material,
unremediable operational problems for its internal systems. However, given the
current uncertainty about the possible extent of the Year 2000 problem,
management cannot provide assurance that these efforts will be successful or
that the remediation costs will not be materially different from Ovation's
current estimates. At worst case, failure by Ovation or by certain of its
interconnected service providers or software vendors to remediate Year 2000
readiness issues could result in the disruption of Ovation's operations,
possibly impacting operation of the network and Ovation's ability to bill or
collect revenues. A prolonged network outage could have a material adverse
effect on Ovation's results of operations, cash flows, and could possibly affect
its ability to service its indebtedness.
Recently Issued Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS 131"). This pronouncement,
effective for calendar year 1998 financial statements, 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. Ovation expects that the adoption of
SFAS 131 will require Ovation to discontinue
90
<PAGE>
reporting segments currently disclosed in its annual consolidated financial
statements due to the increasing convergence of its computer, telephone and
cable television businesses.
In June 1998, the FASB issued Statement of Financial Accounting Standard
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS 133 as of the beginning of any fiscal quarter
after issuance (fiscal quarters beginning June 16, 1998 and thereafter).
SFAS 133 cannot be applied retroactively. SFAS 133 must be applied to
(a) derivative instruments, and (b) certain derivative instruments embedded in
hybrid contracts that were issued, acquired, or substantively modified after
December 31, 1997 (and, at Ovation's election, before January 1, 1998).
Ovation does not expect the impact of the adoption of SFAS 133 to be
material to Ovation's results of operations as Ovation does not currently hold
any derivative instruments or engage in hedging activities.
No other recently issued accounting pronouncements are expected to have a
significant effect on future financial statements.
91
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF OVATION
Holders of record of Ovation Common Stock and Ovation Preferred Stock at
the close of business on the Record Date are entitled to notice of and to vote
at the Special Meeting and any adjournment of that meeting. As of the Record
Date, there were 23,971,756 shares of Ovation Common Stock issued and
outstanding and 240,000 shares of Ovation Preferred Stock issued and
outstanding. Each share of Ovation Common Stock is entitled to one vote on each
matter submitted for stockholder action. Each share of Ovation Preferred Stock
is entitled to 50 votes on each matter submitted for stockholder action.
The following table sets forth information concerning the number of shares
of Ovation Common Stock held by each stockholder who is known to Ovation's
management to be the beneficial owner of more than five percent of the
outstanding Ovation Common Stock as of _____________, 1999, and the number of
shares of McLeodUSA Common Stock that such stockholders would beneficially own
immediately following the Merger, based on certain assumptions set forth below.
<TABLE>
<CAPTION>
Beneficial Ownership of
Beneficial McLeodUSA Common
Ownership of Stock to Be Received
Name and Address of Ovation Common Percent in Connection with
Beneficial Owner of Common Stock Stock (1) of Class (2) the Merger (7)
- -------------------------------- -------------- ------------ ------------------------
<S> <C> <C> <C>
Media/Communications Partners III
Limited Partnership (3)............................. 18,437,017 76.9% 3,591,968
75 State Street
Boston, MA 02109
Timothy T. Devine (8)............................... 1,634,340 6.8% 584,396
6231 Hummingbird Road
Excelsior, MN 55331
</TABLE>
Footnotes begin on page ___.
The following table sets forth information concerning the number of shares
of Ovation Preferred Stock held by each stockholder who is known to Ovation's
management to be the beneficial owner of more than five percent of the
outstanding Ovation Preferred Stock as of ____________, 1999. The Ovation
Preferred Stock will be converted into the right to receive cash in the Merger.
<TABLE>
<CAPTION>
Name and Address of Beneficial Ownership of
Beneficial Owner of Preferred Stock Ovation Preferred Stock (1) Percent of Class (4)
- ---------------------------------------------------- --------------------------- --------------------
<S> <C> <C>
Media/Communications Partners III
Limited Partnership (5)............................. 222,300 92.6%
75 State Street
Boston, MA 02109
</TABLE>
Footnotes begin on page ___.
92
<PAGE>
The following table sets forth information concerning the number of shares
of Ovation Common Stock held as of ___________, 1999 by each of Ovation's
directors and executive officers and all of Ovation's directors and executive
officers as a group, and the number of shares of McLeodUSA Common Stock that
such persons would beneficially own immediately following the Merger, based on
certain assumptions set forth below.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership of Ovation Common Stock (1)
--------------------------------------------------------------------------
Beneficial
Ownership of
Shared McLeodUSA
Sole Voting Voting and Total Percent of Common Stock
Name of and Dispositive Dispositive Beneficial Ownership to Be Received in
Beneficial Owner Power Power Power (6) Class (2) the Merger (7)
---------------- --------------- ----------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C>
Timothy T. Devine (8)................. 1,634,340 -- 1,634,340 6.8% 584,396
Nicholas Lenoci, Jr. (9).............. 383,000 -- 383,000 1.6 136,951
Charles Osborne (10).................. 325,000 -- 325,000 1.4 116,211
Jonethan D. Biasetti (11)............. 198,400 -- 198,400 * 70,943
Peter O. Claudy (12).................. -- 19,353,035 19,353,035 80.7 3,770,430
James F. Wade (13).................... -- 19,353,035 19,353,035 80.7 3,770,430
Scott A. Rediger (14)................. 645,769 -- 645,769 2.7 230,910
Kenneth A. Kirley (15)................ 248,000 -- 248,000 1.0 88,678
All directors and executive officers
as a group (8 persons) (16)......... 3,434,509 19,353,035 22,787,544 94.6% 4,998,519
</TABLE>
- -------------------------------
* Indicates less than 1%.
The following table sets forth information concerning the number of shares
of Ovation Preferred Stock held as of __________, 1999 by each of Ovation's
directors and executive officers and all of Ovation's directors and executive
officers as a group. The Ovation Preferred Stock will be converted into the
right to receive cash in the Merger.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial Ownership of Ovation Preferred Stock (1)
-----------------------------------------------------------------------------
Name of Sole Voting and Shared Voting and Total Beneficial Percent of
Beneficial Owner Dispositive Power Dispositive Power Power (6) Ownership Class(4)
---------------- ----------------- ----------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Timothy T. Devine (8)................. -- -- -- --
Nicholas Lenoci, Jr. (9).............. -- -- -- --
Charles Osborne (10).................. -- -- -- --
Jonethan D. Biasetti (11)............. -- -- -- --
Peter O. Claudy (17).................. -- 234,000 234,000 97.5%
James F. Wade (18).................... -- 234,000 234,000 97.5%
Scott A. Rediger (14)................. -- -- -- --
Kenneth A. Kirley (15)................ -- -- -- --
All directors and executive officers
as a group (8 persons)(16).......... -- 234,000 234,000 97.5%
</TABLE>
- --------------------------------
* Indicates less than 1%.
(1) The numbers of shares stated are based on information furnished by each
person listed and include shares personally owned of record by that person
and shares that, under applicable regulations, are considered to be
otherwise beneficially owned by that person. Under these regulations, a
beneficial owner of a security includes any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship
or otherwise has or shares voting power or dispositive power with respect
to the security. Voting power includes the power to vote or to direct the
voting of the security. Dispositive power includes the power to dispose or
to direct the disposition of the security. A person
93
<PAGE>
also will be considered the beneficial owner of a security if the person
has a right to acquire beneficial ownership of the security within 60 days.
(2) The percentages reflected in this column were computed with reference to a
total of 23,971,756 shares of Ovation Common Stock outstanding as of the
Record Date plus, where applicable, options to purchase shares of Ovation
Common Stock currently outstanding that are currently exercisable or that
may be exercised within 60 days.
(3) Does not include the 916,018 shares of Ovation Common Stock owned by M/C
Investors L.L.C.
(4) The percentages reflected in the column were computed with reference to a
total of 240,000 shares of Ovation Preferred Stock outstanding as of the
Record Date.
(5) Does not include 11,700 shares of Ovation Preferred Stock held by M/C
Investors L.L.C.
(6) These numbers include shares over which the listed person is legally
entitled to share voting or dispositive power by reason of joint ownership,
trust or other contract or property right, and shares held by spouses and
children over whom the listed person may have influence by reason of
relationship.
(7) Reflects beneficial ownership of McLeodUSA Common Stock to be received in
the Merger in exchange for shares of Ovation Common Stock beneficially
owned, including options to purchase shares of Ovation Common Stock,
calculated as if the Merger had been consummated on February 1, 1999 and
based on the form of consideration elected by the persons listed prior to
the date of this Prospectus and Proxy Statement. Media/Communications
Partners III Limited Partnership and M/C Investors L.L.C. have elected to
receive a combination of cash and shares of McLeodUSA Common Stock in
exchange for their Ovation Common Stock. Based on this election, and
calculated as if the Merger had been consummated on February 1, 1999,
Media/Communications Partners III Limited Partnership and M/C Investors
L.L.C. would receive $87,017,786 and $4,323,360, respectively, for their
Ovation Common Stock in addition to the shares of McLeodUSA Common Stock
indicated. Messrs. Devine, Lenoci, Osborne, Rediger and Kirley have each
elected to receive shares of McLeodUSA Common Stock in exchange for their
Ovation Common Stock. Assumes Mr. Biasetti elects to receive shares of
McLeodUSA Common Stock in exchange for his Ovation Common Stock. See "The
Merger--Interests of Certain Persons in the Merger," on page ___.
(8) Mr. Devine is the President, Chief Executive Officer and a Director of
Ovation. Includes 79,025 shares of Ovation Common Stock that Mr. Devine
will have the option to purchase at the time of the Merger for a price of
$.40 per share pursuant to a stockholders' agreement dated January 7, 1999.
(9) Mr. Lenoci is the Chief Operating Officer of Ovation.
(10) Mr. Osborne is the Chief Financial Officer and Treasurer of Ovation.
(11) Mr. Biasetti is the Vice President--Finance of Ovation. As of the date of
this Prospectus and Proxy Statement, Mr. Biasetti had not elected whether
to receive cash or shares of McLeodUSA Common Stock in the Merger in
exchange for his shares of Ovation Common Stock.
(12) Peter O. Claudy is a Director of Ovation. Includes 18,437,017 shares of
Ovation Common Stock owned by Media/Communications Partners III Limited
Partnership over which Mr. Claudy exercises shared voting and dispositive
power and 916,018 shares of Ovation Common Stock owned by M/C Investors
L.L.C. over which Mr. Claudy exercises shared voting and dispositive power,
all of which Mr. Claudy disclaims beneficial ownership over.
(13) James F. Wade is a Director of Ovation. Includes 18,437,017 shares of
Ovation Common Stock owned by Media/Communications Partners III Limited
Partnership over which Mr. Wade exercises shared voting and dispositive
power and 916,018 shares of Ovation Common Stock owned by M/C Investors
94
<PAGE>
L.L.C. over which Mr. Wade exercises shared voting and dispositive power,
all of which Mr. Wade disclaims beneficial ownership over.
(14) Mr. Rediger is the Senior Vice President--Business Development of Ovation.
Includes 31,225 shares of Ovation Common Stock that Mr. Rediger will have
the option to purchase at the time of the Merger for a price of $.40 per
share pursuant to a stockholders' agreement dated January 7, 1999.
(15) Mr. Kirley is the Vice President--General Counsel of Ovation.
(16) Peter O. Claudy and James F. Wade exercise shared voting and dispositive
power over identical shares of Ovation Common Stock and Ovation Preferred
Stock owned by Media/Communications Partners III Limited Partnership and
M/C Investors L.L.C.
(17) Peter O. Claudy is a Director of Ovation. Includes 222,300 shares of
Ovation Preferred Stock owned by Media/Communications Partners III Limited
Partnership over which Mr. Claudy exercises shared voting and dispositive
power and 11,700 shares of Ovation Preferred Stock owned by M/C Investors
L.L.C. over which Mr. Claudy exercises shared voting and dispositive power
all of which Mr. Claudy disclaims beneficial ownership over.
(18) James F. Wade is a Director of Ovation. Includes 222,300 shares of Ovation
Preferred Stock owned by Media/Communications Partners III Limited
Partnership over which Mr. Claudy exercises shared voting and dispositive
power and 11,700 shares of Ovation Preferred Stock owned by M/C Investors
L.L.C. over which Mr. Wade exercises shared voting and dispositive power
all of which Mr. Claudy disclaims beneficial ownership over.
95
<PAGE>
OVATION EXECUTIVE COMPENSATION
The following table shows certain information concerning the compensation
paid to Mr. Devine for services rendered to Ovation during the years ended
December 31, 1998 and 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
Name and ------------------- Number of Securities All Other
Principal Position Year Salary Underlying Options(1) Compensation
------------------ ---- ------ --------------------- ------------
<S> <C> <C> <C> <C>
Timothy T. Devine 1998 $127,000 -- $558 (2)
President and Chief Executive
Officer 1997 $127,000 -- $419 (3)
</TABLE>
(1) Pursuant to a stockholders' agreement dated January 7, 1999 among Ovation
and M/C, Ovation must reserve for issuance 1,341,095 shares of Ovation
Common Stock. This agreement grants Mr. Devine the option, upon a sale of
Ovation, to purchase (pro rata based on his relative ownership of Ovation
Common Stock at the time of the sale of Ovation) any such shares that are
neither outstanding nor subject to any options or rights held by existing or
former employees of Ovation. Pursuant to this agreement, Mr. Devine will
have the option to purchase 79,025 shares of Ovation Common Stock at the
time of the Merger for a price of $.40 per share. The value of this option,
based on the book value of Ovation Common Stock as of December 31, 1998, is
$10,273. Mr. Devine holds no other options to purchase shares of Ovation
capital stock.
(2) Represents $126 and $432 in premiums paid by Ovation for life insurance and
long-term disability insurance, respectively, for Mr. Devine.
(3) Represents $95 and $324 in premiums paid by Ovation for life insurance and
long-term disability insurance, respectively, for Mr. Devine.
96
<PAGE>
MCLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
If the Merger is completed, shares of Ovation Common Stock may be converted
into shares of McLeodUSA Common Stock. As a result, Ovation stockholders, whose
rights are currently governed by the DGCL, the Ovation Certificate of
Incorporation and the Ovation Bylaws, may become McLeodUSA stockholders, whose
rights are governed by the DGCL, the McLeodUSA Certificate of Incorporation and
the McLeodUSA Bylaws.
The following is a description of the capital stock of McLeodUSA, including
the McLeodUSA Common Stock to be issued in the Merger, and a summary of the
material differences between the rights of Ovation stockholders and McLeodUSA
stockholders. These differences arise from the differences between the
governing instruments of McLeodUSA (the McLeodUSA Certificate of Incorporation
and the McLeodUSA Bylaws) relative to the governing instruments of Ovation (the
Ovation Certificate of Incorporation and the Ovation Bylaws). Although it is
impractical to compare all of the aspects in which the companies' governing
instruments differ with respect to stockholders' rights, the following
discussion summarizes the significant differences between them.
DESCRIPTION OF McLEODUSA CAPITAL STOCK
The following summary description of the capital stock of McLeodUSA does
not purport to be complete and is qualified in its entirety by the provisions of
the McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws and by the
applicable provisions of the DGCL. For information on how to obtain copies of
the McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws, see "Where
You Can Find More Information."
Authorized and Outstanding Capital Stock of McLeodUSA
Pursuant to the McLeodUSA Certificate of Incorporation, McLeodUSA has
authority to issue 274,000,000 shares of capital stock, consisting of
250,000,000 shares of McLeodUSA Common Stock, 22,000,000 shares of Class B
Common Stock, par value $.01 per share (the "McLeodUSA Class B Common Stock"),
and 2,000,000 shares of Preferred Stock, par value $.01 per share (the
"McLeodUSA Preferred Stock"). As of February __, 1999, __________ shares of
McLeodUSA Common Stock, no shares of McLeodUSA Class B Common Stock and no
shares of McLeodUSA Preferred Stock were issued and outstanding.
The rights of the holders of McLeodUSA Common Stock and McLeodUSA Class B
Common Stock discussed below are subject to such rights as the McLeodUSA Board
may hereafter confer on holders of McLeodUSA Preferred Stock that may be issued
in the future. Such rights may adversely affect the rights of holders of
McLeodUSA Common Stock or McLeodUSA Class B Common Stock, or both.
McLeodUSA Common Stock
Voting Rights. Each holder of McLeodUSA Common Stock is entitled to attend all
special and annual meetings of the stockholders of McLeodUSA and, together with
the holders of shares of McLeodUSA Class B Common Stock and the holders of all
other classes of stock entitled to attend and vote at such meetings, to vote
upon any matter (including, without limitation, the election of directors)
properly considered and acted upon by the stockholders of McLeodUSA. Holders of
McLeodUSA Common Stock are entitled to one vote per share.
97
<PAGE>
Liquidation Rights. In the event of any dissolution, liquidation or winding up
of McLeodUSA, whether voluntary or involuntary, the holders of McLeodUSA Common
Stock, the holders of McLeodUSA Class B Common Stock and holders of any class or
series of stock entitled to participate therewith, shall become entitled to
participate in the distribution of any assets of McLeodUSA remaining after
McLeodUSA has paid, or provided for payment of, all debts and liabilities of
McLeodUSA and after McLeodUSA has paid, or set aside for payment, to the holders
of any class of stock having preference over the McLeodUSA Common Stock in the
event of dissolution, liquidation or winding up the full preferential amounts
(if any) to which they are entitled.
Dividends. Dividends may be paid on the McLeodUSA Common Stock, the McLeodUSA
Class B Common Stock and on any class or series of stock entitled to participate
therewith when and as declared by the McLeodUSA Board.
No Preemptive or Conversion Rights. The holders of McLeodUSA Common Stock have
no preemptive or subscription rights to purchase additional securities issued by
McLeodUSA nor any rights to convert their McLeodUSA Common Stock into other
securities of McLeodUSA or to have their shares redeemed by McLeodUSA.
McLeodUSA Class B Common Stock
Voting Rights. Each holder of McLeodUSA Class B Common Stock is entitled to
attend all special and annual meetings of the stockholders of McLeodUSA and,
together with the holders of shares of McLeodUSA Common Stock and the holders of
all other classes of stock entitled to attend and vote at such meetings, to vote
upon any matter or thing (including, without limitation, the election of
directors) properly considered and acted upon by the stockholders of McLeodUSA.
Holders of McLeodUSA Class B Common Stock are entitled to .40 vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding up
of McLeodUSA, whether voluntary or involuntary, the holders of McLeodUSA Class B
Common Stock, the holders of McLeodUSA Common Stock and the holders of any class
or series of stock entitled to participate therewith, shall become entitled to
participate in the distribution of any assets of McLeodUSA remaining after
McLeodUSA has paid, or provided for payment of, all debts and liabilities of
McLeodUSA and after McLeodUSA has paid, or set aside for payment, to the holders
of any class of stock having preference over the McLeodUSA Class B Common Stock
in the event of dissolution, liquidation or winding up the full preferential
amounts (if any) to which they are entitled.
Dividends. Dividends may be paid on the McLeodUSA Class B Common Stock, the
McLeodUSA Common Stock and on any class or series of stock entitled to
participate therewith when and as declared by the McLeodUSA Board.
Conversion into Common Stock; No Other Preemptive or Conversion Rights. The
shares of McLeodUSA Class B Common Stock may be converted at any time at the
option of the holder into fully paid and nonassessable shares of McLeodUSA
Common Stock at the rate of one share of Common Stock for each share of Class B
Common Stock (as adjusted for any stock split). Except for this conversion
right, the holders of McLeodUSA Class B Common Stock have no preemptive or
subscription rights to purchase additional securities issued by McLeodUSA nor
any rights to convert their McLeodUSA Class B Common Stock into other securities
of McLeodUSA or to have their shares redeemed by McLeodUSA.
McLeodUSA Preferred Stock
The McLeodUSA Certificate of Incorporation authorizes the McLeodUSA Board,
from time to time and without further stockholder action, to provide for the
issuance of up to 2,000,000 shares of McLeodUSA Preferred Stock, in one or more
series, and to fix the relative rights and preferences of
98
<PAGE>
the shares, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion privileges. As of the date hereof, the
McLeodUSA Board has not provided for the issuance of any series of such
McLeodUSA Preferred Stock and there are no agreements or understandings for the
issuance of any such McLeodUSA Preferred Stock. Because of its broad discretion
with respect to the creation and issuance of McLeodUSA Preferred Stock without
stockholder approval, the McLeodUSA Board could adversely affect the voting
power of the holders of McLeodUSA Common Stock and, by issuing shares of
McLeodUSA Preferred Stock with certain voting, conversion and/or redemption
rights, could discourage any attempt to obtain control of McLeodUSA.
INVESTOR AGREEMENT AND STOCKHOLDERS' AGREEMENTS
McLeodUSA has entered into an agreement (as amended, the ``Investor
Agreement'') with IES, MHC and Clark E. and Mary E. McLeod (collectively, the
``Investor Stockholders'') and certain other stockholders. The Investor
Agreement provides that each Investor Stockholder, for so long as such Investor
Stockholder owns at least 10% of the outstanding capital stock of McLeodUSA,
shall vote such Investor Stockholder's stock and take all action within its
power to (i) establish the size of the McLeodUSA Board at nine directors; (ii)
cause to be elected to the McLeodUSA Board one director designated by IES (for
so long as IES owns at least 10% of the outstanding capital stock of McLeodUSA);
(iii) cause to be elected to the McLeodUSA Board one director designated by MHC
(for so long as MHC owns at least 10% of the outstanding capital stock of
McLeodUSA); (iv) cause to be elected to the McLeodUSA Board three directors who
are executive officers of McLeodUSA designated by Clark E. McLeod (for so long
as Clark E. and Mary E. McLeod collectively own at least 10% of the outstanding
capital stock of McLeodUSA); and (v) cause to be elected to the McLeodUSA Board
four independent directors nominated by the McLeodUSA Board. The Investor
Agreement also provides that, for a period ending in March 1999 and subject to
certain exceptions, each of IES and MHC will refrain from acquiring, or agreeing
or seeking to acquire, beneficial ownership of any securities issued by
McLeodUSA.
On June 14, 1997, certain shareholders of CCI (collectively, the "CCI
Shareholders"), McLeodUSA and the Investor Stockholders entered into a
Stockholders' Agreement (as amended, the "June 1997 Stockholders' Agreement"),
which became effective on September 24, 1997. Pursuant to the June 1997
Stockholders' Agreement, which amends and restates the Investor Agreement among
the parties thereto, each Investor Stockholder and the CCI Shareholders, for so
long as each such party owns at least 10% of the outstanding McLeodUSA Common
Stock, shall, for a period of three years after September 24, 1997, vote such
party's shares and take all action within its power to (i) establish the size of
the McLeodUSA Board at up to 11 directors; (ii) cause to be elected to the
McLeodUSA Board one director designated by IES (for so long as IES owns at least
10% of the outstanding McLeodUSA Common Stock); (iii) cause to be elected to the
McLeodUSA Board one director designated by MHC (for so long as MHC owns at least
10% of the outstanding McLeodUSA Common Stock); (iv) cause to be elected to the
McLeodUSA Board three directors who are executive officers of McLeodUSA
designated by Clark E. McLeod (for so long as Clark E. and Mary E. McLeod
collectively own at least 10% of the McLeodUSA Common Stock); (v) cause Richard
A. Lumpkin to be elected to the McLeodUSA Board (for so long as the CCI
Shareholders collectively own at least 10% of the McLeodUSA Common Stock); and
(vi) cause to be elected to the McLeodUSA Board four non-employee directors
nominated by the McLeodUSA Board. The June 1997 Stockholders' Agreement
provides that, for a period ending in June 1999, and subject to certain
exceptions, each of IES and MHC will refrain from acquiring, or agreeing or
seeking to acquire, beneficial ownership of any securities issued by McLeodUSA.
The June 1997 Stockholders' Agreement also provides that, until September 24,
1998, and subject to certain exceptions, no Investor Stockholder or CCI
Shareholder will offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of, directly or indirectly, (as previously defined,
"Transfer"), any equity securities of McLeodUSA without the consent of the
McLeodUSA Board. In addition, the June 1997 Stockholders' Agreement provides
that if McLeodUSA grants any Investor Stockholder or CCI Shareholder the
opportunity to register equity securities of McLeodUSA under the Securities Act,
McLeodUSA will grant all other Investor Stockholders and CCI Shareholders the
same opportunity to register their pro rata portion of
99
<PAGE>
McLeodUSA equity securities owned by them. The other operative provisions of the
Investor Agreement remain unchanged in the June 1997 Stockholders' Agreement.
On November 18, 1998, McLeodUSA entered into a Stockholders' Agreement (the
"November 1998 Stockholders' Agreement") with IES, Clark E. and Mary E. McLeod,
and Richard A. Lumpkin, Gail G. Lumpkin and certain other parties affiliated or
related thereto (collectively, as previously defined, the "Lumpkins," and
together with IES and Clark E. and Mary E. McLeod, as previously defined, the
"Principal Stockholders"), but not including MHC.
The November 1998 Stockholders' Agreement provides that until December 31,
2001, the Principal Stockholders will not Transfer any equity securities of
McLeodUSA, or any other securities convertible into or exercisable for such
equity securities, beneficially owned by such Principal Stockholder without
receiving the prior written consent of the McLeodUSA Board, except for certain
permitted transfers as provided in the November 1998 Stockholders' Agreement.
The November 1998 Stockholders' Agreement further provides that the McLeodUSA
Board shall determine on a quarterly basis commencing with the quarter ending
December 31, 1998 and ending on December 31, 2001, the aggregate number, if any,
of shares of McLeodUSA Common Stock (not to exceed in the aggregate 150,000
shares per quarter) that the Principal Stockholders may Transfer during certain
designated trading periods following the release of McLeodUSA's quarterly or
annual financial results.
The November 1998 Stockholders' Agreement provides that to the extent the
McLeodUSA Board grants registration rights to a Principal Stockholder in
connection with a Transfer of securities of McLeodUSA by such Principal
Stockholder, it will grant similar registration rights to the other parties as
set forth in the November 1998 Stockholders' Agreement. In addition, the
November 1998 Stockholders' Agreement provides that the McLeodUSA Board shall
determine on an annual basis commencing with the year ending December 31, 1999
and ending on December 31, 2001 (each such year, an "Annual Period"), the
aggregate number, if any, of shares of McLeodUSA Common Stock (not to exceed in
the aggregate on an annual basis a number of shares equal to 15% of the total
number of shares of McLeodUSA Common Stock beneficially owned by the Principal
Stockholders as of December 31, 1998) (the "Registrable Amount"), to be
registered by McLeodUSA under the Securities Act, for Transfer by the Principal
Stockholders. The November 1998 Stockholders' Agreement also provides that in
any underwritten primary offering (other than pursuant to a registration
statement on Form S-4 or Form S-8 or any successor forms thereto or other form
which would not permit the inclusion of shares of McLeodUSA Common Stock of the
Principal Stockholders), McLeodUSA will give written notice of such offering to
the Principal Stockholders and will undertake to register the shares of
McLeodUSA Common Stock of such parties up to the Registrable Amount, if any, as
determined by the McLeodUSA Board. The November 1998 Stockholders' Agreement
provides that McLeodUSA may subsequently determine not to register any shares of
the Principal Stockholders under the Securities Act and may either not file a
registration statement or otherwise withdraw or abandon a registration statement
previously filed.
The November 1998 Stockholders' Agreement terminates on December 31, 2001.
In addition, if during any Annual Period McLeodUSA has not provided a Principal
Stockholder a reasonable opportunity to Transfer pursuant to the registration of
securities under the Securities Act or pursuant to certain other provisions of
the November 1998 Stockholders' Agreement on the terms therein specified an
aggregate number of shares of McLeodUSA Common Stock equal to not less than 15%
of the total number of shares of McLeodUSA Common Stock beneficially owned by
such Principal Stockholder as of December 31, 1998, then such Principal
Stockholder may terminate the November 1998 Stockholders' Agreement as it
applies to such Principal Stockholder within 10 business days following the end
of any such Annual Period.
The November 1998 Stockholders' Agreement also contains provisions relating
to the designation and election of directors to the McLeodUSA Board which
provisions take effect on the terms and under the circumstances specified
therein.
100
<PAGE>
On January 7, 1999, M/C entered into a Stockholders' Agreement (as
previously defined, the "Ovation Stockholders' Agreement") with McLeodUSA and
the Principal Stockholders pursuant to which, among other things, M/C agreed
through December 31, 2001 to certain restrictions on its ability to transfer the
shares of McLeodUSA Common Stock that it will receive in the Merger. For a
description of the Ovation Stockholders' Agreement, see "Terms of the Merger
Agreement and Related Transactions--Ovation Stockholders' Agreement."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Limitations of Director Liability. Section 102(b)(7) of the DGCL
authorizes corporations to limit or eliminate the personal liability of
directors to corporations and their stockholders for monetary damages for breach
of directors' fiduciary duty of care. Although Section 102(b)(7) does not change
directors' duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The McLeodUSA Certificate
of Incorporation limits the liability of directors to McLeodUSA or its
stockholders to the full extent permitted by Section 102(b)(7). Specifically,
directors of McLeodUSA are not personally liable for monetary damages to
McLeodUSA or its stockholders for breach of the director's fiduciary duty as a
director, except for liability: (i) for any breach of the director's duty of
loyalty to McLeodUSA or its stockholders; (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law;
(iii) for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL; or (iv) for any transaction
from which the director derived an improper personal benefit.
Indemnification. To the maximum extent permitted by law, the McLeodUSA
Bylaws provide for mandatory indemnification of directors and officers of
McLeodUSA against any expense, liability or loss to which they may become
subject, or which they may incur as a result of being or having been a director
or officer of McLeodUSA. In addition, McLeodUSA must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims.
McLeodUSA also maintains directors' and officers' liability insurance.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Classified Board. The McLeodUSA Certificate of Incorporation provides for
the division of the McLeodUSA Board into three classes of directors, serving
staggered three-year terms. The McLeodUSA Certificate of Incorporation further
provides that the approval of the holders of at least two-thirds of the shares
entitled to vote thereon and the approval of a majority of the entire McLeodUSA
Board are necessary for the alteration, amendment or repeal of certain sections
of the McLeodUSA Certificate of Incorporation relating to the election and
classification of the McLeodUSA Board, limitation of director liability,
indemnification and the vote requirements for such amendments to the McLeodUSA
Certificate of Incorporation. These provisions may have the effect of deterring
hostile takeovers or delaying changes in control or management of McLeodUSA.
Certain Statutory Provisions. McLeodUSA is subject to the provisions of
Section 203 of the DGCL. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless
(i) prior to such date, the corporation's board of directors approved either the
business combination or the transaction that resulted in the stockholder
becoming an interested stockholder, (ii) upon consummation of the transaction
that resulted in such person becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding, for purposes of
determining the number of shares outstanding, shares owned by certain directors
or certain employee stock plans), or (iii) on or after the date the stockholder
became an interested stockholder, the business combination is approved by the
101
<PAGE>
corporation's board of directors and authorized by the affirmative vote (and not
by written consent) of at least two-thirds of the outstanding voting stock of
the corporation excluding that stock owned by the interested stockholder. A
"business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person who (other than the corporation and any direct or
indirect wholly owned subsidiary of the corporation), together with affiliates
and associates, owns (or, as an affiliate or associate, within three years
prior, did own) 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the DGCL, McLeodUSA's original certificate of
incorporation provided that it would not be governed by Section 203. Certain
stockholders, including Clark E. and Mary E. McLeod, IES and MHC, became
interested stockholders within the meaning of Section 203 while that certificate
of incorporation was in effect. Accordingly, future transactions between
McLeodUSA and any of such stockholders will not be subject to the requirements
of Section 203.
The McLeodUSA Certificate of Incorporation empowers the McLeodUSA Board to
redeem any of McLeodUSA's outstanding capital stock at a price determined by the
McLeodUSA Board, which price shall be at least equal to the lesser of (i) fair
market value (as determined in accordance with the McLeodUSA Certificate of
Incorporation) or (ii) in the case of a "Disqualified Holder," such holder's
purchase price (if the stock was purchased within one year of such redemption),
to the extent necessary to prevent the loss or secure the reinstatement of any
license, operating authority or franchise from any governmental agency. A
"Disqualified Holder" is any holder of shares of stock of McLeodUSA whose
holding of such stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
McLeodUSA or any of its subsidiaries to conduct any portion of the business of
McLeodUSA or any of its subsidiaries. Under the Telecommunications Act, non-
U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the FCC determines
that the public interest would be served by prohibiting such ownership.
Additionally, the FCC's rules may under certain conditions limit the size of
investments by foreign telecommunications carriers in U.S. international
carriers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the McLeodUSA Common Stock is Norwest
Bank Minnesota, N.A.
102
<PAGE>
COMPARISON OF McLEODUSA COMMON STOCK AND OVATION COMMON STOCK
The rights of Ovation stockholders are currently governed by the DGCL, the
Ovation Certificate of Incorporation and the Ovation Bylaws. In accordance with
the Merger Agreement, at the Effective Time each issued and outstanding share of
Ovation Common Stock may be converted, at the election of the holder, into the
right to receive shares of McLeodUSA Common Stock in accordance with a formula
specified in the Merger Agreement. Accordingly, upon consummation of the Merger,
the rights of Ovation stockholders who become stockholders of McLeodUSA will be
governed by the DGCL and the McLeodUSA Certificate of Incorporation and the
McLeodUSA Bylaws. The following are summaries of the material differences
between the rights of Ovation stockholders and the rights of McLeodUSA
stockholders.
The following discussions are not intended to be complete and are qualified
by reference to the Ovation Certificate of Incorporation, the Ovation Bylaws,
the McLeodUSA Certificate of Incorporation and the McLeodUSA Bylaws. Copies of
these documents will be sent to stockholders of Ovation upon request. See "Where
You Can Find More Information."
Authorized Capital
Ovation. As of January 31, 1999, the authorized capital stock of Ovation
consisted of (i) 30,000,000 shares of Ovation Common Stock, of which
(a) 23,971,756 shares were issued and outstanding, (b) no shares were held in
the treasury of Ovation, and (c) 806,845 shares were reserved for issuance
pursuant to outstanding options to purchase shares of Ovation Common Stock; and
(ii) 6,000,000 shares of preferred stock, $.01 par value per share, of which
(a) 500,000 were designated "Series A Preferred Stock," of which (1) 240,000
shares were issued and outstanding, (2) no shares were held in the treasury of
Ovation, and (3) no shares were reserved for any purpose; (b) 5,000 shares were
designated "Series B Preferred Stock," of which (1) no shares were issued and
outstanding, (2) no shares were held in the treasury of Ovation, and (3) no
shares were reserved for any purpose; and (c) 5,495,000 shares were designated
"Preferred Stock," of which none have ever been issued.
McLeodUSA. As of November 30, 1998, the authorized capital stock of
McLeodUSA consisted of (i) 250,000,000 shares of McLeodUSA Common Stock, of
which 63,498,849 shares were issued and outstanding; (ii) 22,000,000 shares of
McLeodUSA Class B Common Stock, of which no shares were issued and outstanding;
and (iii) 2,000,000 shares of McLeodUSA Preferred Stock, of which no shares were
issued and outstanding.
Board of Directors
Ovation. Pursuant to the Ovation Bylaws, the number of directors of
Ovation shall be not less than the minimum number allowed under the laws of the
State of Delaware and not more than 11, and shall be determined from time to
time by resolution adopted by the Ovation Board. The current number of Ovation
directors is three. The Ovation directors are elected for one-year terms by a
plurality vote at the annual stockholders meeting by the holders of shares
present at the meeting or represented by proxy and entitled to vote in the
election. A quorum at any meeting of the Ovation Board consists of a majority
of the total number of directors, and a majority of the directors present at any
meeting at which a quorum is present is required to approve Ovation Board
action.
McLeodUSA. Pursuant to the McLeodUSA Certificate of Incorporation and the
McLeodUSA Bylaws, the number of McLeodUSA directors shall be between three and
15. The current number of McLeodUSA directors is nine. The McLeodUSA Bylaws
provide that the election and term of the McLeodUSA directors is determined
pursuant to the McLeodUSA Certificate of Incorporation. The
103
<PAGE>
McLeodUSA Board is divided into three classes as nearly equal in number as
possible, and the McLeodUSA directors are elected for three-year terms by a
plurality of the voting rights represented by the shares present in person or
represented by proxy at the annual stockholders meeting and entitled to vote in
the election. A quorum at any meeting of the McLeodUSA Board consists of a
majority of the total number of directors, and a majority of the directors
present at any meeting at which a quorum is present is required to approve
McLeodUSA Board action.
Committees of the Board of Directors
Ovation. Under the Ovation Bylaws, the Ovation Board may appoint one or
more committees. The Ovation Bylaws provide that the Ovation Board may appoint
an Executive Committee composed of two or more members of the Ovation Board,
including the President or Chairman of Ovation, appointed by the Ovation Board
by resolution adopted by a majority of the entire Ovation Board. The Ovation
Bylaws provide that the Ovation Board may appoint other committees, by
resolution adopted by a majority of the entire Ovation Board, to exercise the
authority delegated to them.
McLeodUSA. Pursuant to the McLeodUSA Certificate of Incorporation, the
McLeodUSA Board may designate one or more committees, which must consist of
McLeodUSA directors. The McLeodUSA Board currently has an Audit Committee and a
Compensation Committee.
Newly Created Directorships and Vacancies
Ovation. Pursuant to the Ovation Bylaws, newly created directorships
resulting from an increase in the number of directors and vacancies resulting
from death, resignation, removal, disqualification or any other cause shall be
filled by a majority of the votes of directors then in office, whether or not a
quorum, or by the Ovation stockholders.
McLeodUSA. Pursuant to the McLeodUSA Certificate of Incorporation,
vacancies and newly created directorships resulting from an increase in the
authorized number of McLeodUSA directors elected by all of the holders of
McLeodUSA Common Stock and McLeodUSA Class B Common Stock may be filled by a
majority of the McLeodUSA directors then in office, even if less than a quorum,
or by a sole remaining director. When the number of directors is changed, any
newly created or eliminated directorship shall be apportioned among the classes
of directors so as to make all classes as nearly equal in number as possible. A
decrease in the number of directors may not shorten the term of the incumbent
director.
Removal of Directors
Ovation. Pursuant to the Ovation Bylaws, directors may be removed at any
time, with or without cause, by the holders of a majority of the shares entitled
to vote on the election of directors.
McLeodUSA. Neither the McLeodUSA Certificate of Incorporation nor the
McLeodUSA Bylaws includes a provision setting forth the procedure for the
removal of directors. Under the DGCL, any director or the entire board of
directors of a corporation with a classified board, such as McLeodUSA, may be
removed by the holders of a majority of shares then entitled to vote at an
election of directors, but only for cause.
Officers
Ovation. Pursuant to the Ovation Bylaws, Ovation's principal officers
consist of a President, one or more Vice Presidents, a Treasurer and a
Secretary. The Ovation Board appoints all such
104
<PAGE>
principal officers at its first meeting after the annual meeting of
stockholders. The Ovation Board, or any principal officer to whom the Ovation
Board has delegated such power, may appoint such other officers as they deem
necessary, including a Chairman, a Chief Financial Officer, a Corporate Counsel,
a Controller, one or more Assistant Controllers, one or more Assistant
Treasurers and one or more Assistant Secretaries. The Chairman, if any, must be
chosen from among the directors. The Ovation Board may remove any officer with
or without cause, by the vote of a majority of the entire Ovation Board or,
except for any officer appointed by the Ovation Board, by any committee of
officers upon whom the power of removal may be conferred by the Ovation Board.
McLeodUSA. Pursuant to the McLeodUSA Bylaws, McLeodUSA's officers consist
of a President, a Secretary and a Treasurer, and other officers and assistant
officers as may be elected or appointed by the McLeodUSA Board. The McLeodUSA
Board may remove any officer, with or without cause, by the affirmative vote of
a majority of the McLeodUSA Board.
Special Meetings of Stockholders
Ovation. Pursuant to the Ovation Bylaws, a special meeting of Ovation's
stockholders may be called at any time by the President or Chairman or by order
of the Ovation Board, and must be called by the Secretary upon the request in
writing of Ovation stockholders holding of record a majority of the outstanding
shares of Ovation entitled to vote at such meeting.
McLeodUSA. Pursuant to the McLeodUSA Bylaws, a special meeting of
McLeodUSA's stockholders may be called by the Board of Directors, the
Chairperson, the Chief Executive Officer or the President.
Quorum at Stockholder Meetings
Ovation. Pursuant to the Ovation Bylaws, the holders of record of a
majority of stock issued and outstanding and entitled to vote thereat, present
in person or represented by proxy, constitute a quorum at each stockholder
meeting. In the absence of a quorum, a majority in interest of the stockholders
entitled to vote thereat, present in person or represented by proxy or, in the
absence of all such stockholders, any officer entitled to preside at, or act as
secretary of, such meeting may adjourn the meeting until a quorum is present.
McLeodUSA. Pursuant to the McLeodUSA Bylaws, the holders of a majority of
the voting rights represented by the shares issued and outstanding and entitled
to vote at the meeting, and who are present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders for the
transaction of business. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of such class or classes, present
in person or represented by proxy, shall constitute a quorum entitled to take
action with respect to that vote on that matter. The holders of a majority of
the voting rights represented by the shares represented at a meeting, whether or
not a quorum is present, may adjourn such meeting from time to time.
Stockholder Action by Written Consent
Under the DGCL, unless a corporation's certificate of incorporation
provides otherwise, any action required or permitted to be taken at any annual
or special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if written consents are signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which all shares entitled to vote
were present and voted. Neither the Ovation Certificate of Incorporation nor the
McLeodUSA Certificate of Incorporation addresses this matter.
105
<PAGE>
Advance Notice of Stockholder-Proposed Business at Annual Meetings
Neither the McLeodUSA Certificate of Incorporation or the McLeodUSA Bylaws,
nor the Ovation Certificate of Incorporation or the Ovation Bylaws, include a
provision which requires that advance notice be given to McLeodUSA or Ovation of
stockholder-proposed business to be conducted at annual meetings.
Amendment of Governing Documents
Ovation. Ovation may amend, alter, change or repeal any provision of the
Ovation Certificate of Incorporation as permitted by the DGCL. Under the DGCL,
an amendment to a corporation's certificate of incorporation requires the
recommendation of a corporation's board of directors, the approval of a majority
of all shares entitled to vote thereon, voting together as a single class, and
the approval of a majority of the outstanding stock of each class entitled to
vote separately thereon unless a higher vote is required in the corporation's
certificate of incorporation. Under the DGCL, the Ovation stockholders have the
power to adopt, amend or repeal the Ovation Bylaws or to adopt new bylaws.
McLeodUSA. McLeodUSA may amend or repeal any provision of the McLeodUSA
Certificate of Incorporation as permitted by the DGCL and the McLeodUSA
Certificate of Incorporation, except as noted below. Under the DGCL, an
amendment to a corporation's certificate of incorporation requires the
recommendation of a corporation's board of directors, the approval of a majority
of all shares entitled to vote thereon, voting together as a single class, and
the approval of a majority of the outstanding stock of each class entitled to
vote separately thereon unless a higher vote is required in the corporation's
certificate of incorporation. Pursuant to the McLeodUSA Certificate of
Incorporation, the affirmative vote of at least two-thirds of the voting rights
represented by the shares entitled to vote thereon and the affirmative vote of a
majority of the entire McLeodUSA Board is required to amend, alter or repeal
Sections 5.1 (election of directors) and 5.3 (limitation of liability), Article
6 (indemnification), and Article 8 (amendment of certificate of incorporation)
of the McLeodUSA Certificate of Incorporation.
Pursuant to the McLeodUSA Certificate of Incorporation, the McLeodUSA Board
has the power to adopt, alter, amend and repeal the McLeodUSA Bylaws in
accordance with the DGCL. Under the DGCL, the stockholders also have the power
to amend or repeal the McLeodUSA Bylaws or to adopt new bylaws.
Business Combination with an Interested Stockholder
Ovation. Ovation is subject to the provisions of Section 203 of the DGCL as
generally described above under "--Certain Charter and Statutory Provisions."
McLeodUSA. McLeodUSA is subject to the provisions of Section 203 of the
DGCL as described above under "--Description of McLeodUSA Capital Stock--Certain
Charter and Statutory Provisions."
106
<PAGE>
CERTAIN OTHER MATTERS
Legal Matters
The validity of the McLeodUSA Common Stock offered hereby and certain
federal income tax consequences in connection with the Merger will be passed
upon by Hogan & Hartson L.L.P., Washington, D.C.
The federal income tax consequences described in this Prospectus and Proxy
Statement are the subject of an opinion issued by Edwards & Angell, LLP, Boston,
Massachusetts.
Experts
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
ended December 31, 1997 incorporated by reference in this Registration Statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated financial statements of Consolidated Communications Inc.
as of December 31, 1996 and 1995, and for each of the three years ended
December 31, 1996 incorporated by reference in this Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said reports.
The consolidated financial statements of Ovation as of December 31, 1997
and for the period from March 27, 1997 (inception) to December 31, 1997 included
in this Prospectus and Proxy Statement and in the Registration Statement of
which this Prospectus and Proxy Statement is a part, have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report, appearing
elsewhere herein and in the Registration Statement, and are included in reliance
upon such report given upon the authority of said firm as experts in accounting
and auditing.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
On March 27, 1997, McLeodUSA engaged the accounting firm of Arthur
Andersen LLP as McLeodUSA's principal independent accountants, to replace
McGladrey & Pullen, LLP, McLeodUSA's former independent accountants, effective
with such engagement. The decision to change independent accountants was made
following a review of competitive proposals submitted by Arthur Andersen LLP and
two other major public accounting firms, and was recommended by the Audit
Committee of the McLeodUSA Board and approved by the McLeodUSA Board. McGladrey
& Pullen, LLP did not resign and did not decline to stand for re-election.
During the fiscal years ended December 31, 1996 and 1995, and the interim
period between December 31, 1996 and March 27, 1997, there were 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.
107
<PAGE>
McGladrey & Pullen, LLP's reports on the financial statements of McLeodUSA
for the fiscal years ended December 31, 1996 and 1995 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
McLeodUSA provided McGladrey & Pullen, LLP with a copy of this disclosure
and requested that McGladrey & Pullen, LLP furnish it with a letter addressed to
the SEC stating whether it agreed with the above statements. (A copy of the
McGladrey & Pullen, LLP letter addressed to the SEC is filed as Exhibit 16.1 to
McLeodUSA's Annual Report on Form 10-K for its fiscal year ended December 31,
1997, filed on March 9, 1998).
Other Matters
As of the date of this Prospectus and Proxy Statement, the Ovation Board
knows of no matter that will be presented for consideration at the Special
Meeting other than as described in this Prospectus and Proxy Statement. If any
other matters come before the Special Meeting or any adjournments or
postponements thereof and are voted upon, the enclosed proxies will confer
discretionary authority on the individuals named as proxies therein to vote the
shares represented by such proxies as to any such matters. The individuals named
as proxies intend to vote or not to vote in accordance with the recommendation
of the management of Ovation.
Where You Can Find More Information
McLeodUSA has filed the Registration Statement. The Registration Statement
registers the distribution to Ovation stockholders of the shares of McLeodUSA
Common Stock to be issued in connection with the Merger. The Registration
Statement, including the attached exhibits and schedules, contain additional
relevant information about McLeodUSA Common Stock. The rules and regulations of
the SEC allow us to omit certain information included in the Registration
Statement from this Prospectus and Proxy Statement.
In addition, McLeodUSA files reports, proxy statements and other
information with the SEC under the Exchange Act. You may read and copy any of
this information at the following locations of the SEC:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois
60661-2511
</TABLE>
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov. The
SEC file number for our documents filed under the Exchange Act is 0-20763.
The SEC allows McLeodUSA to "incorporate by reference" information into
this Prospectus and Proxy Statement. This means that McLeodUSA can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is considered
to be a part of this Prospectus and Proxy Statement, except for any information
that is superseded by information that is included directly in this document.
108
<PAGE>
This Prospectus and Proxy Statement incorporates by reference the documents
listed below that McLeodUSA has previously filed or will file with the SEC.
They contain important information about McLeodUSA and its financial condition.
. McLeodUSA's Annual Report on Form 10-K for its fiscal year ended December
31, 1997, filed on March 9, 1998
. McLeodUSA's Current Reports on Form 8-K, filed on March 20, 1998, October
29, 1998, November 19, 1998, January 14, 1999 and February 3, 1999
. McLeodUSA's Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 1998, June 30, 1998 and September 30, 1998, filed on May 13,
1998, August 14, 1998 and November 16, 1998, respectively
. The consolidated financial statements of Consolidated Communications Inc.
and subsidiaries appearing on pages F-45 through F-60 of McLeodUSA's
definitive prospectus dated December 1, 1997 and filed with the SEC on
December 2, 1997 pursuant to Rule 424(b) under the Securities Act as part
of McLeodUSA's Registration Statement on Form S-4 (Registration No. 333-
34227)
. All documents filed with the SEC by McLeodUSA pursuant to Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus
and Proxy Statement and prior to the date of the Special Meeting are
incorporated by reference into this Prospectus and Proxy Statement,
effective the date such documents are filed
. The description of McLeodUSA Common Stock set forth in the McLeodUSA
Registration Statement filed under Section 12 of the Exchange Act on Form
8-A on May 24, 1996, including any amendment or report filed with the SEC
for the purpose of updating such description
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents incorporated by reference in this
document through McLeodUSA or from the SEC through the SEC's web site at the
address described above. Documents incorporated by reference are available from
McLeodUSA without charge, excluding any exhibits to those documents unless the
exhibit is specifically incorporated by reference as an exhibit in this
Prospectus and Proxy Statement. You can obtain documents incorporated by
reference in this Prospectus and Proxy Statement by requesting them in writing
or by telephone from McLeodUSA at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 364-0000
If you would like to request documents, please do so by ____________, 1999
to receive them before the Special Meeting. If you request any incorporated
documents from McLeodUSA, McLeodUSA will mail them to you by first class mail,
or another equally prompt means, within two business days after McLeodUSA
receives your request.
This document constitutes the Prospectus of McLeodUSA and the Proxy
Statement of Ovation. McLeodUSA has supplied all information contained or
incorporated by reference in this
109
<PAGE>
Prospectus and Proxy Statement relating to McLeodUSA and Ovation has supplied
all such information relating to Ovation.
Neither McLeodUSA nor Ovation has authorized anyone to give any information or
make any representation about the Merger or McLeodUSA or Ovation that is
different from, or in addition to, that contained in this Prospectus and Proxy
Statement or in any of the materials that McLeodUSA has incorporated into this
document. Therefore, if anyone does give you information of this sort, you
should not rely on it. The information contained in this document speaks only
as of the date of this document unless the information specifically indicates
that another date applies.
110
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Ovation Communications, Inc. Financial Information
<TABLE>
<S> <C>
OVATION ANNUAL FINANCIAL STATEMENTS
Report of Independent Auditors............................................ F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statements of Changes in Stockholders' Equity............................. F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
BRE COMMUNICATIONS, L.L.C. d/b/a PHONE MICHIGAN FINANCIAL
STATEMENTS (unaudited)
Balance Sheet............................................................. F-13
Statement of Operations................................................... F-14
Statements of Changes in Members' Deficit................................. F-15
Statement of Cash Flows................................................... F-16
Notes to Financial Statements............................................. F-17
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Ovation Communications, Inc.
We have audited the balance sheet of Ovation Communications, Inc., formerly
known as OCI Communications, Inc., as of December 31, 1997, and the related
statements of operations, changes in stockholders' equity and cash flows for the
period from March 27, 1997 (date of inception) through December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ovation Communications, Inc.,
formerly known as OCI Communications, Inc., at December 31, 1997, and the
results of its operations and its cash flows for the period from March 27, 1997
(date of inception) through December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
December 11, 1998
F-2
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
------------ -------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 663,277 $ 4,021,773
Accounts receivable 39,972 3,962,739
Prepaid expenses and other assets 100,780 88,559
----------- -----------
Total current assets 804,029 8,073,071
Property and equipment:
Communications network 14,349,994 29,531,170
Office and computer equipment 239,487 1,306,977
Construction in progress 1,191,121 5,010,898
Furniture and fixtures 117,637 366,389
Leasehold improvements 54,954 394,857
----------- -----------
15,953,193 36,610,291
Less accumulated depreciation 25,839 1,212,060
----------- -----------
Net property and equipment 15,927,354 35,398,231
Debt issuance costs, net 388,142 376,617
Other assets 83,271 96,987
----------- -----------
Total assets $17,202,796 $43,944,906
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 2,357,263 $ 8,946,766
Accrued expenses 283,108 1,577,762
----------- -----------
Total current liabilities 2,640,371 10,524,528
Long-term debt 9,309,276 19,762,008
Stockholders' equity:
Series A Preferred Stock, $.01 par value:
Authorized shares -- 120,000 in 1997
and 500,000 at September 30, 1998
Issued and outstanding shares -- 65,000 in
1997 and 135,593 at September 30, 1998 240,156 879,801
Series B Preferred Stock, $.01 par value:
Authorized shares -- 0 in 1997
and 5,000 at September 30, 1998
Issued and outstanding shares -- 0 -- --
Preferred Stock, $.01 par value:
Authorized shares -- 4,880,000 in 1997
and 5,495,000 at September 30, 1998
Issued and outstanding shares -- 0 -- --
Common Stock, $.01 par value:
Authorized shares -- 20,000,000 in 1997
and 30,000,000 at September 30, 1998
Issued and outstanding shares -- 10,526,316
in 1997 and 18,808,342 at September 30, 1998 105,263 188,084
Additional paid-in capital 6,447,719 16,440,970
Deferred compensation -- (567,224)
Accumulated deficit (1,539,989) (3,283,261)
----------- -----------
Total stockholders' equity 5,253,149 13,658,370
----------- -----------
Total liabilities and stockholders' equity $17,202,796 $43,944,906
=========== ===========
</TABLE>
See accompanying notes
F-3
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Statements of Operations
<TABLE>
<CAPTION>
Period from Period from
March 27, 1997 March 27, 1997
(date of (date of
inception) inception) Nine Months
through through ended
December 31, September 30, September 30,
1997 1997 1998
-------------- -------------- -------------
(unaudited)
<S> <C> <C> <C>
Net sales $ 39,972 $ -- $ 8,173,693
Cost of sales 60,675 4,070 1,583,673
----------- ---------- -----------
(20,703) (4,070) 6,590,020
Operating expenses:
General and administrative 773,732 345,194 3,255,270
Sales and marketing 504,892 391,129 3,274,376
----------- ---------- -----------
Operating income (loss) (1,299,327) (740,393) 60,374
Other income (expense):
Interest expense (39,586) -- (1,215,163)
Interest income 38,430 8,990 50,456
----------- ---------- -----------
Net loss (1,300,483) (731,403) (1,104,333)
Less preferred stock dividends (239,506) -- (638,939)
----------- ---------- -----------
Net loss applicable to common stockholders $(1,539,989) $ (731,403) $(1,743,272)
=========== ========== ===========
Net loss per share applicable to common
stockholders $(.15) $(.10) $(.16)
=========== ========== ===========
Weighted average number of common shares
outstanding 10,007,879 7,534,200 10,995,692
=========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Series A Series B
Preferred Preferred Preferred Common
Stock Stock Stock Stock
-------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for $.01 per
share in March 1997 to founders -- $ -- -- $ -- -- $ -- 2,500,000 $ 25,000
Sale of stock to a venture fund in
March 1997 through October 1997:
Common stock -- $.01 per share -- -- -- -- -- -- 7,500,000 75,000
Series A preferred stock --
$100 per share 65,000 650 -- -- -- -- -- --
Common stock issued in connection
with AT&T credit agreement valued at
$.10 per share -- -- -- -- -- -- 526,316 5,263
Accrual of preferred stock dividends -- 239,506 -- -- -- -- -- --
Net loss for the period
-------------------------------------------------------------------------
Balance at December 31, 1997 65,000 240,156 -- -- -- -- 10,526,316 105,263
Deferred compensation expense
associated with the issuance of
common stock for $.50 per share in
July 1998 through September 1998 to
various key employees -- -- -- -- -- -- 708,000 7,080
Deferred compensation expense
associated with the issuance of
common stock for $.40 per share in
September 1998 to founders -- -- -- -- -- -- 533,059 5,331
Sale of stock to a venture fund in
February 1998 through September 1998:
Common stock -- $.40 per share -- -- -- -- -- -- 7,040,967 70,410
Series A preferred stock --
$100 per share 54,993 550 -- -- -- -- -- --
Series A preferred stock --
$76.53 per share 15,600 156 -- -- -- -- -- --
Accrual of preferred stock dividends -- 638,939 -- -- -- -- -- --
Net loss for the period (unaudited) -- -- -- -- -- -- -- --
-------------------------------------------------------------------------
Balance at September 30, 1998
(unaudited) 135,593 $879,801 -- $ -- -- $ -- 18,808,342 $188,084
=========================================================================
<CAPTION>
Additional
Paid-in Deferred Accumulated
Capital Compensation Deficit Total
--------------------------------------------------------
<S> <C> <C> <C> <C>
Issuance of common stock for $.01 per
share in March 1997 to founders $ (24,750) $ -- $ -- $ 250
Sale of stock to a venture fund in
March 1997 through October 1997:
Common stock -- $.01 per share (74,250) -- -- 750
Series A preferred stock --
$100 per share 6,499,350 -- -- 6,500,000
Common stock issued in connection
with AT&T credit agreement valued at
$.10 per share 47,369 -- -- 52,632
Accrual of preferred stock dividends -- -- (239,506) --
Net loss for the period -- -- (1,300,483) (1,300,483)
--------------------------------------------------------
Balance at December 31, 1997 6,447,719 -- (1,539,989) 5,253,149
Deferred compensation expense
associated with the issuance of
common stock for $.50 per share in
July 1998 through September 1998 to
various key employees 346,920 (354,000) -- --
Deferred compensation expense
associated with the issuance of
common stock for $.40 per share in
September 1998 to founders 207,893 (213,224) -- --
Sale of stock to a venture fund in
February 1998 through September 1998:
Common stock -- $.40 per share 2,745,977 -- -- 2,816,387
Series A preferred stock --
$100 per share 5,498,750 -- -- 5,499,300
Series A preferred stock --
$76.53 per share 1,193,711 -- -- 1,193,867
Accrual of preferred stock dividends -- -- (638,939) --
Net loss for the period (unaudited) -- -- (1,104,333) (1,104,333)
--------------------------------------------------------
Balance at September 30, 1998
(unaudited) $16,440,970 $(567,224) $(3,283,261) $13,658,370
========================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from Period from
March 27, 1997 March 27, 1997
(date of (date of
inception) inception) Nine Months
through through ended
December 31, September 30, September 30,
1997 1997 1998
-------------- -------------- -------------
(unaudited)
<S> <C> <C> <C>
Operating activities
Net loss $ (1,300,483) $ (731,403) $ (1,104,333)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation 25,839 -- 1,186,221
Amortization 4,610 -- 11,525
Value of stock issued in lieu of interest 47,369 -- --
Changes in operating assets and liabilities:
Accounts receivable (39,972) -- (3,922,767)
Prepaid expenses and other assets (100,780) (124,232) 12,221
Other long-term assets (83,271) (6,726) (13,716)
Accounts payable 2,357,263 1,601,764 6,589,503
Accrued expenses 283,108 440 1,294,654
------------ ----------- ------------
Net cash provided by operating activities 1,193,683 739,843 4,053,308
Investing activities
Purchase of property and equipment (15,953,193) (3,205,802) (20,657,098)
------------ ----------- ------------
Net cash used in investing activities (15,953,193) (3,205,802) (20,657,098)
Financing activities
Net proceeds from issuance of long-term debt 9,309,276 -- 10,452,732
Net proceeds from sale of preferred stock 6,500,000 3,250,000 6,693,167
Payment of debt issuance costs (392,752) -- --
Net proceeds from the sale of common stock 6,263 1,000 2,816,387
------------ ----------- ------------
Net cash provided by financing activities 15,422,787 3,251,000 19,962,286
------------ ----------- ------------
Increase in cash and cash equivalents 663,277 785,041 3,358,496
Cash and cash equivalents at beginning of period -- -- 663,277
------------ ----------- ------------
Cash and cash equivalents at end of period $ 663,277 $ 785,041 $ 4,021,773
============ =========== ============
Supplemental schedule of non-cash financing
Accrual of preferred stock dividends $ 239,506 $ $ 638,939
</TABLE>
See accompanying notes.
F-6
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Notes to Financial Statements
December 31, 1997
1. Business Review
Ovation Communications, Inc. (the "Company"), which ceased being a development
stage company in the first quarter of 1998, provides telecommunications services
through the use of company-owned facilities and those of other carriers. The
Company was incorporated in the state of Delaware on March 27, 1997 as OCI
Communications, Inc. The Company changed its name to Ovation Communications,
Inc. in May 1998.
The Company completed the construction of a 66 mile fiber optic SONET ring
network in the greater Minneapolis/St. Paul metropolitan area in December 1997.
Since then the Company has been providing local exchange services, intrastate
interexchange services, high-capacity dedicated private line services, and
special and switched access services. The Company intends to market these
services to companies in the Minneapolis/St. Paul metropolitan area.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all highly liquid investments with a remaining maturity of
three months or less to be cash equivalents. Cash equivalents consist of money
market funds and are carried at cost which approximates market.
Short-Term Investments
Short-term investments, consisting of money market funds, are stated at fair
value, which approximates cost.
Revenue Recognition
The Company records revenues for telecommunications sales at the time of
customer usage.
Furniture and Equipment
Furniture and equipment are stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Communications equipment 5 to 25 years
Furniture and fixtures 5 years
Office and computer equipment 3 years
</TABLE>
Leasehold improvements are amortized over the related lease term or estimated
useful life, whichever is shorter.
Maintenance and repairs are expensed as incurred. Replacements and betterments
are capitalized. The cost and related reserves of assets sold or retired are
removed from the accounts, and any resulting gain or loss is reflected in
results of operations.
F-7
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Notes to Financial Statements
December 31, 1997
2. Summary of Significant Accounting Policies (continued)
The Company constructs certain of its own transmission systems and related
facilities. All internal costs directly related to the construction of such
facilities, including interest and salaries of certain employees, are
capitalized. Such costs amounted to $396,200 ($56,000 in interest) in 1997.
Income Taxes
Income taxes are accounted for under the liability method. Deferred income taxes
are provided for temporary differences between the financial reporting and the
tax bases of assets and liabilities.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Although estimates are considered to be fairly stated at the time the estimates
are made, actual results could differ from those estimates.
Stock-Based Compensation
The Company provides the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, but
applies Accounting Principles Board Opinion No. 25 (APB 25) and related
interpretations in accounting for its stock plans. Under APB 25, when the
exercise price of employee stock equals the market price of the underlying stock
on the date of grant, no compensation expense is recognized.
Impairment of Long-Lived Assets
The Company will record impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount.
Per Share Data
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("Statement 128"). Statement 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share under the
previous rules.
In November 1997, the Board of Directors approved a 100-for-1 stock split for
common stock. Accordingly, all share, per share and weighted average information
has been restated to reflect the split.
Intangible Assets
Intangibles consist of debt issuance costs which were incurred in connection
with the issuance of the long-term debt during 1997. These costs are being
amortized over the term of the facility on a straight-line basis and are
recorded net of accumulated amortization of $4,610 at December 31, 1997.
F-8
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Notes to Financial Statements
December 31, 1997
2. Summary of Significant Accounting Policies (continued)
The Company reviews the recorded amount of intangibles for impairment whenever
events or changes in circumstances indicate that the carrying amount of this
asset may not be recoverable. If this review indicates that the carrying amount
of the asset may not be recoverable, the carrying value of the asset will be
reduced to fair value.
Interim Financial Information
The accompanying financial statements as of September 30, 1998 and for the
period from March 27, 1997 (date of inception) through September 30, 1997 and
for the nine month period ended September 30, 1998 are unaudited. In the
opinion of the management of the Company, these consolidated financial
statements reflect all adjustments, consisting only of normal and recurring
adjustments necessary for a fair presentation of the consolidated financial
statements. The results of operations for the nine-month period ended
September 30, 1998 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 1998.
3. Leases
The Company leases three facilities under noncancelable operating leases, which
expire throughout 2008. Rent expense related to the operating leases was
approximately $105,400 for the year ended December 31, 1997. Future minimum
lease commitments under operating leases as of December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998 $ 226,740
1999 261,547
2000 265,346
2001 265,516
2002 266,462
Thereafter 950,315
----------
$2,235,926
==========
</TABLE>
4. Sale of Common Stock to Founders and Management
In March 1997, the Company issued 2,500,000 shares of Restricted Common Stock to
various members of executive management at $.01 per share. The shares vest based
on both passage of time and on meeting performance objectives over a four year
period from the date of issuance. The compensation expense associated with the
vested stock did not have a material impact to the financial statements of the
Company for the year ended December 31, 1997. At any time following the
termination of employment of a management stockholder for any reason, other than
by death or disability, the Company shall have the right to purchase the
securities held by the management stockholder for a price equal to the fair
market value of the securities being purchased. The Company also has the right
to repurchase 900,000 shares of the Restricted Common Stock sold to the
President of the Company at the same price paid at original issuance, for the
purpose of distributing such shares via an employee stock option plan or
otherwise to employees. Executive management redistributed 488,124 of their
shares throughout 1997 to employees of the Company.
F-9
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Notes to Financial Statements
December 31, 1997
The restricted shares issued to these key employees through October 1, 1998 vest
as follows based on the assumption that the Company meets the performance
objectives established:
<TABLE>
<S> <C>
1997 516,466
1998 818,021
1999 748,212
2000 748,212
2001 731,746
2002 178,402
----------
3,741,059
==========
</TABLE>
5. Deferred Compensation (unaudited)
In July through September 1998, the Company issued 708,000 and 533,059
additional shares of the Company's Restricted Common Stock at a fair value of
$.50 and $.40, respectively, to various key employees. The shares vest based on
passage of time over a four year period from the date of issuance. The fair
value associated with these stock issuances has been recorded as deferred
compensation at September 30, 1998, and will be amortized over the vesting
period of the shares.
6. Sale of Common and Preferred Stock
In March 1997, the Company entered into an agreement with an investor, to issue
and sell up to 120,000 shares of the Company's Series A Preferred Stock, at a
price of $100 per share and an aggregate of 7,500,000 shares of the Company's
$.01 par value per share Common Stock. The proceeds from the sale of these
securities are to be used to fund capital expenditures and working capital
required to construct and operate a competitive local exchange carrier (CLEC)
network in the Minneapolis and St. Paul metropolitan area. In March 1997 the
Company issued the 7,500,000 shares of Common Stock at $.01 per share. The
Company also has the right to repurchase 250,000 shares of the Common Stock at
the same price paid at original issuance, for the purpose of distributing such
shares via an employee stock option plan or otherwise to employees.
In March through October 1997, the Company issued 65,000 of the 120,000 shares
of Series A Preferred Stock at $100 per share, from which the Company received
net proceeds of $6,500,000. The Series A Preferred Stock has certain voting and
registration rights and has preference over Common Stock upon liquidation. The
holders of the Preferred Stock are entitled to a cumulative cash dividend of 10%
per annum. Cumulative dividends in arrears of $239,507 existed at December 31,
1997.
In November 1997, the Company also issued 526,316 shares of Common Stock to AT&T
Commercial Finance Corporation ("AT&T") at $.01 per share as inducement for AT&T
to enter into a long-term credit agreement. For further discussion of this
credit agreement, see Note 6. These shares constituted 5% of the fully diluted
Common Stock outstanding at the date of the issuance. AT&T has the preemptive
right to purchase a pro rata portion of any additional equity securities
(including any warrants, options or other rights to purchase equity securities
and any convertible securities) that the Company shall desire to issue or sell
in order to maintain 5% of the fully diluted Common Stock outstanding. This
preemptive right does not apply in certain circumstances, such as employee
related stock transactions in which the total number of common shares
outstanding does not change, an IPO, or stock issued to unaffiliated parties in
connection with a merger or consolidation.
F-10
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Notes to Financial Statements
December 31, 1997
6. Sale of Common and Preferred Stock (continued)
In February through July 1998, the Company issued 54,993 of the 120,000 shares
of the Series A Preferred Stock under the March 1997 agreement at a price of
$100 per share.
In June 1998, the Company entered into the second part of an agreement with an
investor, to issue and sell up to an additional 120,000 shares of the Company's
Series A Preferred Stock, of which 15,600 and 104,000 shares were issued on
September 18, 1998 and October 1, 1998, respectively, at a price of $76.53 per
share and an aggregate of 7,040,967 shares of the Company's Common Stock, at a
price of $.40 per share.
7. Notes Payable
In November 1997, the Company entered into a $23,600,000 credit agreement with
AT&T. All borrowings on the line of credit are due in 16 consecutive quarterly
installments beginning in November 2000. Interest accrues at a rate per annum
equal to 4 3/4 percent over the commercial paper rate (10.25% at December 31,
1997), and is payable on a quarterly basis. The note matures in January 2005.
Virtually all of the Company's assets are pledged as collateral under the above
debt. As discussed previously in Note 6, the Company issued 526,316 shares of
Common Stock at $.01 per share in connection with this agreement. The shares
were deemed to have a value of $.10 per share or $52,632. Additional interest
expense in the amount of $47,369 has been recorded as a discount against the
note and will be amortized over the life of the notes.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998 $ --
1999 --
2000 --
2001 1,852,616
2002 2,050,976
Thereafter 5,453,053
----------
$9,356,645
==========
</TABLE>
On October 1, 1998, the Company amended this credit agreement. Under the amended
credit agreement, the line of credit was increased to $95,000,000; however, the
corresponding interest rate was not adjusted. This amendment was made for the
purpose of financing additional working capital needs and the acquisition of
Phone Michigan. For further discussion of this acquisition see Note 9. As of
December 11, 1998, the Company has borrowed $61,265,346 against this facility.
8. Income Taxes
At December 31, 1997, the Company had net operating loss carryforwards for tax
purposes of approximately $1,514,000 which is available to offset future taxable
income. The net operating loss carryforward begins to expire in 2012 and is
subject to limitations if significant ownership changes occur. Net operating
loss carryforward deferred tax assets of approximately $606,000 at December 31,
1997 have been reserved for in their entirety by a valuation allowance.
F-11
<PAGE>
Ovation Communications, Inc.
(Formerly known as OCI Communications, Inc.)
Notes to Financial Statements
December 31, 1997
9. Phone Michigan Acquisition
On August 7, 1998, the Company entered into an agreement with BRE
Communications, L.L.C. to acquire all of the issued and outstanding ownership
interests of the LLC for cash and stock which closed on October 1, 1998. The
Company paid approximately $55,000,000 in cash and stock in exchange for the
assets of the LLC. This transaction will be accounted for as a purchase.
10. Subsequent Events
On January 7, 1999, the Company entered into an Agreement and Plan of Merger
with McLeodUSA Incorporated (McLeodUSA), pursuant to which the Company will be
merged with and into a wholly owned subsidiary of McLeodUSA. All preferred stock
will be exchanged for cash. All common stock of the Company and each right to
receive shares of the Company's common stock will be exchanged for the right to
receive cash or shares of McLeodUSA common stock at the election of the holder.
F-12
<PAGE>
BRE COMMUNICATIONS, L.L.C. d/b/a PHONE MICHIGAN
<TABLE>
<CAPTION>
December 31, September 30,
BALANCE SHEET (unaudited) ----------------------------- --------------
1996 1997 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $1,071,191 $ 259,372 $ 308,553
Accounts receivable, net 67,897 1,052,884 7,284,652
Prepaid expenses and other 28,560 63,012 1,268,005
--------------------------------------------
Total current assets 1,167,648 1,375,268 8,861,210
PROPERTY AND EQUIPMENT 948,997 10,038,050 22,561,827
Less accumulated depreciation (828) (461,462) (1,721,776)
--------------------------------------------
Net property and equipment 948,169 9,576,588 20,840,051
DEFERRED CHARGES AND OTHER 90,345 812,473 1,490,346
Less accumulated amortization -- (42,112) (186,582)
--------------------------------------------
Net deferred charges and other 90,345 770,361 1,303,764
--------------------------------------------
TOTAL ASSETS 2,206,162 11,722,217 31,005,025
============================================
LIABILITIES AND MEMBERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 45,407 $ 1,838,496 $ 6,100,837
Accrued expenses and other liabilities 397,148 707,016 2,974,881
Current portion of long-term debt 15,237 18,635 18,444
--------------------------------------------
Total current liabilities 457,792 2,564,147 9,094,162
LONG-TERM LIABILITIES
Long-term debt, less current portion 1,057,563 10,038,928 22,424,631
Deferred interest -- 468,461 1,082,163
--------------------------------------------
Total long-term liabilities 1,057,563 10,507,389 23,506,794
MEMBERS' DEFICIT
Members' capital 769,658 1,269,658 1,269,658
Accumulated capital deficit (78,851) (2,618,977) (2,865,589)
--------------------------------------------
Total members' capital (deficit) 690,807 (1,349,319) (1,595,931)
--------------------------------------------
TOTAL LIABILITIES AND MEMBERS' DEFICIT $2,206,162 $11,722,217 $31,005,025
============================================
</TABLE>
See notes to financial statements.
F-13
<PAGE>
BRE COMMUNICATIONS, L.L.C. d/b/a PHONE MICHIGAN
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS Period Ended Year Ended Nine Months Ended
(unaudited) December 31, December 31, September 30,
1996 1997 1997 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ $ 3,922,979 $ 2,817,396 $13,601,703
COST OF GOODS/SERVICES 2,681,586 1,969,478 5,132,929
---------------------------------------------------------
GROSS MARGIN 1,241,393 847,918 8,468,774
OPERATING EXPENSES:
Selling, general and administrative 75,178 2,734,603 1,680,414 6,275,521
Depreciation and amortization 828 502,747 260,553 1,404,784
---------------------------------------------------------
Total operating expenses 76,006 3,237,350 1,940,967 7,680,305
---------------------------------------------------------
OPERATING LOSS (76,006) (1,995,957) (1,093,049) 788,469
OTHER INCOME (EXPENSE)
Interest, net (2,845) (543,864) (270,997) (1,035,081)
Other expense (3,182)
Other income 2,877
---------------------------------------------------------
Total other income (expense) (2,845) (544,169) (270,997) (1,035,081)
---------------------------------------------------------
NET LOSS $(78,851) $(2,540,126) $(1,364,046) $ (246,612)
=========================================================
</TABLE>
See notes to financial statements.
F-14
<PAGE>
BRE COMMUNICATIONS, L.L.C. d/b/a PHONE MICHIGAN
STATEMENTS OF MEMBERS' DEFICIT (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B Members' Accumulated
Units Units Capital Deficit Total
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 16, 1996
Member contribution 10,000 98,000 $ 769,658 $ (78,851) $ 690,807
Net loss
------------------------------------------------------------------
Balance at
December 31, 1996 10,000 98,000 $ 769,658 $ (78,851) $ 690,807
Member contribution $ 500,000 $ $ 500,000
Net loss (2,540,126) $ (2,540,126)
------------------------------------------------------------------
Balance at
December 31, 1997 10,000 98,000 $ 1,269,658 $ (2,618,977) $ (1,349,319)
Net loss (246,612) $ (246,612)
------------------------------------------------------------------
Balance at
September 30, 1998 10,000 98,000 $ 1,269,658 $ (2,865,589) $ (1,595,931)
==================================================================
</TABLE>
See notes to financial statements.
F-15
<PAGE>
BRE COMMUNICATIONS, L.L.C. d/b/a PHONE MICHIGAN
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Period Ended Year Ended Nine Months Ended
(unaudited) December 31, December 31, September 30,
1996 1997 1997 1998
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $ (78,851) $(2,540,126) $(1,364,046) $ (246,612)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 828 502,747 260,553 1,404,784
Changes in assets and liabilities:
Accounts receivable (67,897) (984,987) (188,956) (6,231,768)
Prepaid expenses and other (28,560) (34,452) (188,314) (1,204,993)
Deferred charges and other (62,485) (224,077) (30,086) (674,834)
Accounts payable 45,407 1,410,164 156,854 4,262,341
Accrued expenses and other liabilities 397,148 692,792 80,864 2,267,865
Deferred interest -- 468,461 266,096 613,702
--------------------------------------------------------------
Net cash from (used in) operating activities 205,590 (709,478) 1,007,035 190,485
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (948,997) (9,089,053) (6,008,030) (12,523,777)
--------------------------------------------------------------
Net cash from (used in) investing activities (948,997) (9,089,053) (6,008,030) (12,523,777)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,072,800 9,000,000 6,139,438 12,400,000
Repayments of long-term debt (15,237) (14,488)
Debt acquisition costs (27,860) (498,051) (3,039)
Member contribution 769,658 500,000 147,000
--------------------------------------------------------------
Net cash provided by financing activities 1,814,598 8,986,712 6,286,438 12,382,473
--------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,071,191 (811,819) (728,627) 49,181
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,071,191 259,372
--------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD 1,071,191 259,372 (728,627) 308,553
==============================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ -- $ 63,194 $ 34,670 $ 498,314
==============================================================
</TABLE>
See notes to financial statements.
F-16
<PAGE>
BRE COMMUNICATIONS, L.L.C. d/b/a PHONE MICHIGAN
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
______________________________________________________________________________
1. SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - BRE Communications, L.L.C. d/b/a Phone Michigan (the
"Company") is primarily in the business of providing competitive local
telephone exchange and long distance service to residential and business
customers in the State of Michigan. In addition to providing local
exchange service, the Company also installs fiber networks for a number of
school districts and other businesses in the State of Michigan.
Revenue Recognition - The Company recognizes revenue related to monthly
usage charges and other recurring charges during the period in which the
services are performed. The Company recognizes the revenue earned from its
contracts to install fiber networks utilizing the completed contract
method. Down payments received, if any, related to these contracts are
recognized as deferred revenue until the completion of the installation of
the fiber network at which time the Company recognizes the related revenue.
Estimates - In the preparation of financial statements in conformity with
generally accepted accounting principles management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Concentrations - During 1997, approximately 75% of the Company's revenues
were from a single customer. In addition, a significant portion of the
Company's operations are supported by services and facilities obtained from
a single supplier. Although the Company has not experienced significant
problems relative to such support, the inability to develop alternative
sources if required in the near future, could have an adverse impact on the
Company's operations.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
highly liquid investments purchased with an original maturity of three
months or less.
Depreciation - Property and equipment is recorded at cost and depreciated
over the estimated useful lives of the assets using the straight-line
method. The Company depreciates automobiles, computers and software over
five years, equipment, furniture and fixtures and switch and sonet
equipment over seven years, building improvements and fiber network over
fifteen years and buildings over forty years.
Deferred Charges and Other Assets - The Company has capitalized certain
one-time connection charges related to their network, costs incurred in the
formation of the Company, and debt acquisition costs. The connection
charges and organization costs are being amortized over a period of sixty
months. The loan origination fees are being amortized over the life of the
loan (seven years). The total amortization expense for those assets for
the year ended December 31, 1997 and the nine months ended September 30,
1998 was $42,112 and $144,470, respectively.
Income Taxes - The Company has been established as a limited liability
company and accordingly, no provision has been made for federal income
taxes since these taxes are the personal responsibility of the members.
Stock-Based Compensation - The Company has elected to apply the recognition
and measurement principles of Accounting Principles Board Opinion No. 25 to
its stock-based compensation as
F-17
<PAGE>
permitted by Statement of Financial Accounting Standard No. 123, Accounting
for Stock-Based Compensation.
Members' Capital - The Company's economic interests are represented by
Class A and Class B units, with the Class A units having certain redemption
and liquidation preferences to the Class B units.
Basis of Presentation - As noted in the accompanying financial statements,
the Company has experienced a loss of approximately $2,540,000 for the year
ended December 31, 1997 and approximately $247,000 for the nine months
ended September 30, 1998, while it has also experienced negative operating
cash flows of approximately $709,000 for 1997 and approximately $190,000 of
positive cash flows for the nine months ended September 30, 1998.
Management believes that the Company's existing Revolving Credit Agreement
will be sufficient to finance the Company's operations in 1998, as the
Revolving Credit Agreement extends to March 31, 2004 (Note 6). In
addition, the Company is currently installing a significant number of
access lines and negotiating for additional municipality agreements which
are anticipated to result in significant revenues and cash flows to the
Company.
Management has plans to expand its operations and services in existing and
additional municipalities. In conjunction with these plans, the Company
anticipates utilizing its existing revolving credit agreement and other
financing options to fund its growth.
Although management expects that it can successfully implement these plans,
their accomplishment cannot be guaranteed. The Company's future liquidity
and the ultimate realization and classification of its assets and
liabilities could be influenced by the Company's ability to successfully
implement these expanded marketing and financing plans. The accompanying
financial statements have been prepared assuming that the Company will
continue as a going concern and do not include adjustments that might
result from the degree of success of such implementation.
2. PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following at:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Land $ 200,000 $ 200,000 $ 200,000
Buildings and improvements 461,753 539,906 719,344
Communications network 256,682 3,303,378 6,667,867
Switch and sonet equipment 4,441,172 12,100,534
Furniture, fixtures, and other equipment 30,562 710,885 1,954,920
Automobiles 85,956 158,157
Construction in progress 756,753 761,005
--------- ----------- -----------
Total 948,997 10,038,050 22,561,827
Accumulated depreciation 828 461,462 1,721,776
--------- ----------- -----------
Property and equipment, net $ 948,169 $ 9,576,588 $20,840,051
========= =========== ===========
</TABLE>
F-18
<PAGE>
3. DEFERRED CHARGES AND OTHER
Deferred charges and other, net included the following at:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Collection install charges $ 185,116 $ 434,084
Debt acquisition costs $ 27,860 525,911 528,950
Organizational and other costs 62,485 101,446 527,312
-------- --------- ----------
Total 90,345 812,473 1,490,346
Accumulated amortization 42,112 186,582
-------- --------- ----------
Deferred charges and other, net $ 90,345 $ 770,361 $1,303,764
======== ========= ==========
</TABLE>
4. OPERATING LEASES, COMMITMENTS AND CONTINGENCIES
The Company leases various equipment and real estate under operating leases
on which rental expense was approximately $100,000 for the year ended
December 31, 1997. The future minimum lease payments under such operating
leases are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 189,296
1999 163,180
2000 107,918
2001 7,178
---------
Total $ 467,572
=========
</TABLE>
5. EMPLOYEE BENEFIT PLANS
The Company participates in a 401(k) plan (the "Plan") which is
administered by a related party, City Signal Fiber Services ("City Signal")
(Note 7). Before becoming eligible to participate in the Plan, an employee
must have completed one year of service and be at least 19 years old. All
employer matching contributions are at the discretion of the employer. The
vesting schedule for all participants is determined based on the number of
years of employment. Each employee vests 20% upon completion of two years
of service and continues to vest 20% for each year of employment beyond the
initial two years until the employee becomes 100% vested. The Company did
not make any matching contributions to the Plan during 1997.
Effective July 1, 1997 the Company adopted the Phone Michigan Executive
Stock Appreciation Plan (the "Stock Plan"), a deferred compensation plan
established for the benefit of a select group of employees. The Company
has authorized and issued 1,900 stock appreciation units ("Units") under
the Stock Plan which vest over a period beginning after four years of
service at 33 1/3% per year, subject to certain other vesting requirements.
A participant shall become 100% vested in the event of death, total
disability or change in control. In the event a participant's employment
is terminated for just cause (as defined in the Stock Plan), the
participants' interest in each and every unit awarded under the Stock Plan
shall be forfeited. Additional units may be awarded at the discretion of
the members of the Company. The per Unit value is equal to .01% of the net
equity of the Company. Although the Units were deemed compensatory, the
compensation expense element is deemed insignificant during 1997 based on
the current members' deficit. Subsequent to year end, 800 non-vested units
terminated under the Stock Plan.
F-19
<PAGE>
6. LONG-TERM DEBT
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------- -------------- ---------------
<S> <C> <C> <C>
Revolving credit notes with banks interest due
quarterly at LIBOR rate plus the applicable margin
(9.28125% at December 31, 1997), principal due
March 31, 2004 in accordance with the reduction
schedule below $ 2,000,000 $14,400,000
Subordinated promissory notes, interest deferred
until maturity at 10% per annum, principal due
October 1, 2005 $ 500,000 7,500,000 7,500,000
Promissory note payable to bank, due in monthly
installments of $5,810 including interest at 9.0% per
annum, with final payment due December 1, 2001 572,800 557,563 543,075
---------- ----------- -----------
Total 1,072,800 10,057,563 22,443,075
Less current portion (15,237) (18,635) (18,444)
---------- ----------- -----------
Long term portion $1,057,563 $10,038,928 $22,424,631
========== =========== ===========
</TABLE>
Revolving Credit Notes
In October 1997, the Company entered into a $20 million loan agreement
("Revolving Credit Agreement") with Fleet National Bank as agent and
participating banks ("the Banks") (as defined in the Revolving Credit
Agreement) to finance capital expenditures and working capital needs of
the Company.
Borrowings are subject to meeting certain compliance requirements regarding
the number of outstanding municipality agreements, access lines, and
operating cash flows. The terms of the Revolving Credit Agreement also
require that the Company not exceed certain leverage ratios and maintain
other financial ratios. The notes are secured by all of the assets of the
Company. As of December 31, 1997, the Company was in compliance with its
debt covenants and had additional borrowing availability of approximately
$4,256,000.
The commitment will be reduced in equal quarterly installments according to
the following schedule:
<TABLE>
<CAPTION>
Year
<S> <C>
2000 $ 1,000,000
2001 4,000,000
2002 5,000,000
2003 5,000,000
2004 5,000,000
-----------
Total $20,000,000
===========
</TABLE>
At the time of such reductions, any borrowings outstanding in excess of
commitment levels are due and payable.
F-20
<PAGE>
The units of members' capital owned by the Company were pledged as
collateral to secure loans pursuant to, and may not be pledged to any other
party under the terms of the Revolving Credit Agreement.
As a part of the Revolving Credit Agreement, the Company issued to the
Banks warrants to purchase 2,000 Class B units at an exercise price of $.01
per unit. The Banks may receive the right to purchase additional units
based on the level of borrowings under the Revolving Credit Agreement and
other increases in the Company's outstanding units up to a maximum of 5,158
Class B Units. The warrants expire October 31, 2007 or upon exercise, if
earlier. The warrants also contain put options exercisable on or after
October 24, 2004, and certain other registration rights. The redemption
price of the put options will be determined based upon the fair market
value of the Company.
In accordance with Emerging issues Task Force 88-9, the Company has
evaluated the fair market value of the warrants and the related put
options, and management believes the value of such warrants and put options
is not significant at December 31, 1997. The Company will annually
reassess the fair market value of the warrant put options and record an
annual accretion charge to retained earnings for the difference between the
estimated put redemption price and the warrant value assigned at the date
of issuance. Such accretion will be recognized over the period from the
date of issuance to the earliest put date (October 24, 2004).
Subordinated Debt
At December 31, 1997, the Company had promissory notes outstanding
amounting to $7,500,000. The notes are held by Media/Communications
Partners III Limited Partnership and M/C Investors L.L.C., who also have a
minority ownership interest in the Company. The notes are subordinate to
the obligations to banks, and interest payments on the notes are deferred
until maturity.
7. RELATED PARTY
The Company's key supplier for construction services is City Signal, an S-
Corporation 100% owned by the Company's President and majority member.
City Signal provides construction services primarily for the installation
of network and switch equipment to the Company. The Company purchased
approximately $2,855,000 of services from City Signal during 1997 and
approximately $1,298,000 during the nine months ended September 30, 1998
and at December 31, 1997 and September 30, 1998 accounts payable included
approximately $381,000 and $285,000, respectively, for these services.
8. SUBSEQUENT EVENT
On August 7, 1998 the Company entered into an agreement with Ovation
Communications, Inc. ("Ovation") to sell all issued and outstanding
ownership interests in exchange for approximately $55,000,000 in cash and
stock of Ovation. This transaction closed on October 1, 1998.
******
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
by and among
MCLEODUSA INCORPORATED,
BRAVO ACQUISITION CORPORATION,
OVATION COMMUNICATIONS, INC.
and
Certain of the Stockholders of
OVATION COMMUNICATIONS, INC.
----------------
Dated as of January 7, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I THE MERGER....................................................... 1
Section 1.01. The Merger................................................. 1
Section 1.02. Effective Time............................................. 2
Section 1.03. Effect of the Merger....................................... 2
Section 1.04. Certificate of Incorporation; Bylaws....................... 2
Section 1.05. Directors and Officers..................................... 2
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES.............. 2
Section 2.01. Conversion of Securities................................... 2
Section 2.02. Exchange of Certificates................................... 4
Section 2.03. Stock Transfer Books....................................... 6
Section 2.04. Stock Options.............................................. 6
Section 2.05. Closing.................................................... 7
Section 2.06. Dissenting Stockholders.................................... 7
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.................. 8
Section 3.01. Organization and Standing.................................. 8
Section 3.02. Subsidiaries............................................... 8
Section 3.03. Certificate of Incorporation and Bylaws.................... 9
Section 3.04. Capitalization............................................. 9
Section 3.05. Authority; Binding Obligation.............................. 9
Section 3.06. No Conflict; Required Filings and Consents................. 10
Section 3.07. Licenses; Compliance....................................... 11
Section 3.08. Financial Statements....................................... 12
Section 3.09. Absence of Undisclosed Liabilities......................... 13
Section 3.10. Absence of Certain Changes or Events....................... 13
Section 3.11. Litigation; Disputes....................................... 14
Section 3.12. Debt Instruments........................................... 14
Section 3.13. Real Property Leases....................................... 14
Section 3.14. Other Agreements; No Default............................... 15
Section 3.15. Labor Relations............................................ 16
Section 3.16. Pension and Benefit Plans.................................. 17
Section 3.17. Taxes and Tax Matters...................................... 19
Section 3.18. Customers.................................................. 20
Section 3.19. Certain Business Practices................................. 20
Section 3.20. Insurance.................................................. 21
Section 3.21. Potential Conflicts of Interest............................ 21
Section 3.22. Receivables................................................ 22
Section 3.23. Real Property.............................................. 22
Section 3.24. Books and Records.......................................... 22
Section 3.25. Assets..................................................... 23
Section 3.26. No Infringement or Contest................................. 23
Section 3.27. Intentionally Deleted...................................... 24
Section 3.28. Board Recommendation....................................... 24
Section 3.29. Vote Required.............................................. 24
Section 3.30. Banks; Attorneys-in-fact................................... 24
Section 3.31. Intentionally Deleted...................................... 24
Section 3.32. Brokers.................................................... 24
Section 3.33. Environmental Matters...................................... 24
Section 3.34. Disclosure................................................. 25
Section 3.35. Directors, Officers and Affiliates......................... 26
</TABLE>
(i)
APPENDICES
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 3.36. Copies of Documents...................................... 26
Section 3.37. Condition and Operation of the System.................... 26
Section 3.38. Reorganization........................................... 27
Section 3.39. State Takeover Statutes; Certain Charter Provisions...... 27
Section 3.40. Year 2000 Review......................................... 28
Section 3.41. Affiliate Agreements..................................... 28
ARTICLE IIIA REPRESENTATIONS AND WARRANTIES OF PRINCIPAL COMPANY
STOCKHOLDERS............................................................ 28
Section 3A.01. Principal Company Stockholders That Are Entities........ 28
Section 3A.02. Principal Company Stockholders That Are Individuals..... 29
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUIROR SUB... 29
Section 4.01. Organization and Qualification; Subsidiaries............. 30
Section 4.02. Certificate of Incorporation and Bylaws.................. 30
Section 4.03. Authority; Binding Obligation............................ 30
Section 4.04. No Conflict; Required Filings and Consents............... 30
Section 4.05. No Prior Activities of Acquiror Sub...................... 31
Section 4.06. Brokers.................................................. 31
Section 4.07. SEC Documents............................................ 31
Section 4.08. Acquiror Common Stock.................................... 32
Section 4.09. Capitalization........................................... 32
Section 4.10. Reorganization........................................... 33
Section 4.11. Compliance............................................... 33
Section 4.12. Disclosure............................................... 33
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS...................... 34
Section 5.01. Conduct of Business of the Company....................... 34
Section 5.02. Other Actions............................................ 36
Section 5.03. Certain Tax Matters...................................... 36
Section 5.04. Access and Information................................... 36
Section 5.05. No Solicitation.......................................... 37
ARTICLE VI ADDITIONAL AGREEMENTS......................................... 38
Section 6.01. Registration Statement; Proxy Statement.................. 38
Section 6.02. Stockholder Approval..................................... 39
Section 6.03. Appropriate Action; Consents; Filings.................... 39
Section 6.04. Amendment to Stockholders' Agreement..................... 40
Section 6.05. Update Disclosure; Breaches.............................. 40
Section 6.06. Public Announcements..................................... 41
Section 6.07. Registration of Company Options.......................... 41
Section 6.08. Unaudited Financial Information.......................... 41
Section 6.09. Environmental Matters.................................... 42
Section 6.10. Post-Signing SEC Documents............................... 42
Section 6.11. Indemnification.......................................... 42
Section 6.12. Procedures; Conditions of Indemnification................ 43
Section 6.13. Affiliates; Tax Treatment................................ 44
Section 6.14. Tax Returns.............................................. 45
Section 6.15. Reorganization........................................... 45
Section 6.16. Directors' and Officers' Insurance; Indemnification...... 45
Section 6.17. Obligations of Acquiror Sub.............................. 46
Section 6.18. Loan Agreement........................................... 46
Section 6.19 Letters of Accountants................................... 46
</TABLE>
(ii)
APPENDICES
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VII CONDITIONS PRECEDENT.......................................... 47
Section 7.01. Conditions to Obligations of Each Party Under This Merger
Agreement.............................................................. 47
Section 7.02. Additional Conditions to Obligations of Acquiror and
Acquiror Sub........................................................... 48
Section 7.03. Additional Conditions to Obligations of the Company....... 49
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER............................ 51
Section 8.01. Termination............................................... 51
Section 8.02. Effect of Termination..................................... 52
Section 8.03. Expenses.................................................. 52
Section 8.04. Amendment................................................. 52
Section 8.05. Extension; Waiver......................................... 52
ARTICLE IX GENERAL PROVISIONS............................................. 53
Section 9.01. Survival of Representations and Warranties................ 53
Section 9.02. Notices................................................... 53
Section 9.03. Headings.................................................. 54
Section 9.04. Severability.............................................. 54
Section 9.05. Entire Agreement.......................................... 54
Section 9.06. Assignment................................................ 55
Section 9.07. Parties in Interest....................................... 55
Section 9.08. Mutual Drafting........................................... 55
Section 9.09. Specific Performance...................................... 55
Section 9.10. Governing Law............................................. 55
Section 9.11. Counterparts.............................................. 55
Section 9.12. Confidentiality........................................... 55
Section 9.13. General Exclusion......................................... 56
ARTICLE X DEFINITIONS..................................................... 56
EXHIBITS
EXHIBIT A FORM OF AFFILIATE AGREEMENT.....................................
EXHIBIT B FORM OF REVOLVING CREDIT AGREEMENT AND PROMISSORY NOTE..........
EXHIBIT C FORM OF TAX OPINION TO BE RENDERED BY COUNSEL TO ACQUIROR.......
EXHIBIT D FORM OF ACQUIROR TAX CERTIFICATE................................
EXHIBIT E FORM OF COMPANY TAX CERTIFICATE.................................
EXHIBIT F FORM OF TAX OPINION TO BE RENDERED BY COUNSEL TO THE COMPANY....
EXHIBIT G FORM OF ACQUIROR TAX CERTIFICATE................................
EXHIBIT H FORM OF COMPANY TAX CERTIFICATE.................................
</TABLE>
(iii)
APPENDICES
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of January 7, 1999 (this "Merger
Agreement"), among McLeodUSA Incorporated, a Delaware corporation
("Acquiror"), Bravo Acquisition Corporation, a Delaware corporation ("Acquiror
Sub") and a direct wholly owned subsidiary of Acquiror, Ovation
Communications, Inc., a Delaware corporation (the "Company"), and those
stockholders of the Company named on the signature pages hereof (the
"Principal Company Stockholders");
WHEREAS, the Company, upon the terms and subject to the conditions of this
Merger Agreement and in accordance with the General Corporation Law of the
State of Delaware ("Delaware Law"), will merge with and into Acquiror Sub (the
"Merger");
WHEREAS, the Board of Directors of the Company has (i) determined that the
Merger is advisable and fair to the holders of Company Capital Stock (as
defined in Section 3.04) and is in the best interests of such stockholders and
(ii) approved and adopted this Merger Agreement and the transactions
contemplated hereby and recommended approval and adoption of this Merger
Agreement by the stockholders of the Company (the "Company Stockholders");
WHEREAS, the Board of Directors of Acquiror has determined that the Merger
is advisable and in the best interests of Acquiror and its stockholders and
the Boards of Directors of Acquiror and Acquiror Sub and the sole stockholder
of Acquiror Sub have approved and adopted this Merger Agreement and the
transactions contemplated hereby;
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax-free reorganization under the provisions of Section
368(a) and Section 368(a)(2)(D) of the United States Internal Revenue Code of
1986, as amended (the "Code"); and
WHEREAS, in order to induce Acquiror and Acquiror Sub to enter into this
Merger Agreement, concurrently herewith (i) M/C Investors, L.L.C.,
Media/Communications Partners III Limited Partnership, Timothy T. Devine,
Kenneth A. Kirley, Nicholas Lenoci, Jr., Charles M. Osborne and Scott A.
Rediger are entering into voting agreements pursuant to which, among other
things, each such stockholder agrees to vote in favor of this Merger Agreement
and the Merger and against any Competing Transaction (as defined in Section
5.05(a)), (ii) M/C Investors, L.L.C. and Media/Communications Partners III
Limited Partnership are entering into a stockholders' agreement with Acquiror,
Clark E. and Mary E. McLeod, Richard Lumpkin and IES Investments Inc. (the
"Stockholders' Agreement") and (iii) Acquiror is agreeing to lend to the
Company up to $20,000,000 on a senior subordinated unsecured basis as provided
in Section 6.18 (the "Acquiror Loan");
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this Merger
Agreement, and intending to be legally bound hereby, the parties hereto agree
as follows.
ARTICLE I
THE MERGER
Section 1.01. The Merger.
Upon the terms and subject to the conditions set forth in this Merger
Agreement, and in accordance with Delaware Law, at the Effective Time (as
defined in Section 1.02) the Company shall be merged with and into Acquiror
Sub. As a result of the Merger, the separate corporate existence of the
Company shall cease and Acquiror Sub shall continue as the surviving
corporation of the Merger (the "Surviving Corporation").
A-1
APPENDICES
<PAGE>
Section 1.02. Effective Time.
Subject to the provisions of Section 2.05, as promptly as practicable after
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the parties hereto shall cause the Merger to be consummated by
filing this Merger Agreement, articles of merger or other appropriate
documents (in any such case, the "Articles of Merger") with the Secretary of
State of the State of Delaware, in such form as required by, and executed in
accordance with the relevant provisions of, Delaware Law (the date and time of
such filing being the "Effective Time"). The day on which the Effective Time
shall occur shall hereinafter be referred to as the "Closing Date."
Section 1.03. Effect of the Merger.
At the Effective Time, the effect of the Merger shall be as provided in the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of the Company and Acquiror Sub
shall vest in the Surviving Corporation, and all debts, liabilities and duties
of the Company and Acquiror Sub shall become the debts, liabilities and duties
of the Surviving Corporation.
Section 1.04. Certificate of Incorporation; Bylaws.
(a) Unless otherwise determined by Acquiror prior to the Effective Time, at
the Effective Time the certificate of incorporation of Acquiror Sub shall
continue unchanged and shall be the certificate of incorporation of the
Surviving Corporation, until thereafter amended as provided by Law (as defined
in Article X) and such certificate of incorporation, except that Article I of
Acquiror Sub's certificate of incorporation shall be amended at the Effective
Time to read as follows: "The name of the corporation is Ovation
Communications, Inc."
(b) Unless otherwise determined by Acquiror prior to the Effective Time, at
the Effective Time the bylaws of Acquiror Sub shall continue unchanged and
shall be the bylaws of the Surviving Corporation until thereafter amended as
provided by Law, the certificate of incorporation of the Surviving Corporation
and such bylaws.
Section 1.05. Directors and Officers.
The directors of Acquiror Sub immediately prior to the Effective Time shall
be the initial directors of the Surviving Corporation, each to hold office in
accordance with the certificate of incorporation and bylaws of the Surviving
Corporation, and the officers of Acquiror Sub immediately prior to the
Effective Time shall be the initial officers of the Surviving Corporation, in
each case until their respective successors are duly elected or appointed and
qualified.
ARTICLE II
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
Section 2.01. Conversion of Securities.
At the Effective Time, as provided in this Merger Agreement, by virtue of
the Merger and without any action on the part of Acquiror Sub, the Company or
the Company Stockholders:
(a) Conversion.
(i) Company Common Stock. Subject to the provisions of this Section
2.01, each share of common stock, $.01 par value per share, of the
Company ("Company Common Stock") issued and outstanding immediately
prior to the Effective Time (other than any shares of Company Common
Stock to be canceled pursuant to Section 2.01(c) or any Company
Dissenting Shares (as defined in Article X)), shall be converted,
subject to Section 2.01(a)(iv)
A-2
APPENDICES
<PAGE>
and Section 2.02(e), into the right to receive, at the election of the
holder thereof, either (A) the Common Stock Cash Amount (as defined in
Article X), or (B) one share of Class A common stock, par value $.01
per share, of Acquiror ("Acquiror Common Stock") multiplied by the
Common Stock Exchange Ratio (as defined in Article X). Each record
holder of shares of Company Common Stock immediately prior to the
Effective Time will be entitled to elect to receive either cash
pursuant to the Common Stock Cash Amount (such election being referred
to herein as a "Cash Election" and such shares being referred to herein
as "Cash Election Shares") or Acquiror Common Stock pursuant to the
Common Stock Exchange Ratio for each such share of Company Common
Stock. All such elections must be made on a form designated for that
purpose by Acquiror (a "Form of Election") that must be delivered to
Acquiror after the effectiveness of the Registration Statement (as
defined in Section 6.01(a)), unless otherwise permitted by Law, and
prior to the third (3rd) business day preceding the Scheduled Closing
Date. If Acquiror does not receive a Form of Election from a holder of
shares of Company Common Stock prior to the third (3rd) business day
preceding the Scheduled Closing Date, then such holder shall be deemed
to have elected to receive Acquiror Common Stock for all shares of
Company Common Stock owned by such holder. Holders of record of shares
of Company Common Stock who hold such shares as nominees, trustees or
in other representative capacities (a "Representative") may submit
multiple Forms of Election, provided such Representative certifies that
each such Form of Election covers all the shares of Company Common
Stock held by such Representative for a particular beneficial owner.
All such shares of Company Common Stock shall no longer be
outstanding and shall automatically be canceled and retired and shall
cease to exist, and each certificate previously representing any such
shares shall thereafter represent the right to receive the Acquiror
Common Stock and/or cash into which such shares were converted in the
Merger. No fractional share of Acquiror Common Stock shall be issued,
and, in lieu thereof, a cash payment shall be made pursuant to Section
2.02(e) hereof.
(ii) Company Preferred Stock. Each share of Series A Preferred Stock,
$.01 par value per share, of the Company ("Company Series A Preferred
Stock") issued and outstanding immediately prior to the Effective Time
(other than any shares of Company Series A Preferred Stock to be
canceled pursuant to Section 2.01(c) or any Company Dissenting Shares),
shall be converted into the right to receive its Preferred Liquidation
Preference (as defined in Article X) in cash, without interest (the
"Preferred Stock Cash Amount").
All such shares of Company Series A Preferred Stock shall no longer
be outstanding and shall automatically be canceled and retired and
shall cease to exist, and each certificate previously representing any
such shares shall thereafter represent the right to receive the
Preferred Stock Cash Amount into which such shares were converted in
the Merger.
(iii) Merger Consideration. If between the date of this Merger
Agreement and the Effective Time the outstanding shares of Acquiror
Common Stock or Company Common Stock shall have been changed into a
different number of shares or a different class, by reason of any stock
dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the Common Stock Exchange Ratio and
the Common Stock Cash Amount shall be appropriately and correspondingly
adjusted to reflect such stock dividend, subdivision, reclassification,
recapitalization, split, combination or exchange of shares.
(iv) Adjustment for Changes in Value. To the extent that the value of
the Acquiror Common Stock forming part of the Merger Consideration (as
defined in Article X) as of the Effective Time, based upon the closing
price of the Acquiror Common Stock on The Nasdaq Stock Market's
National Market System on the last trading day immediately prior to the
Closing Date (as defined in Section 2.05) (the "Acquiror Common Stock
Closing Price"), would be less than 50% (or such lesser percentage, not
below 40%, as the Company may
A-3
APPENDICES
<PAGE>
reasonably determine in connection with the qualification of the Merger
as a tax-free reorganization under Section 368(a) of the Code) of the
sum of (A) the aggregate value of the Merger Consideration (with
Acquiror Common Stock being valued for this purpose at the Acquiror
Common Stock Closing Price), (B) any amounts paid directly or
indirectly by the Company or Acquiror to purchase or redeem shares of
the Company's capital stock on or after December 1, 1998 and (C) an
amount equal to the number of Company Dissenting Shares multiplied by
the Common Stock Cash Amount, then (A) the Acquiror Common Stock
portion of the Merger Consideration shall be increased by a number of
shares of Acquiror Common Stock equal to the amount of such deficit in
value divided by the Acquiror Common Stock Closing Price (rounded to
the nearest whole share) (the "Stock Adjustment Amount"), (B) the
aggregate Common Stock Cash Amount shall be correspondingly reduced by
an amount equal to the product of the Stock Adjustment Amount
multiplied by the Acquiror Common Stock Closing Price (the "Cash
Adjustment Amount"), and (C) each Cash Election Share shall be
converted, subject to Section 2.02(e), into the right to receive (1) a
number of shares of Acquiror Common Stock equal to the Stock Adjustment
Amount divided by the Cash Election Shares and (2) an amount in cash
equal to the Common Stock Cash Amount minus the quotient of the Cash
Adjustment Amount divided by the Cash Election Shares.
(b) Cancellation and Retirement of Company Capital Stock. All such shares
of Company Capital Stock referred to in Section 2.01(a) (other than any
shares of Company Capital Stock to be canceled pursuant to Section 2.01(c))
shall no longer be outstanding and shall automatically be canceled and
retired and shall cease to exist, and each certificate previously
representing any such shares shall thereafter represent the right to
receive the Merger Consideration as described in Section 2.01(a). The
holders of certificates which prior to the Effective Time represented
shares of Company Capital Stock shall cease to have any rights with respect
thereto except as otherwise provided herein or by Law.
(c) Cancellation of Treasury Stock. Any shares of Company Capital Stock
held in the treasury of the Company and any shares of Company Capital Stock
owned by Acquiror or any direct or indirect wholly owned subsidiary of
Acquiror or of the Company immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof and no payment
shall be made with respect thereto.
(d) Acquiror Sub Common Stock. Each share of common stock, par value
$0.01 per share, of Acquiror Sub issued and outstanding immediately prior
to the Effective Time shall continue to be one issued and outstanding share
of common stock, par value $.01 per share, of the Surviving Corporation,
and all of which shall continue to be held by Acquiror.
Section 2.02. Exchange of Certificates.
(a) Exchange Agent. Prior to the Effective Time, Acquiror shall deposit, or
shall cause to be deposited, with Norwest Bank Minnesota, N.A., or another
bank or trust company designated by Acquiror (the "Exchange Agent"), for the
benefit of the holders of Company Capital Stock for exchange through the
Exchange Agent in accordance with this Article II as of the Effective Time,
(i) certificates representing the whole shares of Acquiror Common Stock
issuable to such holders pursuant to Section 2.01, (ii) cash in an amount
sufficient to permit payment of the cash payable pursuant to Section 2.01 and
(iii) cash in an amount sufficient to permit payment of the cash payable in
lieu of fractional shares pursuant to Section 2.02(e) (such certificates for
shares of Acquiror Common Stock, together with any dividends or distributions
with respect thereto, and such amounts of cash, being hereafter referred to as
the "Exchange Fund"). Acquiror shall irrevocably instruct the Exchange Agent,
at the Effective Time, to deliver the shares of Acquiror Common Stock to be
issued and to deliver by check or, if requested, in immediately available
funds the amount of cash to be paid to the holders of Company Capital Stock
pursuant to Section 2.01 out of the Exchange Fund pursuant to the procedures
set forth in Section 2.02(b) beginning immediately after the Effective Time.
A-4
APPENDICES
<PAGE>
(b) Exchange Procedures. At the earliest practicable date prior to the
Effective Time, Acquiror shall mail or shall cause to be delivered to each
holder of record of a certificate or certificates of Company Capital Stock
which immediately prior to the Effective Time represented outstanding shares
of Company Capital Stock (the "Certificates") (i) a letter of transmittal
(which shall specify that delivery shall be effected, and risk of loss and
title to the Certificates shall pass, only upon proper delivery of the
Certificates to the Exchange Agent and shall be in customary form) and (ii)
instructions for use in effecting the surrender of the Certificates in
exchange for cash or certificates representing shares of Acquiror Common
Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and such other
customary documents as may be required pursuant to such instructions, the
holder of such Certificate shall be entitled to receive in exchange therefor,
and Acquiror shall thereupon cause the Exchange Agent to deliver to the holder
of such Certificate, (i) the amount of cash, by check or, if requested, in
immediately available funds, which such holder has the right to receive in
accordance with Section 2.01, (ii) a certificate representing that number of
whole shares of Acquiror Common Stock which such holder has the right to
receive in accordance with Section 2.01 together with any dividends or other
distributions to which such holder is entitled pursuant to Section 2.02(c) and
(iii) cash in lieu of fractional shares of Acquiror Capital Stock to which
such holder is entitled pursuant to Section 2.02(e). The Certificates so
surrendered shall forthwith be canceled. In the event of a transfer of
ownership of shares of Company Capital Stock which is not registered in the
transfer records of the Company, the proper number of shares of Acquiror
Common Stock may be issued and/or the proper amount of cash may be paid
pursuant hereto to a transferee if the Certificates representing such shares
of Company Capital Stock, properly endorsed or otherwise in proper form for
transfer, are presented to the Exchange Agent, accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.02, each Certificate shall be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration issuable in exchange therefor, together
with any dividends or other distributions to which such holder is entitled
pursuant to Section 2.02(c). No interest will be paid or will accrue on any
cash payable pursuant to Sections 2.01(a), 2.02(c) or 2.02(e).
(c) Distributions with Respect to Unexchanged Shares of Acquiror Common
Stock. No dividends or other distributions declared or made after the
Effective Time with respect to Acquiror Common Stock with a record date after
the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the whole shares of Acquiror Common Stock
represented thereby until the holder of such Certificate shall surrender such
Certificate. Subject to the effect of escheat, tax or other applicable Laws,
following surrender of any such Certificate, there shall be paid to the record
holder of the certificates representing whole shares of Acquiror Common Stock
issued in exchange therefor, without interest, (i) promptly, the amount of any
cash payable with respect to (A) the shares of Company Common Stock formerly
represented by such Certificate, and (B) a fractional share of Acquiror Common
Stock to which such holder is entitled pursuant to Section 2.02(e), and the
amount of dividends or other distributions with a record date after the
Effective Time theretofore paid with respect to such whole shares of Acquiror
Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions, with a record date after the Effective Time
but prior to surrender and a payment date occurring after surrender, payable
with respect to such whole shares of Acquiror Common Stock.
(d) No Further Rights in Company Capital Stock. All shares of Acquiror
Common Stock issued or cash paid upon conversion of the shares of Company
Capital Stock in accordance with the terms hereof (including any cash paid
pursuant to Sections 2.01(a), 2.02(c) or 2.02(e)) shall be deemed to have been
issued and paid in full satisfaction of all rights pertaining to such shares
of Company Capital Stock.
(e) No Fractional Shares. No fractional shares of Acquiror Common Stock
shall be issued upon surrender for exchange of the Certificates, and any such
fractional share interests will not entitle the
A-5
APPENDICES
<PAGE>
owner thereof to vote or to any rights of a stockholder of Acquiror, but in
lieu thereof each holder of shares of Company Common Stock who would otherwise
be entitled to receive a fraction of a share of Acquiror Common Stock, after
aggregating all Certificates delivered by such holder, and rounding down to
the nearest whole share, shall receive an amount in cash equal to the average,
during the ten (10) trading days immediately prior to the Effective Time, of
the daily closing prices for Acquiror Common Stock on The Nasdaq Stock
Market's National Market System as reported by Nasdaq (the "Average Trading
Price") multiplied by the fraction of a share of Acquiror Common Stock to
which such holder would otherwise be entitled. Such payment in lieu of
fractional shares shall be administered by the Exchange Agent pursuant to the
procedures set forth in Section 2.02(b).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Company Capital Stock for six (6)
months after the Effective Time shall be delivered to Acquiror, upon demand.
Any holders of Company Capital Stock who have not theretofore complied with
this Article II shall thereafter look only to Acquiror for the cash and shares
of Acquiror Common Stock to which they are entitled pursuant to Section 2.01,
any dividends or other distributions with respect to Acquiror Common Stock to
which they are entitled pursuant to Section 2.02(c) and any cash in lieu of
fractional shares of Acquiror Common Stock to which they are entitled pursuant
to Section 2.02(e).
(g) No Liability. None of Acquiror, Acquiror Sub, the Company, the Surviving
Corporation or the Exchange Agent shall be liable to any Person (as defined in
Article X) for any shares of Acquiror Common Stock (or dividends or
distributions with respect thereto) or cash delivered to a public official
pursuant to any abandoned property, escheat or similar Laws.
(h) Lost, Stolen or Destroyed Certificates. In the event any certificate
evidencing shares of Company Capital Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue in exchange for such lost, stolen or
destroyed certificate, upon the making of an affidavit of that fact by the
holder thereof, such shares of Acquiror Common Stock and cash, if any, as may
be required pursuant to this Article II; provided, however, that Acquiror may,
in its reasonable discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate to
deliver a bond in such sum as it may reasonably direct as indemnity against
any claim that may be made against Acquiror, the Surviving Corporation, or the
Exchange Agent with respect to the certificate alleged to have been lost,
stolen or destroyed.
Section 2.03. Stock Transfer Books.
At the Effective Time, the stock transfer books of the Company shall be
closed and there shall be no further registration of transfers of shares of
Company Capital Stock thereafter on the records of the Company. From and after
the Effective Time, the holders of certificates representing shares of Company
Capital Stock outstanding immediately prior to the Effective Time shall cease
to have any rights with respect to such shares of Company Capital Stock except
as otherwise provided herein or by Law. On or after the Effective Time, any
Certificates presented to the Exchange Agent or Acquiror for any reason shall
be converted into cash and/or shares of Acquiror Common Stock issuable in
exchange therefor pursuant to Section 2.01(a), any dividends or other
distributions to which the holders thereof are entitled pursuant to Section
2.02(c) and any cash in lieu of fractional shares of Acquiror Common Stock to
which the holders thereof are entitled pursuant to Section 2.02(e).
Section 2.04. Stock Options.
Prior to the Effective Time, the Company and Acquiror shall take such action
as may be necessary or appropriate for Acquiror, at its option, to assume or
to issue a substitute option with respect to each outstanding unexpired and
unexercised option to purchase shares of Company Common Stock (collectively,
the "Company Stock Options") under the Company's 1997 Stock Option Plan (the
A-6
APPENDICES
<PAGE>
"Company Stock Plan") so that at the Effective Time each Company Stock Option
will become or be replaced by an option to purchase a number of whole shares
of Acquiror Common Stock (an "Acquiror Option") equal to the product of the
Common Stock Exchange Ratio and the number of shares of Company Common Stock
subject to such Company Stock Options (assuming full vesting) under the
Company Stock Option (and rounding any fractional share up to the nearest
whole share), at a price per share equal to the aggregate exercise price for
the shares of Company Common Stock subject to such Company Stock Option
divided by the number of whole shares of Acquiror Common Stock deemed to be
purchasable pursuant to such Company Stock Option. Each substituted Acquiror
Option shall otherwise be subject to the same terms and conditions as apply to
the related Company Stock Option. The date of grant of each substituted
Acquiror Option for purposes of such terms and conditions shall be deemed to
be the date on which the corresponding Company Stock Option was granted. As to
each assumed Company Stock Option, at the Effective Time (i) all references to
the Company in the stock option agreements with respect to the Company Stock
Options being assumed shall be deemed to refer to Acquiror; (ii) Acquiror
shall assume all of the Company's obligations with respect to the related
Company Stock Option; and (iii) Acquiror shall issue to each holder of a
Company Stock Option a document evidencing the foregoing assumption by
Acquiror. Nothing in this Section 2.04 shall affect the schedule of vesting
with respect to the Company Stock Options in accordance with the terms of the
Company Stock Plan. It is the purpose and intention of the parties that,
subject to applicable Law, the assumption of such Company Stock Options or the
substitution of Acquiror Options for Company Stock Options shall meet the
requirements of Section 424(a) of the Code and that each assumed Company Stock
Option or the substituted Acquiror Option shall qualify immediately after the
Effective Time as incentive stock options as defined in Section 422 of the
Code to the extent that the related Company Stock Option so qualified
immediately before the Effective Time and the foregoing provisions of this
Section 2.04 shall be interpreted to further such purpose and intention. The
Company represents and warrants that the assumption of Company Stock Options
or substitution of Acquiror Options therefor, as contemplated by this Section
2.04, may be effected pursuant to the terms of the Company Stock Options and
the Company Stock Plan without the consent of any holder of a Company Stock
Option and without liability to any such holder. Acquiror represents and
warrants that it has the full power and authority to assume the Company Stock
Options or to substitute Acquiror Options therefor.
Section 2.05. Closing.
Subject to the terms and conditions of this Merger Agreement, the closing of
the Merger (the "Closing") will take place after the satisfaction of the
latest to occur or, if permissible, waiver of the conditions set forth in
Article VII hereof. The scheduled closing date will take place as soon as
practicable (but, in any event, no later than the first business day following
the tenth (10th) day) after the satisfaction of the latest to occur or, if
permissible, waiver of the conditions set forth in Section 7.01 hereof (the
"Scheduled Closing Date"), at the offices of Hogan & Hartson L.L.P., Columbia
Square, 555 13th Street, N.W., Washington, D.C. 20004, unless another date or
place is agreed to in writing by the parties hereto.
Section 2.06. Dissenting Stockholders.
Subject to the terms and conditions hereof, at and after the Effective Time,
any holder of shares of Company Capital Stock who complies with Section 262 of
Delaware Law (a "Company Dissenting Stockholder") shall be entitled to obtain
payment from the Surviving Corporation of the fair value of such Company
Dissenting Stockholder's shares of Company Capital Stock as determined
pursuant to Section 262 of Delaware Law; provided, however, that, to the
extent permissible under Delaware Law, no such payment shall be made unless
and until such Company Dissenting Stockholder has surrendered to the Exchange
Agent the Certificate representing the shares of Company Capital Stock for
which payment is being made. The Company shall give Acquiror prompt notice of
any demands for appraisal or withdrawals of demands for appraisal received by
the Company and any other documents
A-7
APPENDICES
<PAGE>
obtained by the Company pursuant to the provisions of Section 262 of Delaware
Law, and, except with the prior written consent of Acquiror, which shall not
be unreasonably withheld, shall not settle or offer to settle any such
demands.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as specifically set forth in the Disclosure Schedule delivered by the
Company to Acquiror prior to the execution and delivery of this Merger
Agreement (the "Company Disclosure Schedule") (the contents of which Company
Disclosure Schedule may be updated, corrected or otherwise modified by the
Company up to ten (10) days prior to the Closing Date in accordance with
Section 6.05(b) hereof) (with (i) a disclosure with respect to a Section of
this Merger Agreement to require a specific reference in the Company
Disclosure Schedule to the Section of this Merger Agreement to which each such
disclosure applies, (ii) no disclosure to be deemed to apply with respect to
any Section to which it does not expressly refer and (iii) the Company having
the right to cross-reference the sections of the Company Disclosure Schedule
as appropriate with respect to disclosures that are reasonably related), the
Company hereby represents and warrants (which representation and warranty
shall be deemed to include the disclosures with respect thereto so specified
in the Company Disclosure Schedule) to, and agrees with, Acquiror and Acquiror
Sub as follows, in each case as of the date of this Merger Agreement, unless
otherwise specifically set forth herein or in the Company Disclosure Schedule:
Section 3.01. Organization and Standing.
The Company is a corporation duly organized, validly existing and in good
standing under Delaware Law, and has the full and unrestricted corporate power
and authority to own, operate and lease its Assets (as defined in Article X),
to carry on its business as currently conducted, to execute and deliver this
Merger Agreement and to carry out the transactions contemplated hereby. The
Company is duly qualified to conduct business as a foreign corporation and is
in good standing in Illinois, Michigan, Minnesota and Wisconsin and in each
jurisdiction where the nature of its business or the ownership or leasing of
its properties makes such qualification necessary other than where the failure
to be so qualified would not have a Company Material Adverse Effect (as
defined in Article X).
Section 3.02. Subsidiaries.
Except as set forth in Section 3.02 of the Company Disclosure Schedule, the
Company has no Subsidiaries (as defined in Article X) and neither the Company
nor any Subsidiary has any equity investment or other interest in, nor has the
Company or any Subsidiary made advances or loans to (other than intra-company
transactions between or among the Company and any Subsidiary and other than
for customary credit extended to customers of the Company in the Ordinary
Course of Business (as defined in Article X) and reflected in the Financial
Statements (as defined in Section 3.08)), any Person. Section 3.02 of the
Company Disclosure Schedule sets forth (a) the authorized capital stock or
other equity interests of each Subsidiary and the percentage of the
outstanding capital stock or other equity interests of each Subsidiary owned
by the Company. All of such shares of capital stock or other equity interests
of the Subsidiaries have been duly authorized and validly issued and are
outstanding, fully paid and nonassessable and except as set forth in Section
3.02 of the Company Disclosure Schedule, are owned by the Company free and
clear of all Encumbrances (as defined in Article X) other than Encumbrances
arising under applicable securities Laws. Each Subsidiary is duly organized,
validly existing and in good standing under the Laws of its state or
jurisdiction of organization (as listed in Section 3.02 of the Company
Disclosure Schedule), and has the requisite corporate or limited liability
company power and authority to own, operate and lease its Assets and to carry
on its business as currently conducted. Each Subsidiary is duly qualified to
conduct business as a foreign Person and is in good standing in each
jurisdiction where the nature of its business or the ownership or leasing of
A-8
APPENDICES
<PAGE>
its properties makes such qualification necessary, other than where the
failure to be so qualified would not have a Company Material Adverse Effect.
Section 3.03. Certificate of Incorporation and Bylaws.
The Company has furnished to Acquiror a true and complete copy of (i) the
certificate of incorporation and (ii) the organizational documents of the
Company and each Subsidiary, as in effect on the date hereof, certified as of
a recent date by the Company's corporate secretary, and a true and complete
copy of the Company's bylaws and the bylaws or other governing agreements of
each Subsidiary, as currently in effect, certified by the Company's corporate
secretary.
Section 3.04. Capitalization.
The authorized capital stock of the Company consists of (a) 30,000,000
shares of Company Common Stock, of which: (i) 23,971,756 shares are issued and
outstanding, all of which are duly authorized, validly issued, fully paid and
nonassessable; (ii) no shares are held in the treasury of the Company; and
(iii) 806,845 shares are reserved for issuance pursuant to Company Stock
Options (including 127,705 shares to be issued pursuant to Section 4.2 of the
Ovation Stockholders' Agreement); (b) 6,000,000 shares of Company preferred
stock, $.01 par value per share ("Company Preferred Stock"), of which (A)
500,000 are designated "Series A Preferred Stock", of which: (i) 240,000
shares are issued and outstanding, all of which are duly authorized, validly
issued, fully paid and nonassessable; and (ii) no shares are held in the
treasury of the Company; (B) 5,000 are designated "Series B Preferred Stock",
of which: (i) no shares are issued and outstanding; and (ii) no shares are
held in the treasury of the Company; and (C) 5,495,000 are designated
"Preferred Stock," of which none have ever been issued. The Company Common
Stock and Company Preferred Stock are referred to collectively in this Merger
Agreement as the "Company Capital Stock." Section 3.04 of the Company
Disclosure Schedule sets forth the names and addresses of all holders of
record of the Company Common Stock and the Company Preferred Stock. Except as
described in this Section 3.04 or in Section 3.04 of the Company Disclosure
Schedule, no other shares of Company Capital Stock have been reserved for any
purpose. Except as set forth in clause (a)(iii) above or in Section 3.04 of
the Company Disclosure Schedule, there are no outstanding securities
convertible into or exchangeable for Company Common Stock, any other
securities of the Company, or any capital stock or other securities of any of
the Subsidiaries and no outstanding options, rights (preemptive or otherwise),
or warrants to purchase or to subscribe for any shares of such stock or other
securities of the Company or any of the Subsidiaries. Except as set forth in
Section 3.04 of the Company Disclosure Schedule, there are no outstanding
Agreements (as defined in Article X) affecting or relating to the voting,
issuance, purchase, redemption, registration, repurchase or transfer of
Company Common Stock, any other securities of the Company, or any capital
stock or other securities of any Subsidiary, except as contemplated hereunder.
Each of the outstanding shares of Company Common Stock and of capital stock
of, or other equity interests in, the Subsidiaries was issued in compliance
with all applicable federal and state Laws concerning the issuance of
securities. There are no obligations, contingent or otherwise, of the Company
or any Subsidiary to provide funds to, make any investment (in the form of a
loan, capital contribution or otherwise) in, or provide any guarantee with
respect to, any Person other than the Company or its wholly owned
Subsidiaries. There are no Agreements pursuant to which any Person (other than
the Company or its wholly owned Subsidiaries) is or may be entitled to receive
any of the revenues or earnings, or any payment based thereon or calculated in
accordance therewith, of the Company or any Subsidiary.
Section 3.05. Authority; Binding Obligation.
The execution and delivery by the Company of this Merger Agreement, the
execution and delivery by the Company and the Subsidiaries of all other
agreements, documents, certificates or other instruments contemplated hereby,
and the consummation by the Company and the Subsidiaries of the
A-9
APPENDICES
<PAGE>
transactions contemplated hereby and thereby, have been duly authorized by all
necessary corporate action, and no other corporate proceedings on the part of
the Company or the Subsidiaries are necessary to authorize this Merger
Agreement and the other agreements, documents, certificates or other
instruments contemplated hereby, or to consummate the transactions
contemplated hereby and thereby, other than the approval and adoption of this
Merger Agreement by the holders of a majority of the voting power attributable
to the outstanding shares of Company Common Stock and Company Series A
Preferred Stock, voting together as a class, in accordance with Delaware Law
and the Company's certificate of incorporation and bylaws. This Merger
Agreement has been duly executed and delivered by the Company and constitutes
a legal, valid and binding obligation of the Company, enforceable in
accordance with its terms, except as such enforceability may be subject to the
effects of any applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar Laws affecting creditors' rights
generally and subject to the effects of general equitable principles (whether
considered in a proceeding in equity or at law); provided, however, that the
Merger will not become effective until Articles of Merger reflecting the
Merger are filed with the office of the Secretary of State of the State of
Delaware.
Section 3.06. No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by the Company and the
Subsidiaries of this Merger Agreement and all other agreements, documents,
certificates or other instruments contemplated hereby, the fulfillment of and
compliance with the respective terms and provisions hereof and thereof, and
the consummation by the Company and the Subsidiaries of the transactions
contemplated hereby and thereby, do not and will not: (i) conflict with, or
violate any provision of, the certificate of incorporation or bylaws of the
Company or the certificate or articles of incorporation or bylaws of any
Subsidiary; (ii) subject to (A) obtaining the requisite approval and adoption
of this Merger Agreement by the holders of a majority of the voting power
attributable to the outstanding shares of Company Common Stock and Company
Series A Preferred Stock, voting together as a class, in accordance with
Delaware Law and the Company's certificate of incorporation and bylaws and (B)
obtaining the consents, approvals, authorizations and permits of, and making
filings with or notifications to, the applicable Governmental Entity pursuant
to the applicable requirements, if any, of the Securities Act (as defined in
Article X), the Exchange Act (as defined in Article X), Blue Sky Laws (as
defined in Article X), the HSR Act (as defined in Article X), the
Communications Act (as defined in Article X), the Federal Aviation Act (as
defined in Article X), applicable state utility Laws, applicable municipal
franchise Laws and the filing and recordation of the Articles of Merger as
required by Delaware Law, conflict with or violate any Law applicable to the
Company or any Subsidiary, or any of their respective Assets; (iii) subject to
obtaining the consents and approvals set forth in Section 3.06(b) of the
Company Disclosure Schedule, conflict with, result in any breach of, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under any Agreement to which the Company or any
Subsidiary is a party or by which the Company or any Subsidiary, or any of
their respective Assets, may be bound; or (iv) except as disclosed in Section
3.06(b) of the Company Disclosure Schedule, result in or require the creation
or imposition of, or result in the acceleration of, any indebtedness or any
Encumbrance of any nature upon, or with respect to, the Company or any
Subsidiary or any of the Assets now owned or hereafter acquired by the Company
or any Subsidiary; except for any such conflict or violation described in
clause (ii), any such conflict, breach or default described in clause (iii),
or any such creation, imposition or acceleration described in clause (iv) that
would not have a Company Material Adverse Effect and that would not prevent
the Company from consummating the Merger on a timely basis.
(b) Except as set forth in Section 3.06(b) of the Company Disclosure
Schedule and non-material Agreements allowing the installation, maintenance or
operation of the Company's or its Subsidiaries' fiber optic network on, over,
under or across a specific parcel of real property, the execution, delivery
and performance by the Company and the Subsidiaries of this Merger Agreement
and all other
A-10
APPENDICES
<PAGE>
agreements, documents, certificates or other instruments contemplated hereby,
the fulfillment of and compliance with the respective terms and provisions
hereof and thereof, and the consummation by the Company and the Subsidiaries
of the transactions contemplated hereby and thereby, do not and will not: (i)
require any consent, approval, authorization or permit of, or filing with or
notification to, any Person not party to this Merger Agreement, except (A) the
approval and adoption of this Merger Agreement by the holders of a majority of
the voting power attributable to the outstanding shares of Company Common
Stock and Company Series A Preferred Stock, voting together as a class, in
accordance with Delaware Law and the Company's certificate of incorporation
and bylaws, (B) pursuant to the applicable requirements, if any, of the
Securities Act, the Exchange Act, Blue Sky Laws, the HSR Act, the
Communications Act, the Federal Aviation Act, applicable state utility Laws
and applicable municipal franchise Laws and Laws of other Governmental
Entities, (C) the filing and recordation of the Articles of Merger as required
by Delaware Law, and (D) where the failure to obtain any consent, approval,
authorization or permit or to make any filing or notification otherwise
required to be disclosed hereunder would not have a Company Material Adverse
Effect; or (ii) result in or give rise to any penalty, forfeiture, Agreement
termination, right of termination, amendment or cancellation, or restriction
on business operations of Acquiror, the Company, the Surviving Corporation or
any Subsidiary that would have a Company Material Adverse Effect. Furthermore,
there is no Agreement when considered on its face when standing alone where
the failure to obtain consent to the transactions contemplated by this Merger
Agreement would cause the Company to be unable to conduct its business.
Section 3.07. Licenses; Compliance.
(a) Each of the Company and each Subsidiary is in possession of all Licenses
(as defined in Article X) necessary for the Company or any Subsidiary to own,
lease and operate its Assets or to carry on its business as it is now being
conducted (the "Company Licenses"), except where the failure to possess any
such Company License would not have a Company Material Adverse Effect. All
Company Licenses that are FCC (as defined in Article X), FAA (as defined in
Article X) or state utilities Licenses or municipal franchises, and all other
Company Licenses the loss of which would not have a Company Material Adverse
Effect, are listed and described in Section 3.07(a) of the Company Disclosure
Schedule. All Company Licenses are valid and in full force and effect through
the respective dates indicated in such Company Licenses, except for any such
invalidity or failure to be in full force and effect that would not have a
Company Material Adverse Effect, and no suspension, cancellation, complaint,
proceeding, order or investigation of or with respect to any Company License
(or operations thereunder) the loss of which would not have a Company Material
Adverse Effect is pending or, to the knowledge of the Company or any
Subsidiary, threatened. The Company has indicated in Section 3.07 of the
Company Disclosure Schedule those Company Licenses which expire within 12
months from the date of this Merger Agreement. Neither the Company nor any
Subsidiary is in violation of or default under any Company License, except for
any such violation or default that would not have a Company Material Adverse
Effect. Except as set forth in Section 3.07(a) of the Company Disclosure
Schedule, since January 1, 1997, neither the Company nor any Subsidiary has
received written or, to the knowledge of the Company or any Subsidiary, oral
notice from any Governmental Entity or any other Person of any allegation of
any such violation or default under a Company License.
(b) Neither the Company nor any Subsidiary is in violation of or default
under, nor has it breached, (i) any term or provision of its certificate or
articles of incorporation or bylaws or (ii) any Agreement or restriction to
which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary, or any of their respective Assets, is bound or affected, except
for any such violation, default or breach described in clause (ii) that would
not have a Company Material Adverse Effect. The Company and the Subsidiaries
have complied and are in full compliance with all Laws, except where the
failure so to comply would not have a Company Material Adverse Effect.
(c) All returns, reports, statements and other Documents required to be
filed by the Company or any Subsidiary with any Governmental Entity have been
filed and complied with and are true, correct
A-11
APPENDICES
<PAGE>
and complete in all material respects (and any related fees required to be
paid have been paid in full except where the failure to so file or to so pay
such fees would not have a Company Material Adverse Effect). To the knowledge
of the Company and the Subsidiaries, all material records of every type and
nature relating to the Company Licenses or the business, operations or Assets
of the Company or any Subsidiary have been maintained in all material respects
in accordance with good business practices and the rules of any Governmental
Entity and are maintained at the Company or the appropriate Subsidiary.
(d) Except as provided in Section 3.07(a) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary has any interest in any
License (including both any Company License and any License held by third
parties in which the Company or any Subsidiary has an interest) the loss of
which would have a Company Material Adverse Effect and that is subject to
restrictions on assignment or transfer based on the circumstances under which
the License was granted (such as eligibility or auction rules), the status of
construction and operation (such as rules restricting resale for a certain
period after construction), or any other restrictions other than an ordinary
course requirement for prior approval of transactions such as the Merger
contemplated herein.
(e) Neither the Company nor any Subsidiary is aware of any fact or
circumstance related to them that would reasonably be expected to cause the
filing of any objection to any application for any Governmental consent
required hereunder, lead to any delay in processing such application, or
require any waiver of any Governmental rule, policy or other applicable Law.
Section 3.08. Financial Statements.
(a) The Company has prepared an audited consolidated balance sheet of the
Company and the Subsidiaries as of the end of the fiscal year ended December
31, 1997 (the "Audited Balance Sheet") and the related audited consolidated
statements of income, shareholders' equity and cash flows of the Company and
the Subsidiaries for such fiscal year (the Audited Balance Sheet and such
audited consolidated statements of income, shareholders' equity and cash flows
are hereinafter referred to collectively as the "Audited Statements"), in each
case, audited by Ernst & Young L.L.P. in accordance with generally accepted
auditing standards and accompanied by the related report of Ernst & Young
L.L.P. A true and complete copy of the Audited Statements has been delivered
to Acquiror and is attached as an exhibit to, and constitutes an integral part
of, the Company Disclosure Schedule. The Company has also prepared unaudited
consolidated balance sheets of the Company and the Subsidiaries as of the last
day of each month ending after January 1, 1998 and prior to December 1, 1998
(including the unaudited consolidated balance sheets to be furnished to
Acquiror pursuant to Section 6.08, the "Unaudited Balance Sheets") and the
unaudited consolidated statements of income of the Company and the
Subsidiaries for the one-month periods then ended (the Unaudited Balance
Sheets and such statements of income, including the unaudited consolidated
statements of income to be furnished to Acquiror pursuant to Section 6.08, are
hereinafter referred to collectively as the "Unaudited Statements" and,
together with the Audited Statements, as the "Financial Statements").
(b) The Financial Statements, including, without limitation, the notes
thereto, (i) are complete and correct in all material respects, (ii) have been
prepared in accordance with the books and records of the Company and the
Subsidiaries, and (iii) present fairly the consolidated financial position of
the Company and the Subsidiaries and their consolidated results of operations
and cash flows as of and for the respective dates and time periods in
accordance with GAAP applied on a basis consistent with prior accounting
periods, except as noted thereon and subject to, in the case of the Unaudited
Statements, the absence of footnotes and a statement of cash flows and normal
and recurring year-end adjustments which were not or are not expected to be
material in amount, other than as a result of the recording of the acquisition
of BRE Communications, L.L.C. All changes in accounting methods (for financial
accounting purposes) made, agreed to, requested or required with respect to
the Company or any of the Subsidiaries since January 1, 1998 are reflected in
the Financial Statements.
A-12
APPENDICES
<PAGE>
Section 3.09. Absence of Undisclosed Liabilities.
There are no material liabilities or obligations (whether absolute or
contingent, matured or unmatured, known or unknown) of the Company or any
Subsidiary, including but not limited to liabilities for Taxes (as defined in
Article X), of a nature required by GAAP to be reflected, or reserved against,
in the Financial Statements and that are not so reflected, or reserved
against, in the Financial Statements, except for those that may have been
incurred after November 30, 1998 in the Ordinary Course of Business and that
are not material in amount either individually or collectively. Except as
described in Section 3.09 of the Company Disclosure Schedule or reflected in
the Financial Statements, since December 31, 1997, neither the Company nor any
Subsidiary has incurred any liabilities or obligations (whether absolute or
contingent, matured or unmatured, known or unknown) other than in the Ordinary
Course of Business (as defined in Article X).
Section 3.10. Absence of Certain Changes or Events.
Other than as set forth in Section 3.10 to the Company Disclosure Schedule
from December 31, 1997 through the date of this Merger Agreement, there has
been no material adverse change, and no change except in the Ordinary Course
of Business, in the business, operations, prospects, condition (financial or
otherwise), Assets or liabilities of the Company or any Subsidiary. Except as
disclosed pursuant to other provisions of this Merger Agreement or described
in the Company Disclosure Schedule, since November 30, 1998, the Company and
the Subsidiaries have conducted their respective businesses substantially in
the manner theretofore conducted and only in the Ordinary Course of Business,
and neither the Company nor any Subsidiary has (a) incurred any material
damage, destruction or loss not covered by insurance with respect to any
Assets of the Company or of any such Subsidiary; (b) issued any capital stock
or other equity securities or granted any options, warrants or other rights
calling for the issuance thereof; (c) issued any bonds or other long-term debt
instruments, granted any options, warrants or other rights calling for the
issuance thereof, or borrowed any funds; (d) incurred, or become subject to,
any material obligation or liability (whether absolute or contingent, matured
or unmatured, known or unknown), except current liabilities incurred in the
Ordinary Course of Business; (e) discharged or satisfied any Encumbrance or
paid any material obligation or liability (whether absolute or contingent,
matured or unmatured, known or unknown) other than current liabilities shown
in the Unaudited Balance Sheets and current liabilities incurred since
December 31, 1997 in the Ordinary Course of Business; (f) declared or made
payment of, or set aside for payment, any dividends or distributions of any
Assets, or purchased, redeemed or otherwise acquired any of its capital stock,
any securities convertible into capital stock, or any other securities; (g)
mortgaged, pledged or subjected to any Encumbrance (other than a Permitted
Encumbrance) any of its Assets; (h) sold, exchanged, transferred or otherwise
disposed of any of its Assets, or canceled any debts or claims, except in each
case in the Ordinary Course of Business; (i) written down the value of any
Assets or written off as uncollectable any debt, notes or accounts receivable,
except to the extent previously reserved against in the Financial Statements
and not material in amount, and except for write-downs and write-offs in the
Ordinary Course of Business, none of which, individually or in the aggregate,
are material; (j) entered into any transactions other than in the Ordinary
Course of Business; (k) increased the rate of compensation payable, or to
become payable, by it to any of its officers, employees, agents or independent
contractors over the rate being paid to them on November 30, 1998, except for
any increase in the rate of compensation payable, or to become payable in
connection with normal employee salary and performance reviews or otherwise in
the Ordinary Course of Business; (l) made or permitted any amendment or
termination of any material Agreement to which it is a party other than in the
Ordinary Course of Business; (m) through negotiation or otherwise made any
commitment or incurred any liability to any labor organization; (n) made any
accrual or arrangement for or payment of bonuses or special compensation of
any kind to any director, officer or employee, except for any accrual or
arrangement for or payment of bonuses or special compensation in connection
with normal employee salary and performance reviews or otherwise in the
Ordinary Course of Business; (o) directly or indirectly paid any severance or
termination pay in excess of two
A-13
APPENDICES
<PAGE>
months' salary to any officer or employee with an annual salary in excess of
$70,000; (p) made capital expenditures, or entered into commitments therefor,
not provided for in the Company's capital budget for 1998 (a copy of which has
been furnished by the Company to Acquiror) or, if applicable, the Company's
capital budget for 1999 (a copy of which has been furnished by the Company to
Acquiror), except for capital expenditures permitted by Section 5.01; (q) made
any change in any method of accounting or accounting practice except as
required by GAAP and except as specified in the Financial Statements; (r)
entered into any transaction of the type described in Section 3.19; (s) made
any charitable contributions or pledges exceeding $10,000 individually or
$100,000 in the aggregate; or (t) made any Agreement to do any of the
foregoing.
Section 3.11. Litigation; Disputes.
(a) Except as disclosed in Section 3.11(a) of the Company Disclosure
Schedule, there are no actions, suits, claims, arbitrations, proceedings or
investigations pending or, to the knowledge of the Company or any Subsidiary,
threatened against, affecting or involving the Company or any Subsidiary or
their respective businesses or Assets, or the transactions contemplated by
this Merger Agreement, at law or in equity, or before or by any court,
arbitrator or Governmental Entity, domestic or foreign that would have a
Company Material Adverse Effect. Neither the Company nor any Subsidiary is (i)
operating under or subject to any order (except for orders that Persons
similarly situated, engaged in similar businesses and owning similar Assets
are operating under or subject to), award, writ, injunction, decree or
judgment of any court, arbitrator or Governmental Entity, or (ii) in default
with respect to any order, award, writ, injunction, decree or judgment of any
court, arbitrator or Governmental Entity.
(b) Except as set forth in Section 3.11(b) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary is currently involved in, or
to the knowledge of the Company or any Subsidiary, reasonably anticipates any
dispute with, any of its current or former employees, agents, brokers,
distributors, vendors, customers, business consultants, franchisees,
franchisors, representatives or independent contractors (or any current or
former employees of any of the foregoing Persons) affecting the business or
Assets of the Company or any Subsidiary, except for any such disputes that, if
resolved adversely to the Company or any Subsidiary, would not have a Company
Material Adverse Effect.
Section 3.12. Debt Instruments.
Section 3.12 of the Company Disclosure Schedule lists all mortgages,
indentures, notes, guarantees and other Agreements for or relating to borrowed
money (including, without limitation, conditional sales agreements and capital
leases) to which the Company or any Subsidiary is a party or which have been
assumed by the Company or any Subsidiary or to which any Assets of the Company
or any Subsidiary are subject that evidences an indebtedness in excess of
$100,000. Neither the Company nor the Subsidiaries is in default under any of
such mortgages, indentures, notes, guarantees and other Agreements, and there
has not occurred any event which (whether with or without notice, lapse of
time or the happening or occurrence of any other event) would constitute such
a default, except for any such default that would not have a Company Material
Adverse Effect.
Section 3.13. Real Property Leases.
Section 3.13 of the Company Disclosure Schedule lists all real property
leases with a term in excess of two (2) years or requiring payments in excess
of $100,000 in the aggregate over its term under which the Company or any
Subsidiary is the lessee or lessor. The Company and the Subsidiaries are the
owners and holders of all the leasehold estates purported to be granted to
them by the leases listed in Section 3.13 of the Company Disclosure Schedule.
Each such lease is in full force and effect and constitutes a legal, valid and
binding obligation of, and to the Company's knowledge, is legally
A-14
APPENDICES
<PAGE>
enforceable in all material respects against, the respective parties thereto
and grants the leasehold estate it purports to grant free and clear of all
Encumbrances other than Permitted Encumbrances. The Company and the
Subsidiaries have in all respects performed all material obligations
thereunder required to be performed by any of them to date. To the knowledge
of the Company and the Subsidiaries, no party is in default in any material
respect under any of the foregoing, and there has not occurred any event which
(whether with or without notice, lapse of time or the happening or occurrence
of any other event) would constitute such a material default.
Section 3.14. Other Agreements; No Default.
(a) Except non-material Agreements allowing the installation, maintenance or
operation of the Company's or its Subsidiaries' fiber optic network on, over,
under or across a specific parcel of real property, Sections 3.04, 3.13 and
3.14(a) of the Company Disclosure Schedule list each Agreement (other than
Agreements solely between the Company and its wholly owned Subsidiaries) to
which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary, or any of their respective Assets, is bound, and which is:
(i) an Agreement with a term in excess of two (2) years or requiring
payments in excess of $100,000 in any twelve (12) month period or $100,000
in the aggregate over its term for the employment of any director, officer,
employee, consultant or independent contractor, or providing for severance
payments to any such director, officer, employee, consultant or independent
contractor;
(ii) a license Agreement or distributor, dealer, sales representative,
sales agency, advertising, property management or brokerage Agreement
involving an annual payment in excess of $100,000;
(iii) an Agreement with any labor organization or other collective
bargaining unit;
(iv) an Agreement for the future purchase of materials, supplies,
services, merchandise or equipment involving payments of more than $100,000
over its remaining term (including, without limitation, periods covered by
any option to renew by any party);
(v) an Agreement for the purchase, sale or lease of any Asset with a
purchase or sale price or aggregate rental payment in excess of $100,000;
(vi) a profit-sharing, bonus, incentive compensation, deferred
compensation, stock option, severance pay, stock purchase, employee
benefit, insurance, hospitalization, pension, retirement or other similar
plan or Agreement;
(vii) an Agreement for the sale of any of its Assets or services or the
grant of any preferential rights to purchase any of its Assets, services or
rights, other than in the Ordinary Course of Business;
(viii) an Agreement that contains any provisions requiring the Company or
any Subsidiary to indemnify any other party;
(ix) a joint venture Agreement or other Agreement involving the sharing
of revenues or profits;
(x) an Agreement with an Affiliate (as defined in Article X) of the
Company or any Subsidiary;
(xi) an Agreement (including, without limitation, an Agreement not to
compete and an exclusivity Agreement) that reasonably could be interpreted
to impose any restriction on the business or operations of the Company or
any Subsidiary, or any of their respective Affiliates, prior to the
Effective Time, or on the business or operations of Acquiror or any of its
Affiliates after the Effective Time;
(xii) an Agreement material to the Company and its Subsidiaries not
otherwise described in this Section 3.14(a) which by its terms does not
terminate or is not terminable by the Company or by a Subsidiary within
thirty (30) days or upon thirty (30) days' (or less) notice;
A-15
APPENDICES
<PAGE>
(xiii) an Agreement with any Governmental Entity the loss or cancellation
of which would reasonably be expected to have a Company Material Adverse
Effect;
(xiv) an Agreement with any of the twenty (20) largest customers of the
Company and the Subsidiaries, taken as a whole (based on amounts billed),
for each of (A) the year ended December 31, 1997 and (B) the period from
January 1, 1998 through the date of this Merger Agreement;
(xv) a material Agreement to provide any customer with free service or
service at rates departing from the standard rate schedules of the System
(as defined in Article X);
(xvi) an Agreement with any incumbent local exchange carrier involving an
aggregate payment in excess of $100,000; or
(xvii) any other Agreement (A) that is material to the Company and the
Subsidiaries, taken as a whole, or the conduct of their businesses or
operations, or (B) the absence of which would have a Company Material
Adverse Effect,
(the foregoing Agreements referred to herein as the "Company Contracts"). The
Company has furnished Acquiror with access to true and complete copies of each
Company Contract (including any amendments thereto).
(b) Each Company Contract is in full force and effect and constitutes a
legal, valid and binding obligation of, and, to the Company's knowledge, is
legally enforceable in all material respects against the respective parties
thereto. All necessary approvals of any Governmental Entity with respect
thereto have been obtained (except where the failure so to obtain any such
approval would not have a Company Material Adverse Effect), all material
filings or registrations therefor have been made, and there are no outstanding
material disputes thereunder and, to the knowledge of the Company or any
Subsidiary, no threatened cancellation or termination thereof. The Company and
the Subsidiaries have performed all material obligations thereunder required
to be performed by any of them to date. To the knowledge of the Company and
the Subsidiaries, no party is in default in any material respect under any of
the Company Contracts, and there has not occurred any event which (whether
with or without notice, lapse of time or the happening or occurrence of any
other event) would constitute such a material default. No Agreement has been
canceled or otherwise terminated within the twelve (12) months prior to the
date of this Merger Agreement that would have been a "Company Contract" had
such Agreement not been canceled or terminated and the cancellation or
termination of which has had or is reasonably likely to have a Company
Material Adverse Effect. Except as specifically described in Section 3.14(a)
of the Company Disclosure Schedule, there has been no material written or oral
modification or amendment to any Company Contract and, to the Company's
knowledge, there are no reasonably expected changes to any Company Contract.
Section 3.15. Labor Relations.
There are no collective bargaining or other labor union Agreements to which
the Company or any Subsidiary is a party. There are no strikes, work
stoppages, union organization efforts or other controversies (other than
grievance proceedings) pending, to the Company's knowledge, threatened or
reasonably anticipated between the Company or any Subsidiary and (a) any
current or former employees of the Company or of any Subsidiary (other than
disputes with sales employees not in excess of $3,000 in the aggregate per
such employee) or (b) any union or other collective bargaining unit
representing such employees. The Company and the Subsidiaries have complied
and are in compliance with all Laws relating to employment or the workplace,
including, without limitation, Laws relating to wages, hours, collective
bargaining, safety and health, work authorization, equal employment
opportunity, immigration, withholding, unemployment compensation, worker's
compensation, employee privacy and right to know, except where the failure so
to comply would have a Company Material Adverse Effect. Except as set forth in
Section 3.15(b) of the Company Disclosure
A-16
APPENDICES
<PAGE>
Schedule, neither the Company nor any Subsidiary has been notified by any
Governmental Agency or counsel to any claimant of any unresolved violation or
alleged violation of any Law relating to equal employment opportunity, civil
or human rights, or employment discrimination generally. Except as set forth
in Section 3.15(c) to the Company Disclosure Schedule, there are no collective
bargaining Agreements, employment Agreements between the Company or any
Subsidiary and any of their respective employees, or professional service
Agreements not terminable at will relating to the businesses and Assets of the
Company or of any Subsidiary. Except as set forth in Section 3.15(d) to the
Company Disclosure Schedule, the consummation of the transactions contemplated
hereby will not cause Acquiror, the Surviving Corporation, the Company or any
Subsidiary to incur or suffer any liability relating to, or obligation to pay,
severance, termination or other payments to any Person under any Agreement.
Section 3.16. Pension and Benefit Plans.
(a) Except as set forth in Section 3.16(a) to the Company Disclosure
Schedule, neither the Company nor any Subsidiary (i) maintains or during the
past six (6) years has maintained any Plan (as defined in Article X) or Other
Arrangement (as defined in Article X), (ii) is or during the past six (6)
years has been a party to any Plan or Other Arrangement, or (iii) has
obligations under any Plan or Other Arrangement.
(b) The Company has furnished to Acquiror true and complete copies of each
of the following Documents: (i) the Documents setting forth the terms of each
Plan; (ii) all related trust Agreements or annuity Agreements (and any other
funding Document) for each Plan; (iii) for the three (3) most recent plan
years, all annual reports (Form 5500 series) on each Plan that have been filed
with any Governmental Entity; (iv) the current summary plan description and
subsequent summaries of material modifications for each Title I Plan (as
defined in Article X); (v) all DOL (as defined in Article X) opinions on any
Plan; (vi) all correspondence with the PBGC (as defined in Article X) on any
Plan exchanged during the past three (3) years; (vii) all IRS (as defined in
Article X) rulings, opinions or technical advice relating to any Plan and the
current IRS determination letter issued with respect to each Qualified Plan
(as defined in Article X); and (viii) all current Agreements with service
providers or fiduciaries for providing services on behalf of any Plan. For
each Other Arrangement, the Company has furnished to Acquiror true and
complete copies of each policy, Agreement or other Document setting forth or
explaining the current terms of the Other Arrangement, all related trust
Agreements or other funding Documents (including, without limitation,
insurance contracts, certificates of deposit, money market accounts, etc.),
all significant employee communications, all correspondence with or other
submissions to any Governmental Entity, and all current Agreements with
service providers or fiduciaries for providing services on behalf of any Other
Arrangement.
(c) No Plan is a Multiemployer Plan (as defined in Article X).
(d) No Plan is an ESOP (as defined in Article X).
(e) No Plan is a Minimum-Funding Plan (as defined in Article X).
(f) Section 3.16(g) of the Company Disclosure Schedule sets forth the
contributions that (i) the Company or any Subsidiary has promised or is
otherwise obligated to make under each Individual Account Plan that is a
Statutory-Waiver Plan (as defined in Article X) and (ii) are unpaid as of the
date of this Merger Agreement.
(g) The Company and the Subsidiaries have made all contributions and other
payments required by and due under the terms of each Plan and Other
Arrangement or have accrued such payments and contributions on the Company's
Financial Statements as of December 31, 1998. Neither the Company nor any of
its Subsidiaries has taken any action (other than actions required by Law)
relating to any
A-17
APPENDICES
<PAGE>
Plan or Other Arrangement that will materially increase Acquiror's, the
Surviving Corporation's, the Company's or any Subsidiary's obligation under
any Plan or Other Arrangement above the level of expense incurred for the year
ended December 31, 1997.
(h) Section 3.16(i) of the Company Disclosure Schedule sets forth a list of
all Qualified Plans (as defined in Article X). All Qualified Plans and any
related trust Agreements or annuity Agreements (or any other funding Document)
comply and have complied with ERISA, the Code (including, without limitation,
the requirements for Tax qualification described in Section 401 thereof), and
all other Laws, except where the failure so to comply would not have a Company
Material Adverse Effect. The trusts established under such Plans are exempt
from federal income taxes under Section 501(a) of the Code. The Company and
the Subsidiaries have received determination letters issued by the IRS with
respect to each Qualified Plan, and the Company has furnished to Acquiror true
and complete copies of all such determination letters and all correspondence
relating to the applications therefor. All statements made by or on behalf of
the Company or any Subsidiary to the IRS in connection with applications for
determinations with respect to each Qualified Plan were true and complete in
all material respects when made and continue to be true and complete in all
material respects. To the knowledge of the Company and the Subsidiaries,
nothing has occurred since the date of the most recent applicable
determination letter that would adversely affect the tax-qualified status of
any Qualified Plan.
(i) To their knowledge, the Company and the Subsidiaries have complied in
all material respects with all applicable provisions of the Code, ERISA, the
National Labor Relations Act, Title VII of the Civil Rights Act of 1964, the
Age Discrimination in Employment Act, the Fair Labor Standards Act, the
Securities Act, the Exchange Act, and all other Laws pertaining to the Plans,
Other Arrangements and other employee or employment related benefits, and all
premiums and assessments relating to all Plans or Other Arrangements. There
are no investigations by any Governmental Entity, termination proceedings or
other claims (except claims for benefits payable in the normal operation of
the Plans and Other Arrangements), suits or proceedings pending or, to the
knowledge of the Company, threatened or anticipated, against or involving any
Plan or Other Arrangement or asserting any rights or claims to benefits under
any Plan or Other Arrangement that would reasonably be expected to give rise
to any material liability on the part of the Company or the Subsidiaries.
Neither the Company nor any Subsidiary has any pending claims or lawsuits
before any court, arbiter or Governmental Entity arising under any Law
governing any Plan (except claims for benefits payable in the normal operation
of the Plan and Other Arrangements), and to the knowledge of the Company and
the Subsidiaries there exist no facts that would reasonably be likely to give
rise to such a claim.
(j) Neither the Company nor any Subsidiary nor any of the Plans has engaged
in violation of Section 406(a) or 406(b) of ERISA for which no exemption
exists under Section 408 of ERISA and all "prohibited transactions" (as such
term is defined in Section 4975(c)(1) of the Code), for which no exemption
exists under Section 4975(c)(2) or 4975(d) of the Code which would result in a
material liability to the Company and the Subsidiaries. The Company has
furnished to Acquiror true and complete copies of each request for a
prohibited transaction exemption and each exemption obtained in response to
such request. All such requests were true and complete when made and continue
to be true and complete.
(k) Except as set forth in Section 3.16(n) of the Company Disclosure
Schedule, no Plan or Other Arrangement, individually or collectively, provides
for any payment by the Company or any Subsidiary to any employee or
independent contractor that is not deductible under Section 162(a)(1) or 404
of the Code or that is an "excess parachute payment" pursuant to Section 280G
of the Code.
(l) No Plan is a "qualified foreign plan" (as such term is defined in
Section 404A(e) of the Code), and no Plan is subject to the Laws of any
jurisdiction other than the United States of America or one of its political
subdivisions.
A-18
APPENDICES
<PAGE>
(m) No Plan is a funded Welfare Plan (as defined in Article X) that provide
benefits to current or former employees of the Company or any Subsidiary, or
to their beneficiaries.
(n) No Plan provides or promises post-retirement medical, life insurance or
other benefits now or in the future to current, former or retired employees of
the Company or any Subsidiary except as required by applicable federal and
state continuation law, and (ii) identifies the method of funding (including,
without limitation, any individual accounting) for all such benefits.
(o) All Welfare Plans and the related trusts that are subject to Section
4980B(f) of the Code and Sections 601 through 607 of ERISA comply in all
material respects with and have been administered in material compliance with
the health care continuation-coverage requirements under Section 4980B(f) of
the Code, Sections 601 through 607 of ERISA, and all proposed or final
regulations under Section 162 of the Code explaining those requirements.
(p) The Company and the Subsidiaries have (i) filed or caused to be filed
all returns and reports on the Plans that they are required to file, and (ii)
paid or made adequate provision for all fees, interest, penalties, assessments
or deficiencies that have become due pursuant to those returns or reports or
pursuant to any assessment or adjustment that has been made relating to those
returns or reports. All other fees, interest, penalties and assessments that
are due and payable by or for the Company or any Subsidiary with respect to
any Plan have been timely reported, fully paid and discharged. There are no
unpaid fees, penalties, interest or assessments due from the Company or any
Subsidiary or from any other Person that are or could become an Encumbrance on
any Asset of the Company or any Subsidiary or could otherwise have a Company
Material Adverse Effect. The Company and the Subsidiaries have collected or
withheld all amounts that are required to be collected or withheld by them to
discharge their obligations with respect to each Plan, and all of those
amounts have been paid to the appropriate Governmental Entity or set aside in
appropriate accounts for future payment when due.
Section 3.17. Taxes and Tax Matters.
(a) The Company and the Subsidiaries have (or, in the case of Company Tax
Returns (as defined in Article X) becoming due after the date hereof and
before the Effective Time, will have prior to the Effective Time) duly filed
all Company Tax Returns required to be filed by the Company and the
Subsidiaries at or before the Effective Time with respect to all applicable
material Taxes. No material penalties or other charges are or will become due
with respect to any such Company Tax Returns as the result of the late filing
thereof. All such Company Tax Returns are (or, in the case of returns becoming
due after the date hereof and before the Effective Time, will be) true and
complete in all material respects. The Company and the Subsidiaries: (i) have
paid all Taxes due in connection with any such Company Tax Returns; or (ii)
have established (or, in the case of amounts becoming due after the date
hereof, prior to the Effective Time will have paid or established) in the
Financial Statements adequate reserves (in conformity with GAAP consistently
applied) for the payment of such Taxes. The amounts set up as reserves for
Taxes in the Financial Statements are sufficient for the payment of all unpaid
Taxes, whether or not such Taxes are disputed or are yet due and payable, for
or with respect to the applicable period, and for which the Company or any
Subsidiary may be liable in its own right (including, without limitation, by
reason of being a member of the same affiliated group) or as a transferee of
the Assets of, or successor to, any Person.
(b) Neither the Company nor any Subsidiary, either in its own right
(including, without limitation, by reason of being a member of the same
affiliated group) or as a transferee, has or at the Effective Time will have
any liability for Taxes payable for or with respect to any periods prior to
and including the Effective Time in excess of the amounts actually paid prior
to the Effective Time or reserved for in the Financial Statements, except for
any Taxes due in connection with the Merger or incurred in the Ordinary Course
of Business subsequent to the date of the latest Financial Statement.
A-19
APPENDICES
<PAGE>
(c) Except as set forth in Section 3.17(c) of the Company Disclosure
Schedule, there is no action, suit, proceeding, audit, investigation or claim
pending or, to the knowledge of the Company or any Subsidiary, threatened in
respect of any Taxes for which the Company or any Subsidiary is or may become
liable, nor has any deficiency or claim for any such Taxes been proposed,
asserted or, to the knowledge of the Company or any Subsidiary, threatened.
Except as set forth in Section 3.17(c) of the Company Disclosure Schedule,
neither the Company nor any Subsidiary has consented to any waivers or
extensions of any statute of limitations with respect to any taxable year of
the Company or any Subsidiary. Except as set forth in Section 3.17(c) of the
Company Disclosure Schedule, there is no Agreement, waiver or consent
providing for an extension of time with respect to the assessment or
collection of any Taxes against the Company or any Subsidiary, and no power of
attorney granted by the Company or any Subsidiary with respect to any Tax
matters is currently in force.
(d) The Company has made available to Acquiror true and complete copies of
all Company Tax Returns and all material written communications with any
Governmental Entity relating to any such Company Tax Returns or to any
deficiency or claim proposed or asserted, irrespective of the outcome of such
matter, but only to the extent such items relate to Tax years (i) which are
subject to an audit, investigation, examination or other proceeding, or (ii)
with respect to which the statute of limitations has not expired.
(e) Except as set forth in Section 3.17(e) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary (i) is or has ever been a
partner in a partnership or an owner of an interest in an entity treated as a
partnership for federal income Tax purposes; (ii) has executed or filed with
the IRS any consent to have the provisions of Section 341(f) of the Code apply
to it; (iii) is subject to Section 999 of the Code; (iv) is a passive foreign
investment company as defined in Section 1296(a) of the Code; or (v) is a
party to an Agreement relating to the sharing, allocation or payment of, or
indemnity for, Taxes (other than an Agreement the only parties to which are
the Company and the Subsidiaries).
(f) The Company has complied in all material respects with all rules and
regulations relating to the withholding of Taxes.
Section 3.18. Customers.
To the knowledge of the Company and the Subsidiaries, the relationships of
the Company and the Subsidiaries with their customers are generally good
commercial working relationships. Except as set forth in Section 3.18 of the
Company Disclosure Schedule, during the twelve (12) months prior to the date
of this Merger Agreement, no customer of the Company or any Subsidiary which
accounted for in excess of $120,000 of the revenues of the Company and the
Subsidiaries during such twelve (12) months has canceled or otherwise
terminated its relationship with the Company or any Subsidiary and except to
the extent of events described in Section 9.13(a).
Section 3.19. Certain Business Practices.
Neither the Company, the Subsidiaries nor any of their officers, directors
or, to the knowledge of the Company or any Subsidiary, any of their employees
or agents (or stockholders, distributors, representatives or other persons
acting on the express, implied or apparent authority of the Company or of any
Subsidiary) have paid, given or received or have offered or promised to pay,
give or receive, any bribe or other unlawful payment of money or other thing
of value, any unlawful discount, or any other unlawful inducement, to or from
any Person or Governmental Entity in the United States or elsewhere in
connection with or in furtherance of the business of the Company or any
Subsidiary (including, without limitation, any offer, payment or promise to
pay money or other thing of value (a) to any foreign official or political
party (or official thereof) for the purposes of influencing any act, decision
or omission in order to assist the Company or any Subsidiary in obtaining
business for or with,
A-20
APPENDICES
<PAGE>
or directing business to, any Person, or (b) to any Person, while knowing that
all or a portion of such money or other thing of value will be offered, given
or promised to any such official or party for such purposes). The business of
the Company and the Subsidiaries is not in any manner dependent upon the
making or receipt of such payments, discounts or other inducements.
Section 3.20. Insurance.
Section 3.20 of the Company Disclosure Schedule lists and briefly describes
all policies of title, Asset, fire, hazard, casualty, liability, life,
worker's compensation and other forms of insurance of any kind owned or held
by the Company or any Subsidiary. All such policies: (a) are with insurance
companies reasonably believed by the Company to be financially sound and
reputable; (b) are in full force and effect; (c) are sufficient for compliance
by the Company and by each Subsidiary with all requirements of Law and of all
Agreements to which the Company or any Subsidiary is a party; (d) are valid
and outstanding policies enforceable against the insurer; (e) insure against
risks of the kind customarily insured against and in amounts customarily
carried by companies similarly situated and by companies engaged in similar
businesses and owning similar Assets; and (f) provide that they have the
policy expiration dates as set forth in Section 3.20 of the Company Disclosure
Schedule.
Section 3.21. Potential Conflicts of Interest.
Except as set forth in Section 3.21 of the Company Disclosure Schedule,
neither any present or, to the knowledge of the Company or any Subsidiary,
former director, officer, employee with a salary in excess of $60,000, or
stockholder of the Company or any Subsidiary who beneficially owns more than
5% of the capital stock of the Company or any Subsidiary, nor any Affiliate of
such director, officer, employee or stockholder:
(a) owns, directly or indirectly, any interest in (except for holdings in
securities that are listed on a national securities exchange, quoted on a
national automated quotation system or regularly traded in the over-the-
counter market, where such holdings are not in excess of two percent (2%)
of the outstanding class of such securities and are held solely for
investment purposes), or is a stockholder, partner, other holder of equity
interests, director, officer, employee, consultant or agent of, any Person
that is a lessor, lessee or customer of, or supplier of goods or services
to, the Company or any Subsidiary, except where the value to such
individual of any such arrangement with the Company or any Subsidiary has
been less than $60,000 in the last twelve (12) months;
(b) owns, directly or indirectly, in whole or in part, any Assets with a
fair market value of $60,000 or more which the Company or any Subsidiary
currently uses in its business;
(c) has any cause of action or other suit, action or claim whatsoever
against, or owes any amount to, the Company or any Subsidiary, except for
claims arising in the Ordinary Course of Business from any such Person's
service to the Company or any Subsidiary as a director, officer or
employee;
(d) has sold or leased to, or purchased or leased from, the Company or
any Subsidiary any Assets for consideration in excess of $60,000 in the
aggregate since the inception of the Company;
(e) is a party to any Agreement pursuant to which the Company or any
Subsidiary provides office space to any such Person, or provides services
of any nature to any such Person, other than in the Ordinary Course of
Business in connection with the employment of such Person by the Company or
any Subsidiary; or
(f) has, since the inception of the Company, engaged in any other
material transaction with the Company or any Subsidiary involving in excess
of $60,000, other than (i) in the Ordinary Course of Business in connection
with the employment of such Person by the Company or any Subsidiary, (ii)
dividends, distributions and stock issuances to all common and preferred
stockholders (as applicable) on a pro rata basis and (iii) as set forth in
Section 3.04 of the Company Disclosure Schedule.
A-21
APPENDICES
<PAGE>
Section 3.22. Receivables.
The accounts receivable of the Company and the Subsidiaries shown on the
Audited Balance Sheet and the Unaudited Balance Sheets, or thereafter acquired
by any of them, have been collected or are collectible in amounts not less
than the amounts thereof carried on the books of the Company and the
Subsidiaries, without right of recourse, defense, deduction, counterclaim,
offset or setoff on the part of the obligor, and can reasonably be expected to
be collected within ninety (90) days of the date incurred, except to the
extent of the allowance for doubtful accounts shown on such Audited Balance
Sheet and Unaudited Balance Sheets and except to the extent of events
described in Section 9.13(a).
Section 3.23. Real Property.
(a) Section 3.23(a) of the Company Disclosure Schedule lists all the Real
Property (as defined in Article X), specifying the owner of each parcel
thereof, and all such Real Property is suitable and adequate for the uses for
which it is currently being used.
(b) Except as set forth in Section 3.23(b) of the Company Disclosure
Schedule, the Company and the Subsidiaries are the sole owners of good, valid,
fee simple, marketable and insurable (at standard rates) title to the Real
Property respectively owned by them, including, without limitation, all
buildings, structures, fixtures and improvements thereon and all equipment,
machinery and personal property therein, in each case free and clear of all
Encumbrances, except for Permitted Encumbrances.
(c) All material buildings, structures, fixtures and other improvements on
the Real Property are in reasonable repair, free of known defects and are fit
for the uses to which they are currently devoted. All such buildings,
structures, fixtures and improvements on the Real Property conform to all
Laws, except for any such non-conformance that would not have a Company
Material Adverse Effect. The buildings, structures, fixtures and improvements
on each parcel of the Real Property lie entirely within the boundaries of such
parcel of the Real Property, and no structures of any kind encroach on the
Real Property, except as may be disclosed on an accurate ALTA Land Title
Survey, and except where the failure of any such buildings, structures,
fixtures and improvements on each parcel of Real Property to lie entirely
within the boundaries of such parcel of the Real Property or the encroachment
of any such structure on the Real Property would not have a Company Material
Adverse Effect.
(d) To the knowledge of the Company and the Subsidiaries, none of the Real
Property is subject to any Agreement or other restriction of any nature
whatsoever (recorded or unrecorded), other than Permitted Encumbrances,
preventing or limiting the Company's or any Subsidiary's right to convey or to
use it.
(e) No portion of the Real Property or any material building, structure,
fixture or improvement thereon is the subject of, or affected by, any
condemnation, eminent domain or inverse condemnation proceeding currently
instituted or pending, and neither the Company nor any Subsidiary has any
knowledge that any of the foregoing are, or will be, the subject of, or
affected by, any such proceeding.
(f) The Real Property has reasonable access to adequate electric, gas,
water, sewer and telephone lines, all of which are adequate for the uses to
which the Real Property is currently devoted.
Section 3.24. Books and Records.
The books of account, stock records, minute books and other corporate and
financial records of the Company are complete and correct in all material
respects and have been maintained in accordance with reasonable business
practices for companies similar to the Company, and the matters contained
therein are appropriately and accurately reflected in all material respects in
the Financial Statements in accordance with GAAP.
A-22
APPENDICES
<PAGE>
Section 3.25. Assets.
Except as set forth in Section 3.25 of the Company Disclosure Schedule, the
Company and the Subsidiaries have good, valid and marketable title to all
material Assets respectively owned by them, including, without limitation, all
material Assets reflected in the Audited Balance Sheet and in the Unaudited
Balance Sheets and all material Assets purchased by the Company or by any
Subsidiary since December 31, 1997 (except for Assets reflected in such
Audited Balance Sheet and Unaudited Balance Sheets or acquired since December
31, 1997 which have been sold or otherwise disposed of in the Ordinary Course
of Business), free and clear of all Encumbrances other than Permitted
Encumbrances. All personal property of the Company and the Subsidiaries is in
good operating condition and repair and is suitable and adequate for the uses
for which it is intended or is being used. All Inventory (as defined in
Article X) of the Company and the Subsidiaries (i) consists of items which are
good and merchantable and of a quality and quantity presently usable and
salable in the Ordinary Course of Business and (ii) have been reflected in the
Financial Statements at the lower of cost or market, in accordance with GAAP,
and include no obsolete or discontinued items, except to the extent reserved
against in the Financial Statements.
Section 3.26. No Infringement or Contest.
(a) Section 3.26(a) of the Company Disclosure Schedule identifies and
describes each item of Intellectual Property (as defined in Article X) (i)
owned by the Company or a Subsidiary, (ii) owned by any third party and used
by the Company or any Subsidiary pursuant to license, sublicense or other
Agreement, or (iii) otherwise used by the Company or any Subsidiary and not
otherwise generally used by Persons similarly situated (including, in each
case, specification of whether each such item is owned, licensed or used by
the Company or any Subsidiary) in the case of each of the foregoing clauses
(i), (ii) or (iii), the absence of which would have a Company Material Adverse
Effect.
(b) With respect to each item of Intellectual Property listed in Section
3.26(a) of the Company Disclosure Schedule that is owned by the Company or any
Subsidiary, such Intellectual Property can be used by the Company and the
Subsidiaries in their respective businesses as presently conducted by them,
free and clear of any material restrictions, Encumbrances (other than
Permitted Encumbrances) and royalties on such use, and the Company and the
Subsidiaries have the right to bring action for infringement of such
Intellectual Property. With respect to the Intellectual Property listed in
Section 3.26(a) of the Company Disclosure Schedule that is used by the Company
or a Subsidiary pursuant to license, sublicense or other Agreement, such
Intellectual Property has been licensed on an arm's-length basis and can be
used by the Company and the Subsidiaries in their respective businesses as
currently conducted by them in accordance with the terms and conditions of
such licenses, sublicenses or other Agreements. With respect to each item of
Intellectual Property listed in Section 3.26(a) of the Company Disclosure
Schedule that is otherwise used by the Company or any Subsidiary, such
Intellectual Property can be used by the Company and the Subsidiaries in their
respective businesses as presently conducted by them, free and clear of any
material restrictions, Encumbrances (other than Permitted Encumbrances) and
royalties on such use. Each item of Intellectual Property owned or used by the
Company or any Subsidiary immediately prior to the Closing will be owned or
available for use by the Company or such Subsidiary on identical terms and
conditions identified in all material respects immediately after the Closing.
(c) As used in the businesses of the Company and the Subsidiaries as
conducted in the past and as currently conducted, to the knowledge of the
Company, none of the Intellectual Property listed in Section 3.26(a) of the
Company Disclosure Schedule has at any time infringed or misappropriated or
otherwise violated, or is likely to infringe, misappropriate or violate, any
Intellectual Property of any other Person, nor is the Company or any
Subsidiary otherwise in the conduct of their respective businesses infringing
upon, or alleged to be infringing upon, any Intellectual Property of any other
Person. There are no pending or, to the knowledge of the Company or any
Subsidiary, threatened
A-23
APPENDICES
<PAGE>
claims against the Company or any Subsidiary alleging that the conduct of the
Company's or any Subsidiary's business infringes or conflicts with any
Intellectual Property rights of others. To the knowledge of the Company or any
Subsidiary, there is no Intellectual Property of another Person which
infringes, misappropriates or violates any of the Intellectual Property listed
in Section 3.26(a) of the Company Disclosure Schedule.
(d) The Company and the Subsidiaries own or have the right to use pursuant
to a valid license, sublicense or other Agreement all Intellectual Property
that is material in the operation of the businesses of the Company and the
Subsidiaries as currently conducted and as currently proposed to be conducted.
Section 3.27. Intentionally Deleted.
Section 3.28. Board Recommendation.
The Board of Directors of the Company has adopted, in compliance with
Delaware Law, a resolution approving and adopting this Merger Agreement and
the transactions contemplated hereby and recommending approval and adoption of
this Merger Agreement and the transactions contemplated hereby by the Company
Stockholders.
Section 3.29. Vote Required.
The affirmative vote of the holders of a majority of the voting power
attributable to the outstanding shares of Company Common Stock and Company
Series A Preferred Stock, voting together as a class, is the only vote of the
holders of any class or series of capital stock of the Company necessary to
approve the transactions contemplated by this Merger Agreement.
Section 3.30. Banks; Attorneys-in-fact.
Section 3.30 of the Company Disclosure Schedule sets forth a complete list
showing the name of each bank or other financial institution in which the
Company or any Subsidiary has accounts (including a description of the names
of all Persons authorized to draw thereon or to have access thereto). Such
list also shows the name of each Person holding a power of attorney from the
Company or any Subsidiary and a brief description thereof.
Section 3.31. Intentionally Deleted.
Section 3.32. Brokers.
No broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Merger Agreement based upon arrangements made by or on
behalf of the Company or any Subsidiary or any of their respective Affiliates.
Section 3.33. Environmental Matters.
(a) The Company and each of the Subsidiaries have complied and are in
compliance with, and the Real Property and any real property that is leased by
the Company or any Subsidiary and all improvements thereon are in compliance
with, all Environmental Laws (as defined in Article X), except where the
failure so to comply would not have a Company Material Adverse Effect.
(b) To the knowledge of the Company and the Subsidiaries, neither the
Company nor any Subsidiary has any liability under any Environmental Law, nor
is the Company or any Subsidiary
A-24
APPENDICES
<PAGE>
responsible for any liability of any other Person under any Environmental Law.
Except as set forth in Section 3.33(b) of the Company Disclosure Schedule,
there are no pending or, to the knowledge of the Company or any Subsidiary,
threatened actions, suits, claims, legal proceedings or other proceedings
based on, and neither the Company nor any Subsidiary, has received any formal
or informal notice of any complaint, order, directive, citation, notice of
responsibility, notice of potential responsibility, or information request
from any Governmental Entity or any other Person since January 1, 1993 (or
prior thereto with respect to any such complaint, order, directive, citation,
notice of responsibility, notice of potential responsibility, or information
request which has not been finally resolved) or knows any fact(s) which might
reasonably be expected to form the basis for any such actions or notices
arising out of or attributable to: (i) the current or past presence at any
part of the Real Property or any real property that is leased by the Company
or any Subsidiary of Hazardous Materials (as defined in Article X) or any
substances that pose a hazard to human health or an impediment to working
conditions; (ii) the current or past release or threatened release into the
environment from the Real Property or any real property that is leased by the
Company or any Subsidiary (including, without limitation, into any storm
drain, sewer, septic system or publicly owned treatment works) of any
Hazardous Materials or any substances that pose a hazard to human health or an
impediment to working conditions; (iii) the off-site disposal of Hazardous
Materials originating on or from the Real Property or any real property that
is leased by the Company or any Subsidiary or the businesses or Assets of the
Company or any Subsidiary; (iv) any facility operations, procedures or designs
of the Company or any Subsidiary which do not conform to requirements of the
Environmental Laws; or (v) any violation of Environmental Laws at any part of
the Real Property or any real property that is leased by the Company or any
Subsidiary or otherwise arising from the Company's or any Subsidiary's
activities (or the activities of the Company's or any Subsidiary's
predecessors in title) involving Hazardous Materials.
(c) The Company and the Subsidiaries have been duly issued, and currently
have and will maintain through the Effective Time, all Licenses required under
any Environmental Law. A true and complete list of all such Licenses the
absence of which would have a Company Material Adverse Effect is set out in
Section 3.33(c) of the Company Disclosure Schedule. All Licenses listed in
Section 3.33(c) of the Company Disclosure Schedule are valid and in full force
and effect. Except in accordance with such Licenses, as described in Section
3.33(c) of the Company Disclosure Schedule or as otherwise permitted by Law,
there has been no Hazardous Discharge (as defined in Article X) or discharge
of any other material regulated by such Licenses. Except as disclosed in
Section 3.33(c) of the Company Disclosure Schedule, to the knowledge of the
Company and the Subsidiaries no such Licenses are non-transferable or which
require consent, notification or other action to remain in full force and
effect following consummation of the Merger and the other transactions
contemplated hereby.
(d) Except as set forth in Section 3.33(d) of the Company Disclosure
Schedule, neither the Real Property nor any real property that is leased by
the Company or any Subsidiary contains any underground improvements, including
but not limited to treatment or storage tanks, or underground piping
associated with such tanks, used currently or in the past for the storage,
throughput or other management of Hazardous Materials, and no portion of the
Real Property or any real property that is leased by the Company or any
Subsidiary is or has been used as a dump or landfill or consists of or
contains filled in land or wetlands.
Section 3.34. Disclosure.
(a) None of the information supplied by the Company expressly for inclusion
(and so included or relied on for information included) in (i) the
Registration Statement (as defined in Section 6.01(a)) and (ii) the Proxy
Statement (as defined in Section 6.01(a)), at the respective times that (w)
the Registration Statement is filed with the SEC, (x) the Registration
Statement becomes effective, (y) the Proxy Statement is mailed, and (z) any
meeting of stockholders (and any adjournment thereof) is held to consider, or
written consents are effective with respect to approval of, the transactions
A-25
APPENDICES
<PAGE>
contemplated by this Merger Agreement, shall contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading.
(b) No representation or warranty contained in this Merger Agreement or the
Company Disclosure Schedule (giving full effect to the concepts and
qualifications of materiality and knowledge contained therein and not with the
intention or effect of eliminating or limiting such concepts and
qualifications in any way), and no other agreements, documents, certificates,
instruments or other information furnished or to be furnished, or made
available or to be made available to Acquiror by the Company pursuant to this
Merger Agreement or otherwise in connection herewith or with the transactions
contemplated hereby, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary in
order to make the statements contained therein, in light of the circumstances
under which they were made, not misleading; provided however, that this
representation shall not apply to the matters specifically covered by any
other representation or warranty in this Merger Agreement, it being the intent
of the parties that this sentence not be applied so as to broaden the scope of
those representations and warranties. As of the date of this Merger Agreement,
the Company believes that the Company has a reasonable likelihood of attaining
the results of its business plan as set forth in the Confidential Information
Memorandum (relating to certain senior credit facilities) dated December 1998,
as furnished to Acquiror, based upon the assumptions used in the preparation
of such business plan (which assumptions the Company believes to be
reasonable).
Section 3.35. Directors, Officers and Affiliates.
Section 3.35 of the Company Disclosure Schedule lists all current directors
and officers of the Company and the Subsidiaries, showing each such person's
name, positions, and annual remuneration, bonuses and fringe benefits paid by
the Company or any Subsidiary for the current fiscal year and the most
recently completed fiscal year.
Section 3.36. Copies of Documents.
True and complete copies of all agreements, documents, certificates or other
instruments listed in the Company Disclosure Schedule have been made available
to Acquiror prior to the execution of this Merger Agreement.
Section 3.37. Condition and Operation of the System.
(a) Section 3.37(a)(1) of the Company Disclosure Schedule contains a
description of the size and capacity of the System (as defined in Article X)
(including, as of December 31, 1998, the percentage of the System capacity
that was activated and in operation and the percentage of the System capacity
that was unactivated and in reserve). The system coverage map which
constitutes an integral part of the Company Disclosure Schedule has previously
been made available to Acquiror. The System and all major component parts
(including but not limited to transmission towers, microwave facilities, fiber
optic cables and switches) are in compliance in all material respects with all
applicable build-out requirements, are in good operating condition and repair
ordinary wear and tear excepted, and are suitable, adequate and fit for the
uses for which they are intended and are being used, as the case may be. Since
January 1, 1998, there have been no material complaints with respect to the
Company's or any Subsidiary's performance under Agreements with customers that
have not been substantially corrected, and there have been no material System
outages. The System and the Assets of the Company and the Subsidiaries meet
the technical standards, if any, of the FCC and the FAA and the technical
specifications of the Company Licenses, and do not violate any applicable
Laws, engineering standards or building, fire, zoning, health and safety or
other Laws in any material respect.
A-26
APPENDICES
<PAGE>
(b) Section 3.37(b) of the Company Disclosure Schedule sets forth:
(i) information with respect to System services offered and rates charged
for initiation and provision of System services that is complete and
accurate in all material respects;
(ii) the rate of customer churn for each of (A) the year ended December
31, 1997 and (B) the period from January 1, 1998 through November 30, 1998;
(iii) the amount of fraud loss for each of (A) the year ended December
31, 1997 to the extent such amount exceeded $100,000 and (B) the period
from January 1, 1998 through November 30, 1998 to the extent such amount
exceeded $100,000;
(iv) a list of all independent marketing or selling agents for each month
during the period from January 1, 1998 through December 31, 1998,
indicating the volume of sales generated by such agents;
(v) any complaints received by the Company or any Subsidiary regarding
"slamming" or "cramming" (as such term are understood in the telephone
industry) by the Company, any Subsidiary or any of their respective
employees, resellers, agents or representatives;
(vi) a list and description of all material easements for the
installation, use and repair of fiber optic cable used by the System;
(vii) a list of all FCC Licenses held by the Company or any Subsidiary;
(viii) all material filings by the Company or any Subsidiary with the FCC
since January 1, 1996; and
(ix) a list of any proceedings (other than proceedings of general
applicability) before the FCC, a state utility commission, or other
regulatory body that are reasonably likely to result in (A) adjustments in
and/or refunds of material amounts in the past charged to or paid to third
parties by the Company or any Subsidiary, or (B) adjustments in amounts
otherwise in the future to be charged to or paid to third parties by the
Company or any Subsidiary, in each case including but not limited to
amounts related to universal service, access charges, service rates charged
to customers, franchise fees, or any other revenues or expenses subject to
regulatory oversight.
(c) To the knowledge of the Company, the easements required to be disclosed
pursuant to Section 3.37(b)(vi) above (i) are valid, binding, enforceable and
sufficient for the purposes for which they are used as of the date hereof and
(ii) will be valid, binding, enforceable and sufficient for the such purposes
immediately following the Effective Time without the consent or approval of
any Person.
Section 3.38. Reorganization.
To the knowledge of the Company, neither it nor any of the Subsidiaries has
taken any action or failed to take any action that would jeopardize the
qualification of the Merger as a reorganization within the meaning of Section
368(a) or Section 368(a)(2)(D) of the Code.
Section 3.39. State Takeover Statutes; Certain Charter Provisions.
The Board of Directors of the Company has, to the extent such statutes are
applicable, taken all action (including appropriate approvals of the Board of
Directors of the Company) necessary to exempt the Company, the Subsidiaries
and affiliates, the Merger, this Merger Agreement and the transactions
contemplated hereby and thereby from Section 203 of Delaware Law. To the
knowledge of the Company, no other state takeover statutes or charter or bylaw
provisions are applicable to the Merger or this Merger Agreement and the
transactions contemplated hereby or thereby.
A-27
APPENDICES
<PAGE>
Section 3.40. Year 2000 Review.
(a) The Company and the Subsidiaries will not, to the Company's knowledge,
be materially adversely affected by (i) any failure of the Company's and the
Subsidiaries' computer hardware, software, firmware or embedded chip
technology to be Year 2000 Compliant (as defined in Article X); or (ii) the
cost and/or disruption to normal activities caused by work to be carried out
to ensure such computer hardware, software or embedded chip technology is Year
2000 Compliant.
(b) The Company and the Subsidiaries are currently reviewing their
information technology ("IT") and non-IT computer systems and programs to
determine which are not capable of recognizing the Year 2000 and to verify
system readiness for the millennium date (the "Company Year 2000 Review"). The
Company Year 2000 Review covers all of the Company's and the Subsidiaries'
material operations and is centrally managed.
(c) All of the information related to the Company Year 2000 Review disclosed
in any of the Company's filings with any Governmental Entity was to the
Company's knowledge accurate and complete in all material respects as of the
date the filing was made with such Governmental Entity.
Section 3.41. Affiliate Agreements.
In accordance with Section 6.13, the executive officers, directors and
certain Company Stockholders specified in Section 3.41 of the Company
Disclosure Schedule ("Company Affiliates") have indicated to the Company that
they intend to execute and deliver to Acquiror affiliate agreements in
substantially the form attached hereto as Exhibit A (the "Affiliate
Agreements") and each such Affiliate Agreement, when so executed and
delivered, will, to the knowledge of the Company, constitute a legal, valid
and binding obligation of the respective Company Affiliate who is a party
thereto, enforceable against such Company Affiliate in accordance with its
terms. Except for the Principal Company Stockholders, John F. Wade and Peter
H. O. Claudy, there are no affiliates of the Company as of the date hereof as
that term is used in SEC Rule 145.
ARTICLE IIIA REPRESENTATIONS AND WARRANTIES OF PRINCIPAL COMPANY STOCKHOLDERS
Section 3A.01. Principal Company Stockholders That Are Entities.
To induce Acquiror to enter into this Merger Agreement, each Principal
Company Stockholder that is an entity, severally and not jointly, represents
and warrants to Acquiror on its own behalf and only with respect to itself as
of the date hereof and as of the Effective Date that:
(a) The execution and delivery by such Principal Company Stockholder of
this Merger Agreement, the execution and delivery by such Principal Company
Stockholder of all other agreements, documents, certificates or other
instruments contemplated hereby, and the consummation by such Principal
Company Stockholder of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate, partnership or
limited liability company action, and no other corporate, partnership or
limited liability company proceedings on the part of such Principal Company
Stockholder are necessary to authorize such Principal Company Stockholder
to execute this Merger Agreement and the other agreements, documents,
certificates or other instruments contemplated hereby, or to consummate the
transactions contemplated hereby and thereby, other than the approval and
adoption of this Merger Agreement by a majority of the voting power
attributable to the outstanding Company Common Stock and Company Series A
Preferred Stock, voting together as a class, in accordance with Delaware
Law and the Company's articles of incorporation and bylaws.
A-28
APPENDICES
<PAGE>
(b) This Merger Agreement has been duly executed and delivered by such
Principal Company Stockholder and constitutes a legal, valid and binding
obligation of such Principal Company Stockholder, enforceable in accordance
with its terms, except as such enforceability may be subject to the effects
of any applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar Laws affecting creditors' rights
generally and subject to the effects of general equitable principles
(whether considered in a proceeding in equity or at law).
(c) All of the shares of Company Capital Stock beneficially owned by such
Principal Company Stockholder are set forth on Section 3.04 of the Company
Disclosure Schedule, all of which shares are owned by such Principal
Company Stockholder free and clear of all Encumbrances other than
Encumbrances arising under applicable securities Laws and other than
Encumbrances that will be released at or prior to the Effective Time.
Section 3A.02. Principal Company Stockholders That Are Individuals.
To induce Acquiror to enter into this Merger Agreement, each Principal
Company Stockholder who is an individual, severally and not jointly,
represents and warrants to Acquiror on his own behalf and only with respect to
himself as of the date hereof and as of the Effective Date that:
(a) Such Principal Company Stockholder has the legal capacity and all
other necessary power and authority necessary to execute and deliver this
Merger Agreement, to execute and deliver all other agreements, documents,
certificates or other instruments contemplated hereby, and to consummate
the transactions contemplated hereby and thereby.
(b) This Merger Agreement has been duly executed and delivered by such
Principal Company Stockholder and constitutes a legal, valid and binding
obligation of such Principal Company Stockholder, enforceable in accordance
with its terms, except as such enforceability may be subject to the effects
of any applicable bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or similar Laws affecting creditors' rights
generally and subject to the effects of general equitable principles
(whether considered in a proceeding in equity or at law).
(c) All of the shares of Company Capital Stock beneficially owned by such
Principal Company Stockholder are set forth on Section 3.04 of the Company
Disclosure Schedule, all of which shares are owned by such Principal
Company Stockholder free and clear of all Encumbrances other than
Encumbrances arising under applicable securities Laws and other than
Encumbrances that will be released at or prior to the Effective Time.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF ACQUIROR AND ACQUIROR SUB
Except as specifically set forth in the Disclosure Schedule delivered by
Acquiror and Acquiror Sub to the Company prior to the execution and delivery
of this Merger Agreement (the "Acquiror Disclosure Schedule") (with (i) a
disclosure with respect to a Section of this Merger Agreement to require a
specific reference in the Acquiror Disclosure Schedule to the Section of this
Merger Agreement to which each such disclosure applies, (ii) no disclosure to
be deemed to apply with respect to any Section to which it does not expressly
refer and (iii) Acquiror and Acquiror Sub having the right to cross-reference
the sections of the Acquiror Disclosure Schedule as appropriate with respect
to disclosures that are reasonably related), Acquiror and Acquiror Sub hereby
jointly and severally represent and warrant (which representation and warranty
shall be deemed to include the disclosures with respect thereto so specified
in the Acquiror Disclosure Schedule) to, and agrees with, the Company as
follows, in each case as of the date of this Merger Agreement, unless
otherwise specifically set forth herein or in the Acquiror Disclosure
Schedule:
A-29
APPENDICES
<PAGE>
Section 4.01. Organization and Qualification; Subsidiaries.
Each of Acquiror, Acquiror Sub and Acquiror's Significant Subsidiaries (as
defined in Article X) is a corporation duly organized, validly existing and in
good standing under the Laws of the jurisdiction of its incorporation or
organization, and has the full and unrestricted corporate power and authority
to own, operate and lease its Assets, and to carry on its business as
currently conducted. Each of Acquiror, Acquiror Sub and Acquiror's Significant
Subsidiaries is duly qualified to conduct business as a foreign corporation
and is in good standing in the states, countries and territories in which the
nature of the business conducted by it or the character of the Assets owned,
leased or otherwise held by it makes such qualification necessary, except
where the absence of such qualification as a foreign corporation would not
have an Acquiror Material Adverse Effect (as defined in Article X).
Section 4.02. Certificate of Incorporation and Bylaws.
Acquiror has furnished to the Company a true and complete copy of the
Amended and Restated Certificate of Incorporation of Acquiror and the
certificate of incorporation of Acquiror Sub, as currently in effect,
certified as of a recent date by the Secretary of State (or comparable
Governmental Entity) of their respective jurisdictions of incorporation, and a
true and complete copy of the Amended and Restated Bylaws of Acquiror and the
bylaws of Acquiror Sub, as currently in effect, certified by their respective
corporate secretaries. Such certified copies are attached as exhibits to, and
constitute an integral part of, the Acquiror Disclosure Schedule.
Section 4.03. Authority; Binding Obligation.
Each of Acquiror and Acquiror Sub has the full and unrestricted corporate
power and authority to execute and deliver this Merger Agreement and to carry
out the transactions contemplated hereby. The execution and delivery by
Acquiror and Acquiror Sub of this Merger Agreement and all other agreements,
documents, certificates or other instruments contemplated hereby, and the
consummation by Acquiror and Acquiror Sub of the transactions contemplated
hereby and thereby, have been duly authorized by all necessary corporate
action, and no other corporate proceedings on the part of Acquiror or Acquiror
Sub are necessary to authorize this Merger Agreement and the other agreements,
documents, certificates or other instruments contemplated hereby, or to
consummate the transactions contemplated hereby and thereby. This Merger
Agreement has been duly executed and delivered by Acquiror and Acquiror Sub
and constitutes a legal, valid and binding obligation of Acquiror and Acquiror
Sub, enforceable in accordance with its terms, except as such enforceability
may be subject to the effect of any applicable bankruptcy, insolvency
fraudulent conveyance, reorganization, moratorium or similar Laws affecting
creditors' rights generally and subject to the effect of general equitable
principles (whether considered in a proceeding in equity or at law); provided,
however, that the Merger will not become effective until Articles of Merger
reflecting the Merger are filed with the office of the Secretary of State of
Delaware.
Section 4.04. No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by Acquiror and Acquiror Sub of
this Merger Agreement and all other agreements, documents, certificates or
other instruments contemplated hereby, the fulfillment of and compliance with
the respective terms and provisions hereof and thereof, and the consummation
by Acquiror and Acquiror Sub of the transactions contemplated hereby and
thereby, do not and will not: (i) conflict with, or violate any provision of,
the Amended and Restated Certificate of Incorporation or the Amended and
Restated Bylaws of Acquiror, or the certificate or articles of incorporation
or bylaws of Acquiror Sub or any of Acquiror's Significant Subsidiaries; or
(ii) subject to obtaining the consents, approvals, authorizations and permits
of, and making filings with or notifications to, the applicable Governmental
Entity pursuant to the applicable requirements, if any, of the Securities Act,
the Exchange Act, Blue Sky Laws, the HSR Act, the Communications Act, the
Federal Aviation Act, applicable state utility Laws and applicable municipal
franchise Laws, and the
A-30
APPENDICES
<PAGE>
filing and recordation of the Articles of Merger as required by Delaware Law,
conflict with or violate any Law applicable to Acquiror, Acquiror Sub or any
of Acquiror's Significant Subsidiaries, or any of their respective Assets;
(iii) conflict with, result in any breach of, constitute a default (or an
event that with notice or lapse of time or both would become a default) under
any Agreement to which Acquiror, Acquiror Sub or any of Acquiror's Significant
Subsidiaries is a party or by which Acquiror, Acquiror Sub or any of
Acquiror's Significant Subsidiaries, or any of their respective Assets, may be
bound; or (iv) result in or require the creation or imposition of, or result
in the acceleration of, any indebtedness or any Encumbrance of any nature
upon, or with respect to, Acquiror, Acquiror Sub or any of Acquiror's
Significant Subsidiaries or any of the Assets of Acquiror, Acquiror Sub or any
of Acquiror's Significant Subsidiaries; except for any such conflict or
violation described in clause (ii), any such conflict, breach or default
described in clause (iii), or any such creation, imposition or acceleration
described in clause (iv) that would not have an Acquiror Material Adverse
Effect and that would not prevent Acquiror or Acquiror Sub from consummating
the Merger on a timely basis.
(b) Except as set forth in Section 4.04(b) of the Acquiror Disclosure
Schedule, the execution, delivery and performance by Acquiror and Acquiror Sub
of this Merger Agreement and all other agreements, documents, certificates or
other instruments contemplated hereby, the fulfillment of and compliance with
the respective terms and provisions hereof and thereof, and the consummation
by Acquiror and Acquiror Sub of the transactions contemplated hereby and
thereby, do not and will not: (i) require any consent, approval, authorization
or permit of, or filing with or notification to, any Person not party to this
Merger Agreement, except (A) pursuant to the applicable requirements, if any,
of the Securities Act, the Exchange Act, Blue Sky Laws, the HSR Act, the
Communications Act, the Federal Aviation Act, applicable state utility Laws
and applicable municipal franchise Laws and Laws of other Governmental
Entities, (B) the filing and recordation of the Articles of Merger as required
by Delaware Law and (C) where the failure to obtain any consent, approval,
authorization or permit or to make any filing or notification otherwise
required to be disclosed hereunder would not have an Acquiror Material Adverse
Effect; or (ii) result in or give rise to any penalty, forfeiture, Agreement
termination, right of termination, amendment or cancellation, or restriction
on business operations of Acquiror, the Surviving Corporation or any of
Acquiror's Significant Subsidiaries that would have an Acquiror Material
Adverse Effect.
Section 4.05. No Prior Activities of Acquiror Sub.
Acquiror Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Merger Agreement and has engaged in no other
business activities and has conducted its operations only as contemplated
hereby.
Section 4.06. Brokers.
No broker or finder or investment banker (other than Salomon Smith Barney
Inc., the fees of which shall be solely the responsibility of Acquiror) is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Merger Agreement based upon
arrangements made by or on behalf of Acquiror or any of its Affiliates.
Section 4.07. SEC Documents.
Acquiror has filed all required reports, schedules, forms, statements and
other documents with the SEC (as defined in Article X) since January 1, 1997
(including the Acquiror Post-Signing SEC Documents (as defined in Section
6.10), the "Acquiror SEC Documents"). As of their respective dates, the
Acquiror SEC Documents complied or, in the case of the Acquiror Post-Signing
SEC Documents, will comply as to form in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as the case
may be, and none of the Acquiror SEC Documents contained or, in the case of
the Acquiror Post-Signing SEC Documents, will contain, any untrue statement of
a
A-31
APPENDICES
<PAGE>
material fact or omitted or, in the case of the Acquiror Post-Signing SEC
Documents, will omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The consolidated
financial statements of Acquiror included in the Acquiror SEC Documents comply
or, in the case of the Acquiror Post-Signing SEC Documents, will comply as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been or,
in the case of the Acquiror Post-Signing SEC Documents, will have been
prepared in accordance with GAAP (except, in the case of unaudited statements,
for the lack of normal year-end adjustments, the absence of footnotes and as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods subject thereto (except as may be indicated in the notes thereto) and
fairly present the consolidated financial position of Acquiror and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of operations and cash flows for the periods then ended (subject, in the case
of unaudited statements, to normal year-end adjustments and the absence of
footnotes). Except as disclosed in the Acquiror SEC Documents, as required by
GAAP or as required by any Governmental Entity, Acquiror has not, since
December 31, 1997, made any change in accounting practices or policies applied
in the preparation of financial statements.
Section 4.08. Acquiror Common Stock.
The Acquiror Common Stock to be issued and delivered to the Company
Stockholders pursuant to the Merger has been duly authorized and, when issued
in the Merger in accordance with this Merger Agreement, will be validly
issued, fully paid and nonassessable and will have been approved for listing
subject to official notice of issuance by The Nasdaq Stock Market's National
Market System.
Section 4.09. Capitalization.
The authorized capital stock of Acquiror consists of (a) 250,000,000 shares
of Acquiror Common Stock, of which, as of January 5, 1999: (i) 63,545,925
shares were issued and outstanding, all of which were duly authorized, validly
issued, fully paid and nonassessable; (ii) no shares were held in the treasury
of Acquiror; (iii) 12,278,323 shares were reserved for issuance pursuant to
outstanding options to purchase Acquiror Common Stock granted to employees and
certain other Persons; (iv) 245,536 shares were reserved for issuance pursuant
to a Stock Option Agreement dated August 21, 1998 between Acquiror and QST
Enterprises, Inc.; (v) 10,414 shares were reserved for issuance pursuant to a
Stock Option Agreement dated November 25, 1998 between Acquiror, Inlet, Inc.
and certain shareholders of Inlet, Inc.; (vi) 917,398 shares were reserved for
issuance pursuant to the McLeodUSA Incorporated Employee Stock Purchase Plan;
and (vii) 961,920 shares were reserved for issuance pursuant to the McLeodUSA
Incorporated 401(k) Profit Sharing Plan; (b) 22,000,000 shares of Class B
common stock, par value $.01 per share ("Acquiror Class B Common Stock"), of
which, as of January 5, 1999: (i) no shares were issued and outstanding; (ii)
no shares were held in the treasury of Acquiror; and (iii) 1,300,688 shares
were reserved for issuance pursuant to outstanding options to purchase
Acquiror Class B Common Stock granted to a significant stockholder of
Acquiror; and (c) 2,000,000 shares of serial preferred stock, par value $.01
per share, of which: (i) no shares are issued and outstanding; and (ii) no
shares are held in the treasury of Acquiror. Except for the options set forth
in clauses (a)(iii), (a)(iv), (a)(v), (a)(vi) and (b)(iii) above and as set
forth in Section 4.09(a) of the Acquiror Disclosure Schedule, as of January 5,
1999, there were no outstanding securities convertible into or exchangeable
for capital stock or any other securities of Acquiror, or any capital stock or
other securities of any of Acquiror's Significant Subsidiaries and no
outstanding options, rights (preemptive or otherwise), or warrants to purchase
or to subscribe for any shares of such capital stock or other securities of
Acquiror or any of Acquiror's Significant Subsidiaries. Except as set forth in
Section 4.09(b) of the Acquiror Disclosure Schedule and except for Agreements
relating to the options specified in clauses (a)(iii), (a)(iv), (a)(v),
(a)(vi) and (b)(iii) above, there are no outstanding Agreements to which
Acquiror or any of its Significant Subsidiaries is a party affecting or
relating to the voting, issuance, purchase, redemption, registration,
repurchase or transfer of capital stock or any other
A-32
APPENDICES
<PAGE>
securities of Acquiror, or any capital stock or other securities of any of
Acquiror's Significant Subsidiaries, except as contemplated hereunder. Each of
the outstanding shares of Acquiror Common Stock, and of capital stock of, or
other equity interests in, Acquiror's Significant Subsidiaries was issued in
compliance with all applicable federal and state Laws concerning the issuance
of securities, and, except as set forth in Section 4.09(d) of the Acquiror
Disclosure Schedule, such shares or other equity interests owned by Acquiror
or any of its Significant Subsidiaries are owned free and clear of all
Encumbrances. There are no obligations, contingent or otherwise, of Acquiror
or any of its Significant Subsidiaries to provide funds to, make any
investment (in the form of a loan, capital contribution or otherwise) in, or
provide any guarantee with respect to, any of Acquiror's Significant
Subsidiaries or any other Person. Except as set forth in Section 4.09(e) of
the Acquiror Disclosure Schedule, there are no Agreements pursuant to which
any Person (other than Acquiror or Acquiror's Significant Subsidiaries) is or
may be entitled to receive any of the revenues or earnings, or any payment
based thereon or calculated in accordance therewith, of Acquiror or any of its
Significant Subsidiaries. No vote of the stockholders of Acquiror is required
in connection with the consummation of the Merger and the other transactions
contemplated hereby. Acquiror is the legal and beneficial owner of all of
Acquiror Sub's outstanding capital stock.
Section 4.10. Reorganization.
To the knowledge of Acquiror, neither Acquiror, Acquiror Sub nor any of
Acquiror's Significant Subsidiaries has taken any action or failed to take any
action that would jeopardize the qualification of the Merger as a
reorganization within the meaning of Section 368(a) or Section 368(a)(2)(D) of
the Code.
Section 4.11. Compliance.
Neither Acquiror nor Acquiror Sub is aware of any fact or circumstance
related to them that could reasonably be expected to cause the filing of any
objection to any application for any Governmental consent required hereunder,
lead to any delay in processing such application, or require any waiver of any
Governmental rule, policy or other applicable Law.
Section 4.12. Disclosure.
(a) None of the information supplied by Acquiror or Acquiror Sub expressly
for inclusion (and so included or relied on for information included) in (i)
the Registration Statement and (ii) the Proxy Statement, at the respective
times that (w) the Registration Statement is filed with the SEC, (x) the
Registration Statement becomes effective, (y) the Proxy Statement is mailed,
and (z) any meeting of stockholders (and any adjournment thereof) is held to
consider, or written consents are effective with respect to approval of, the
transactions contemplated by this Merger Agreement, shall contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading.
(b) No representation or warranty contained in this Merger Agreement or the
Acquiror Disclosure Schedule (giving full effect to the concepts and
qualifications of materiality and knowledge contained therein and not with the
intention or effect of eliminating or limiting such concepts and
qualifications in any way), and no other agreements, documents, certificates,
instruments or other information furnished or to be furnished, or made
available or to be made available to the Company by Acquiror or Acquiror Sub
pursuant to this Merger Agreement or otherwise in connection herewith or with
the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; provided however,
that this representation shall not apply to the matters specifically covered
by any other representation or warranty in this Merger Agreement, it being the
intent of the parties that this sentence not be applied so as to broaden the
scope of those representations and warranties.
A-33
APPENDICES
<PAGE>
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
Section 5.01. Conduct of Business of the Company.
The Company hereby covenants and agrees that, from the date of this Merger
Agreement until the Effective Time, the Company, unless otherwise expressly
contemplated by this Merger Agreement or consented to in writing by Acquiror,
will, and will cause the Subsidiaries to, carry on their respective businesses
only in the Ordinary Course of Business or as contemplated by the Company's
1999 capital budget, a copy of which was previously furnished to Acquiror or
in the Confidential Offering Memorandum (relating to certain senior credit
facilities) dated December 1998, use their respective reasonable best efforts
to preserve intact their business organizations and Assets, maintain their
rights and franchises, retain the services of their officers and employees and
maintain their relationships with customers, suppliers, licensors, licensees
and others having business dealings with them, and use their respective
reasonable best efforts to keep in full force and effect liability insurance
and bonds comparable in amount and scope of coverage to that currently
maintained. Without limiting the generality of the foregoing, except as
otherwise consented to in writing by Acquiror or orally by Stephen C. Grey, J.
Lyle Patrick or John Wray or as otherwise expressly contemplated by this
Merger Agreement or as contemplated by the Company's 1999 capital budget, a
copy of which was previously furnished to Acquiror or in the Confidential
Offering Memorandum (relating to certain senior credit facilities) dated
December 1998, from the date of this Merger Agreement until the Effective Time
the Company shall not, and shall not permit any of the Subsidiaries to:
(a) (i) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee, except for increases
or bonuses in the Ordinary Course of Business to employees who are not
directors or officers and except pursuant to existing arrangements
previously disclosed to or approved in writing by Acquiror; (ii) grant any
severance or termination pay (other than pursuant to the normal severance
practices or existing Agreements of the Company or any Subsidiary in effect
on the date of this Merger Agreement as described in Section 5.01(a)(ii) of
the Company Disclosure Schedule) to, or enter into any severance Agreement
with, any director, officer or employee, or enter into any employment
Agreement with any director, officer or employee; (iii) establish, adopt,
enter into or amend any Plan or Other Arrangement, except as may be
required to comply with applicable Law; (iv) pay any benefit not provided
for under any Plan or Other Arrangement; (v) grant any awards under any
bonus, incentive, performance or other compensation plan or arrangement or
Plan or Other Arrangement (including the grant of stock options, stock
appreciation rights, stock-based or stock-related awards, performance units
or restricted stock, or the removal of existing restrictions in any Plan or
Other Arrangement or Agreement or awards made thereunder), except for
grants in the Ordinary Course of Business or as required under the
Agreements set forth in Section 5.01(a)(ii) of the Company Disclosure
Schedule, or (vi) take any action to fund or in any other way secure the
payment of compensation or benefits under any Agreement, except as required
under the Agreements set forth in Section 5.01(a)(ii) of the Company
Disclosure Schedule;
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock other than
capital stock repurchased from departing employees in the Ordinary Course
of Business;
(c) (i) redeem, purchase or otherwise acquire any shares of capital stock
of the Company or any Subsidiary or any securities or obligations
convertible into or exchangeable for any shares of capital stock of the
Company or any Subsidiary, or any options, warrants or conversion or other
A-34
APPENDICES
<PAGE>
rights to acquire any shares of capital stock of the Company or any
Subsidiary or any such securities or obligations, or any other securities
thereof, other than redemption and purchases from departing employees in
the Ordinary Course of Business; (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of its capital
stock or issue or authorize or propose the issuance of any other securities
in respect of, in lieu of or in substitution for, shares of its capital
stock;
(d) except upon the exercise of Company Stock Options in accordance with
their terms, issue, deliver, award, grant or sell, or authorize the
issuance, delivery, award, grant or sale (including the grant of any
limitations in voting rights or other Encumbrances) of, any shares of any
class of its capital stock (including shares held in treasury), any
securities convertible into or exercisable or exchangeable for any such
shares, or any rights, warrants or options to acquire, any such shares, or
amend or otherwise modify the terms of any such rights, warrants or options
the effect of which shall be to make such terms more favorable to the
holders thereof;
(e) except as contemplated by Agreements which have been identified in
Section 3.14(a) of the Company Disclosure Schedule, acquire or agree to
acquire, by merging or consolidating with, by purchasing an equity interest
in or a portion of the Assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof, or otherwise acquire or agree to acquire any Assets of
any other Person (other than the purchase of assets from suppliers or
vendors in the Ordinary Course of Business);
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise
subject to any Encumbrance or dispose of, or agree to sell, lease,
exchange, mortgage, pledge, transfer or otherwise subject to any
Encumbrance or dispose of, any of its Assets, except for sales,
dispositions or transfers in the Ordinary Course of Business;
(g) adopt any amendments to its articles or certificate of incorporation,
bylaws or other comparable charter or organizational documents;
(h) make or rescind any express or deemed election relating to Taxes,
settle or compromise any claim, action, suit, litigation, proceeding,
arbitration, investigation, audit or controversy relating to Taxes, or
change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ended December 31, 1997, except in
either case as may be required by Law, the IRS or GAAP;
(i) make or agree to make any new capital expenditures which are not
included in the Company's 1999 capital budget, a copy of which was
furnished to Acquiror, it being understood that the Company shall provide
prior notice to Acquiror of any expenditures which are individually in
excess of $1,000,000;
(j) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another Person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities of the Company or
any Subsidiary, guarantee any debt securities of another Person, enter into
any "keep well" or other Agreement to maintain any financial statement
condition of another Person or enter into any Agreement having the economic
effect of any of the foregoing, except for borrowings incurred in the
Ordinary Course of Business, or (ii) make any loans, advances or capital
contributions to, or investments in, any other Person other than intra-
group loans, advances, capital contributions or investments between or
among the Company and any of its wholly owned Subsidiaries other than in
the Ordinary Course of Business;
(k) except for costs incurred by the Company in connection with the
transactions contemplated by this Merger Agreement but only to the extent
such costs are deducted pursuant to the calculation of Merger Consideration
in Article II hereof, pay, discharge, settle or satisfy
A-35
APPENDICES
<PAGE>
any claims, liabilities or obligations (whether absolute or contingent,
matured or unmatured, known or unknown), other than the payment, discharge
or satisfaction, in the Ordinary Course of Business or in accordance with
their terms, of liabilities reflected or reserved against in, or
contemplated by, the most recent Financial Statement or incurred in the
Ordinary Course of Business, or waive any material benefits of, or agree to
modify in any material respect, any confidentiality, standstill or similar
Agreements to which the Company or any Subsidiary is a party;
(l) except in the Ordinary Course of Business, waive, release or assign
any rights or claims, or modify, amend or terminate any Agreement to which
the Company or any Subsidiary is a party;
(m) make any change in any method of accounting or accounting practice or
policy other than those required by GAAP or a Governmental Entity;
(n) take any action or fail to take any action that would have a Company
Material Adverse Effect prior to or after the Effective Time or an Acquiror
Material Adverse Effect after the Effective Time, or that would adversely
affect the ability of the Company or any Subsidiary prior to the Effective
Time, or Acquiror or any of its subsidiaries after the Effective Time, to
obtain consents of third parties or approvals of Governmental Entities
required to consummate the transactions contemplated in this Merger
Agreement; or
(o) authorize, or commit or agree to do any of the foregoing.
Section 5.02. Other Actions.
The Company and Acquiror shall not, and shall not permit any of their
respective Affiliates to, take any action that would, or that could reasonably
be expected to, result in (a) any of the representations and warranties of
such party set forth in this Merger Agreement becoming untrue, or (b) any of
the conditions to the Merger set forth in Article VII not being satisfied.
Section 5.03. Certain Tax Matters.
From the date hereof until the Effective Time, the Company and the
Subsidiaries (a) will prepare and timely file with the relevant Taxing
authority all Company Tax Returns ("Post-Signing Returns") required to be
filed, which Post-Signing Returns shall be accurate in all material respects,
or permitted extensions with respect thereto, (b) will timely pay all Taxes
due and payable with respect to such Post-Signing Returns, (c) will pay or
otherwise make adequate provision for all Taxes payable by the Company and the
Subsidiaries for which no Post-Signing Return is due prior to the Effective
Time, and (d) will promptly notify Acquiror of any action, suit, proceeding,
claim or audit pending against or with respect to the Company or any
Subsidiary in respect of any Taxes.
Section 5.04. Access and Information.
For so long as this Merger Agreement is in effect, the Company shall, and
shall cause each Subsidiary to, (a) afford to Acquiror and its officers,
employees, accountants, consultants, legal counsel and other representatives
reasonable access during normal business hours, subject to reasonable advance
notice, to all of their respective properties, Agreements, books, records and
personnel and (b) furnish promptly to Acquiror (i) a copy of each agreement,
document, certificate or other instrument filed with, or received from any
Governmental Entity and (ii) all other information concerning their respective
businesses, operations, prospects, conditions (financial or otherwise),
Assets, liabilities and personnel as Acquiror may reasonably request.
A-36
APPENDICES
<PAGE>
Section 5.05. No Solicitation.
(a) The Company shall, and shall cause its directors, officers, employees,
representatives, agents and Subsidiaries and their respective directors,
officers, employees, representatives and agents to, and the Principal Company
Stockholders shall, and shall cause their respective representatives and
agents to, immediately cease any discussions or negotiations with any Person
that may be ongoing with respect to a Competing Transaction (as defined in
this Section 5.05(a)). While this Merger Agreement is in effect, the Company
shall not, and shall cause the Subsidiaries not to, and the Principal Company
Stockholders shall not, initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Competing Transaction, or enter into
discussions or furnish any information or negotiate with any Person or
otherwise cooperate in any way in furtherance of such inquiries or to obtain a
Competing Transaction, or agree to or endorse any Competing Transaction, or
authorize any of the directors, officers, employees, agents or representatives
of the Company or any Subsidiary to take any such action, and the Company
shall, and shall cause the Subsidiaries to, direct and instruct and use its or
their reasonable best efforts to cause the directors, officers, employees,
agents and representatives of the Company and the Subsidiaries (including,
without limitation, any investment banker, financial advisor, attorney or
accountant retained by the Company or any Subsidiary) not to take any such
action, and the Company or the applicable Principal Company Stockholders shall
promptly notify Acquiror if any such inquiries or proposals are received by
the Company, any Subsidiary, or such Principal Company Stockholders or any of
its or their respective directors, officers, employees, agents, investment
bankers, financial advisors, attorneys, accountants or other representatives,
and the Company or the applicable Principal Company Stockholders shall
promptly inform Acquiror as to the material terms of such inquiry or proposal
and, if in writing, promptly deliver or cause to be delivered to Acquiror a
copy of such inquiry or proposal, and the Company or the applicable Principal
Company Stockholders shall keep Acquiror informed, on a current basis, of the
nature of any such inquiries and the status and terms of any such proposals.
For purposes of this Merger Agreement, "Competing Transaction" shall mean any
of the following involving the Company or the Subsidiaries (other than the
transactions contemplated by this Merger Agreement): (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of ten percent (10%) or more of the Assets of the Company
and the Subsidiaries, taken as a whole, or issuance of ten percent (10%) or
more of the outstanding voting securities of the Company or any Subsidiary in
a single transaction or series of transactions; (iii) any tender offer or
exchange offer for ten percent (10%) or more of the outstanding shares of
capital stock of the Company or any Subsidiary or the filing of a registration
statement under the Securities Act in connection therewith; (iv) any
solicitation of proxies in opposition to approval by the Company Stockholders
of the Merger; (v) any Person shall have acquired beneficial ownership or the
right to acquire beneficial ownership of, or any "group" (as such term is
defined under Section 13(d) of the Exchange Act) shall have been formed after
the date of this Merger Agreement which beneficially owns or has the right to
acquire beneficial ownership of, ten percent (10%) or more of the then
outstanding shares of capital stock of the Company or any Subsidiary; or (vi)
any Agreement to, or public announcement by the Company or any other Person of
a proposal, plan or intention to, do any of the foregoing.
(b) Neither the Board of Directors of the Company nor any committee thereof
nor any Principal Company Stockholder shall (i) withdraw or modify, or propose
to withdraw or modify, in a manner adverse to Acquiror or Acquiror Sub, the
approval or recommendation by such Board of Directors or any such committee or
Principal Company Stockholder of this Merger Agreement or the Merger, (ii)
approve or recommend, or propose to approve or recommend, any Competing
Transaction or (iii) enter into any Agreement with respect to any Competing
Transaction.
A-37
APPENDICES
<PAGE>
ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.01. Registration Statement; Proxy Statement.
(a) As promptly as practicable after the execution of this Merger Agreement,
Acquiror shall prepare and file with the SEC a registration statement on Form
S-4 (such registration statement, together with the amendments thereto being
the "Registration Statement"), containing a proxy statement/prospectus, in
connection with the registration under the Securities Act of the shares of
Acquiror Common Stock issuable pursuant to Section 2.01, the vote or consent
of the Company Stockholders with respect to the Merger (such proxy
statement/prospectus, together with any amendments thereof or supplements
thereto, in each case in the form or forms delivered to the Company
Stockholders, being the "Proxy Statement") and the other transactions
contemplated by this Merger Agreement. Acquiror agrees to provide the Company
with an opportunity to review and comment on the Registration Statement and
the Proxy Statement before filing. Acquiror agrees promptly to provide the
Company with copies of all correspondence from and all responsive
correspondence to the SEC regarding the Registration Statement and Proxy
Statement. Acquiror agrees promptly to notify the Company of all stop orders
or threatened stop orders of which it becomes aware with respect to the
Registration Statement. Each of Acquiror and the Company will use all
reasonable best efforts to have or cause the Registration Statement to become
effective as promptly as practicable, and shall take any action required to be
taken under any applicable federal or state securities Laws in connection with
the issuance of shares of Acquiror Common Stock in the Merger. Each of
Acquiror and the Company shall furnish all information concerning it and the
holders of its capital stock as the other may reasonably request in connection
with such actions. As promptly as practicable after the Registration Statement
shall have become effective, the Company shall mail or otherwise deliver the
Proxy Statement to its stockholders, and the Company shall comply with the
proxy solicitation rules and regulations under the Exchange Act in connection
with the solicitation of such stockholders. The Proxy Statement shall include
the recommendation of the Company's Board of Directors to the Company
Stockholders to vote for or consent to the approval of this Merger Agreement
and the transactions contemplated hereby.
(b) The information supplied by the Company for inclusion in the
Registration Statement shall not, at the time the Registration Statement is
declared effective, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein not misleading. The information supplied by the
Company for inclusion in the Proxy Statement to be sent to the Company
Stockholders in connection with securing the vote or consent of the Company
Stockholders to consider the Merger shall not, at the date the Proxy Statement
(or any amendment thereof or supplement hereto) is first delivered to
stockholders, at the time the vote or consent is secured or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance relating to the Company or any of its affiliates, or its or their
respective officers or directors, should be discovered by the Company which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, the Company shall promptly inform Acquiror.
All documents that the Company is responsible for filing with the SEC in
connection with the transactions contemplated herein will comply as to form
and substance in all material respects with the applicable requirements of the
Securities Act and the rules and regulations thereunder and the Exchange Act
and the rules and regulations thereunder.
(c) The information supplied by Acquiror for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material
A-38
APPENDICES
<PAGE>
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by Acquiror for inclusion in the Proxy Statement to be
sent to the Company Stockholders in connection with securing the vote or
consent shall not, at the date the Proxy Statement (or any amendment thereof
or supplement thereto) is first delivered to stockholders, at the time the
vote or consent is secured or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to
Acquiror or any of its respective affiliates, or its or their respective
officers or directors, should be discovered by Acquiror which should be set
forth in an amendment to the Registration Statement or a supplement to the
Proxy Statement, Acquiror shall promptly inform the Company. All documents
that Acquiror is responsible for filing with the SEC in connection with the
transactions contemplated herein will comply as to form and substance in all
material respects with the applicable requirements of the Securities Act and
the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(d) The Company and Acquiror each hereby (i) consents to the use of its name
and, on behalf of its subsidiaries and affiliates, the names of such
subsidiaries and affiliates and to the inclusion of financial statements and
business information relating to such party and its subsidiaries and
affiliates (in each case, to the extent required by applicable securities
Laws) in any registration statement or proxy statement prepared by the Company
or Acquiror pursuant to this Merger Agreement; (ii) agrees to use its
reasonable best efforts to obtain the written consent of any Person retained
by it which may be required to be named (as an expert or otherwise) in such
registration statement or proxy statement; and (iii) agrees to cooperate, and
to use its reasonable best efforts to cause its subsidiaries and affiliates to
cooperate, with any legal counsel, investment banker, accountant or other
agent or representative retained by any of the parties specified in clause (i)
in connection with the preparation of any and all information required, as
determined after consultation with each party's counsel, to be disclosed by
applicable securities Laws in any such registration statement or proxy
statement.
Section 6.02. Stockholder Approval.
The Company shall promptly after the date of this Merger Agreement take all
action necessary in accordance with Delaware Law and its certificate of
incorporation and bylaws to secure the vote or consent of the Company
Stockholders required by Delaware Law to approve this Merger Agreement and the
transactions contemplated hereby.
Section 6.03. Appropriate Action; Consents; Filings.
(a) Upon the terms and subject to the conditions set forth in this Merger
Agreement, the Company and Acquiror shall use their reasonable best efforts to
take, or cause to be taken, all appropriate action, and do, or cause to be
done, and to assist and cooperate with the other parties in doing all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the transactions contemplated by this Merger Agreement as
promptly as practicable, including (i) executing and delivering any additional
instruments necessary, proper or advisable to consummate the transactions
contemplated by, and to carry out fully the purposes of, this Merger
Agreement, (ii) obtaining from any Governmental Entities any material Licenses
required to be obtained or made by Acquiror or the Company or any of their
subsidiaries in connection with the authorization, execution and delivery of
this Merger Agreement and the consummation of the transactions contemplated
herein, including, without limitation, the Merger, and (iii) making all
necessary filings, and thereafter making any other required submissions, with
respect to this Merger Agreement and the Merger required under (A) the
Securities Act, the Exchange Act and any other applicable federal or state
securities Laws, (B) the HSR Act and (C) any other applicable Law; provided
that Acquiror and the Company shall cooperate with each other in connection
with the
A-39
APPENDICES
<PAGE>
making of all such filings, including providing copies of all such documents
to the non-filing party and its advisors prior to filing and discussing all
reasonable additions, deletions or changes suggested in connection therewith.
The Company and Acquiror shall furnish to each other all information required
for any application or other filing to be made pursuant to the rules and
regulations of any applicable Law in connection with the transactions
contemplated by this Merger Agreement.
(b) (i) The Company and Acquiror shall give (or shall cause their respective
subsidiaries to give) any notices to third parties, and use, and cause their
respective subsidiaries to use, their reasonable best efforts to obtain any
third party consents, approvals or waivers (A) necessary, proper or advisable
to consummate the transactions contemplated in this Merger Agreement, (B)
disclosed or required to be disclosed in the Company Disclosure Schedule or
the Acquiror Disclosure Schedule, as the case may be, or (C) required to
prevent a Company Material Adverse Effect from occurring prior to or after the
Effective Time or an Acquiror Material Adverse Effect from occurring prior to
or after the Effective Time.
(ii) In the event that either the Company or Acquiror shall fail to
obtain any third party consent, approval or waiver described in subsection
(b)(i) above, such party shall use its reasonable best efforts, and shall
take any such actions reasonably requested by the other parties hereto, to
minimize any adverse effect upon the Company and Acquiror, their respective
subsidiaries, and their respective businesses resulting, or which could
reasonably be expected to result after the Effective Time, from the failure
to obtain such consent, approval or waiver.
(c) From the date of this Merger Agreement until the Effective Time, the
Company and Acquiror shall promptly notify each other in writing of any
pending or, to the knowledge of the Company or Acquiror (or their respective
subsidiaries), threatened action, proceeding or investigation by any
Governmental Entity or any other Person (i) challenging or seeking damages in
connection with the Merger or the conversion of the Company Capital Stock into
the Merger Consideration pursuant to the Merger or (ii) seeking to restrain or
prohibit the consummation of the Merger or otherwise limit the right of
Acquiror or its subsidiaries to own or operate all or any portion of the
businesses or Assets of the Company or any Subsidiary. The Company and
Acquiror shall cooperate with each other in defending any such action,
proceeding or investigation, including seeking to have any stay or temporary
restraining order entered by any court or other Governmental Entity vacated or
reversed.
(d) Concurrently with the Closing, Acquiror shall infuse the Company with a
sufficient amount of cash necessary and otherwise cause the Company and the
Subsidiaries to pay and satisfy in full in cash by wire transfer of
immediately available funds all of the Company's and the Subsidiaries'
indebtedness for borrowed money to (i) AT&T Commercial Finance Corporation
("AT&T CFC") and (ii) Media/Communications Partners III Limited Partnership
and M/C Investors, L.L.C.
Section 6.04. Amendment to Stockholders' Agreement.
Acquiror shall use reasonable best efforts to amend the Stockholders'
Agreement promptly following the Closing to add those parties who are parties
to the Stockholders' Agreement, dated as of November 18, 1998, among such
Persons, IES Investments Inc., Acquiror, Clark E. McLeod, Mary E. McLeod and
Richard A. Lumpkin as parties to the Stockholders' Agreement for purposes of
Section 1 thereof and who are not parties to the Stockholders' Agreement.
Section 6.05. Update Disclosure; Breaches.
(a) From and after the date of this Merger Agreement until the Effective
Time, each party hereto shall promptly notify the other parties hereto by
written update to its Disclosure Schedule of (i) any representation or
warranty made by it in connection with this Merger Agreement becoming untrue
or inaccurate, (ii) the occurrence, or non-occurrence, of any event the
occurrence, or non-occurrence, of which would be likely to cause any condition
to the obligations of any party to effect the
A-40
APPENDICES
<PAGE>
Merger and the other transactions contemplated by this Merger Agreement not to
be satisfied, or (iii) the failure of the Company, Acquiror or Acquiror Sub,
as the case may be, to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it pursuant to this Merger
Agreement which would be likely to result in any condition to the obligations
of any party to effect the Merger and the other transactions contemplated by
this Merger Agreement not to be satisfied; provided, however, that subject to
Section 6.05(b), the delivery of any notice pursuant to this Section 6.05(a)
shall not cure any breach of any representation or warranty requiring
disclosure of such matter prior to the date of this Merger Agreement or
otherwise limit or affect the rights and remedies available hereunder to the
party receiving such notice.
(b) The Company shall be permitted to update, correct or otherwise modify
the contents of the Company Disclosure Schedule up to ten (10) days prior to
the Closing Date to reflect changes or corrections so long as the changes or
corrections do not disclose any information that would have a Company Material
Adverse Effect. The representations and warranties of the Company set forth in
Article III shall be deemed to include, retroactively to the date hereof, any
Company Disclosure Schedule updated or modified consistent with the
requirements of this Section 6.05(b).
Section 6.06. Public Announcements.
Acquiror, Acquiror Sub and the Company shall consult with each other before
issuing or making, and shall give each other the opportunity to review and
comment upon, any press release or other public statement with respect to the
Merger and the other transactions contemplated in this Merger Agreement, and
shall not issue any such press release or make any such public statement prior
to such consultation, except as may be required by Law or any listing
agreement with the NASD (as defined in Article X).
Section 6.07. Registration of Company Options.
Acquiror shall take all corporate action necessary to reserve for issuance a
sufficient number of shares of Acquiror Common Stock for delivery upon
exercise of the Company Stock Options assumed in accordance with Section 2.04.
Acquiror shall either (i) include such Company Stock Options on Acquiror's
registration statement or Form S-8 relating to Acquiror's 1996 Employee Stock
Option Plan or (ii) file a registration statement on Form S-8 (or any
successor form) or another appropriate form, effective as of the Effective
Time, with respect to shares of Acquiror Common Stock subject to such Company
Stock Options and shall use its reasonable best efforts to maintain the
effectiveness of such registration statement or registration statements (and
maintain the current status of the prospectus or prospectuses contained
therein) for so long as such Company Stock Options remain outstanding. With
respect to those individuals who subsequent to the Merger will be subject to
the reporting requirements under Section 16(a) of the Exchange Act, Acquiror
shall administer the Company Stock Options assumed pursuant to Section 2.04 in
a manner that complies with Rule 16b-3 promulgated under the Exchange Act.
Section 6.08. Unaudited Financial Information.
The Company will cause to be prepared and will furnish to Acquiror as
promptly as possible an unaudited consolidated balance sheet of the Company
and the Subsidiaries as of the last day of each month ending after November
30, 1998 and the related unaudited consolidated statements of income of the
Company and the Subsidiaries for the one-month period then ended. The Company
will ensure that such Unaudited Statements are complete and correct in all
material respects, have been prepared in accordance with the books and records
of the Company and the Subsidiaries, and present fairly the consolidated
financial position of the Company and the Subsidiaries and their consolidated
results of operations and cash flows as of and for the respective dates and
time periods in accordance with GAAP applied on a basis consistent with prior
accounting periods, except as noted thereon and subject to the
A-41
APPENDICES
<PAGE>
absence of footnotes and a statement of cash flows and normal and recurring
year-end adjustments which are not expected to be material in amount.
Section 6.09. Environmental Matters.
(a) The Company will promptly furnish to Acquiror written notice of any
Hazardous Discharge or of any actions or notices described in Section 3.33(b).
(b) The Company will permit Acquiror, in Acquiror's discretion and at
Acquiror's expense, to cause to be prepared a Phase I environmental report on
each parcel of the Real Property or any real property leased by the Company or
any Subsidiary (to the extent the Company or a Subsidiary has the right to
allow Acquiror to do the same) designated by Acquiror and, if recommended
under the Phase I environmental report and so requested by Acquiror, a Phase
II environmental report, in each case prepared by an environmental consultant
designated by Acquiror (the "Environmental Reports"). The Company shall
cooperate with, and provide such information or other assistance as may be
requested by, Acquiror or the environmental consultant designated by Acquiror
in connection with the preparation and completion of such Environmental
Reports. Acquiror shall cause all Environmental Reports (including drafts
thereof) to be provided to the Company promptly after their receipt by
Acquiror.
Section 6.10. Post-Signing SEC Documents.
Acquiror will file with the SEC all reports, schedules, forms, statements
and other documents required to be filed by it after the date of this Merger
Agreement but before the Effective Time (the "Acquiror Post-Signing SEC
Documents").
Section 6.11. Indemnification.
(a) After the Effective Time, subject to the terms and conditions set forth
in Sections 6.11 and 6.12, the Company Stockholders shall severally and not
jointly indemnify and hold harmless Acquiror, the Surviving Corporation and
their respective officers and directors, and each person, if any, who controls
or may control Acquiror or the Surviving Corporation within the meaning of the
Securities Act (all such persons hereinafter are referred to individually as
an "Indemnified Person" and collectively as "Indemnified Persons," but in no
event shall any stockholder of the Company be such an Indemnified Person),
from and against any and all losses, costs, damages, liabilities and expenses,
including reasonable attorneys' fees and expenses, ("Damages") actually
suffered and arising out of the breach of the representations, warranties,
covenants and agreements given or made by the Company in this Merger
Agreement, in the Articles of Merger or in the Exhibits or Schedules hereto or
in any certificate or document delivered by or on behalf of the Company
pursuant hereto; provided however, that the maximum liability of the Company
Stockholders for indemnification under this Section 6.11 shall be limited to
$37,000,000; provided, further, that such limitation on the indemnification
obligations of the Company Stockholders shall not apply to any claim or claims
for indemnification to the extent such claim or claims are based on common law
fraud; provided, further, the Company Stockholders shall have no liability
under this Section 6.11(a) to the extent claims for Damages hereunder do not
exceed an aggregate of $1,750,000 and that if such Damages exceed an aggregate
of $1,750,000 then the indemnification provided for hereunder shall apply only
to Damages to the extent exceeding $1,750,000. It shall be a condition of the
right of each Indemnified Person to indemnification pursuant to this Section
6.11(a) that such Indemnified Person shall deliver to the Company Stockholder
from whom indemnification is sought a written claim for such indemnification,
setting forth in reasonable detail the basis therefor and setting forth the
amount of damages sought, on or prior to the date that the particular
representation, warranty, covenant or agreement for the breach of which the
indemnification is being sought, expires under the terms of this Merger
Agreement.
A-42
APPENDICES
<PAGE>
(b) In addition to the indemnification provided by Company Stockholders as
set forth in Section 6.11(a), each Principal Company Stockholder shall
severally and not jointly indemnify and hold harmless the Indemnified Persons
for Damages actually suffered and arising out of the breach of the
representations, warranties, covenants and agreements given or made by such
Principal Company Stockholder on its own behalf and only with respect to
itself or this Merger Agreement or in its Exhibits or Schedules thereto or in
any certificate or document delivered by or on behalf of such Principal
Company Stockholder pursuant hereto. No Principal Company Stockholder shall
have any liability for any breach of representation, warranty or covenant by
any other Principal Company Stockholder.
(c) Any payment to be made to an Indemnified Person by a Company Stockholder
or a Principal Company Stockholder under this Section 6.11 may be made in cash
or, in whole or in part, in Acquiror Common Stock having a value per share
equal to the average of the daily closing price, on The Nasdaq Stock Market's
National Market System as reported by Bloomberg, L.P., for the ten (10)
trading days immediately preceding the date of such payment.
(d) Except as set forth in Section 6.11(e), with respect to any Damages or
other amounts payable under this Merger Agreement, a Company Stockholder shall
be liable only for a fraction of such Damages or other amount, the numerator
of which is the number of shares of Company Common Stock (computed on a fully
diluted basis after giving pro forma effect to the exercise of all options,
warrants and rights to acquire Company Common Stock) held by such Company
Stockholder immediately prior to the Effective Time and the denominator of
which is equal to the aggregate number of shares of Company Common Stock
outstanding immediately prior to the Effective Time (computed on a fully
diluted basis and after giving pro forma effect to the exercise of all
options, warrants and rights to acquire Company Common Stock). After the
Effective Time, indemnification pursuant to this Section 6.11 shall be the
sole and exclusive remedy of Acquiror and the Surviving Corporation under or
in connection with this Merger Agreement or any of the transactions
contemplated herein.
(e) With respect to any Damages or other amounts payable under this Merger
Agreement by a Principal Company Stockholder under Section 6.11(b), the
indemnification provided with respect to a representation or warranty shall
apply to all Damages without regard to amount and there shall be no limitation
on the maximum liability for indemnification under Section 6.11(b).
Section 6.12. Procedures; Conditions of Indemnification.
With respect to any indemnification provided pursuant to this Merger
Agreement, the Indemnified Person agrees to give prompt written notice to the
Company Stockholder or Principal Company Stockholder, as the case may be, from
whom indemnification is sought of any claim or other assertion of liability by
third parties (hereinafter called collectively "Claims"), it being understood
that the failure to give such notice shall not affect the Indemnified Person's
right to indemnification and the indemnifying party's obligation to indemnify
as set forth in this Merger Agreement, unless the Company Stockholders' or
Principal Company Stockholders' rights with respect to such Claim are thereby
materially prejudiced.
The obligations and liabilities of the parties hereto with respect to their
respective indemnities pursuant to this Merger Agreement resulting from any
Claim shall be subject to the following terms and conditions:
(a) The Company Stockholders or Principal Company Stockholders, as the
case may be, shall have the right to undertake, by counsel or other
representatives of their own choosing, the defense of such Claim.
(b) In the event that the Company Stockholders or Principal Company
Stockholders, as the case may be, shall elect not to undertake such
defense, or within a reasonable time after notice of
A-43
APPENDICES
<PAGE>
any such Claim from the Indemnified Person shall fail to defend, the
Indemnified Person (upon further written notice to the Company Stockholders
or Principal Company Stockholders, as the case may be) shall have the right
to undertake the defense, compromise or settlement of such Claim, by
counsel or other representatives of its own choosing, on behalf of and for
the account and risk of the Company Stockholders or Principal Company
Stockholders, as the case may be (subject to the right of the Company
Stockholders or Principal Company Stockholders, as the case may be, to
assume defense of such Claim at any time prior to settlement, compromise or
final determination thereof); provided however, that no settlement or
compromise of such Claim shall be made without the written consent of the
Company Stockholders or Principal Company Stockholders, as the case may be,
which consent shall not be unreasonably withheld.
(c) Anything in this Section 6.12 to the contrary notwithstanding, (i) if
the Indemnified Person notifies the Company Stockholder or Principal
Company Stockholder, as the case may be, that the Indemnified Person has
concluded that a Claim may materially and adversely affect the Indemnified
Person other than as a result of money damages or other money payments, the
Indemnified Person shall have the right, at its own cost and expense, to
participate in the defense, compromise or settlement of the Claim, (ii) the
Company Stockholders or Principal Company Stockholders, as the case may be,
shall not, without the Indemnified Person's written consent, settle or
compromise any Claim or consent to entry of any judgment that does not
include as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Person of a release from all liability in
respect of such Claim, and (iii) in the event that the Company Stockholders
or Principal Company Stockholders, as the case may be, undertake defense of
any Claim, the Indemnified Person, by counsel or other representative of
its own choosing and at its sole cost and expense, shall have the right to
consult with the Company Stockholders or Principal Company Stockholders, as
the case may be, and their counsel or other representatives concerning such
Claim and the Company Stockholders or Principal Company Stockholders, as
the case may be, and the Indemnified Person and their respective counsel or
other representatives shall cooperate with respect to such Claim.
(d) Notwithstanding any other provision of this Section 6.12, the
Indemnified Person may at any time assume full control over the
responsibility for any Claim (other than a Claim against one or more
Company Stockholders or Principal Company Stockholders, as the case may
be), by written notice to the Company Stockholders or Principal Company
Stockholders, as the case may be, releasing the Company Stockholders or
Principal Company Stockholders, as the case may be, from any further
indemnity obligation pursuant to this Merger Agreement with respect to said
Claim.
(e) Any decision with respect to any matter under this Section 6.12
relating to indemnification by the Company Stockholders (including, without
limitation, the defense, prosecution, settlement or resolution of Claims)
shall be binding on all Company Stockholders if consented to by those
Company Stockholders who, immediately prior to the Effective Time, hold a
majority of the Company Common Stock held by all Company Stockholders.
Section 6.13. Affiliates; Tax Treatment.
Prior to the Effective Time, the Company shall use its reasonable best
efforts to obtain Affiliate Agreements from each Person listed in Section 3.41
of the Company Disclosure Schedule and any Person who may be deemed to have
become an affiliate of the Company (under SEC Rule 145 of the Securities Act)
after the date of this Merger Agreement and on or prior to the Effective Time,
provided that the Company shall use its reasonable best efforts to obtain
Affiliate Agreements from each such Person as soon as practicable after the
date of this Merger Agreement or the date on which such Person attains such
status, as the case may be. Each party hereto shall use its reasonable best
efforts to cause the Merger to qualify, and shall not take any actions which
could prevent the Merger from qualifying, as a reorganization qualifying under
the provisions of Section 368(a) and Section 368(a)(2)(D) of the Code.
A-44
APPENDICES
<PAGE>
Section 6.14. Tax Returns.
(a) To the extent permitted under applicable Tax Laws, the Merger shall be
reported as a "reorganization" within the meaning of Section 368(a) and
Section 368(a)(2)(D) of the Code in all federal, state and local Tax Returns
filed after the Effective Time. To the extent permitted under applicable Tax
Laws, no party to this Merger Agreement shall take any position inconsistent
with the foregoing on any Tax Return, in any audits or proceeding or
otherwise. Notwithstanding any other provision of this Merger Agreement, the
obligations set forth in this Section 6.14(a) shall survive the Effective Time
without limitation as to time or in any other respect.
(b) Acquiror and the Company each hereby represents and warrants to the
other that it is not aware of any applicable Tax Law that would require such
party to take any position inconsistent with the foregoing on any Tax Return.
Section 6.15. Reorganization.
During the period from the date of this Merger Agreement through the
Effective Time, unless Acquiror and the Company shall otherwise agree in
writing, Acquiror and the Company shall not, and shall cause their respective
subsidiaries not to, and the Principal Company Stockholders shall not,
knowingly take or fail to take any action which action or failure would
jeopardize the qualification of the Merger as a reorganization within the
meaning of Section 368(a) of the Code.
Section 6.16. Directors' and Officers' Insurance; Indemnification.
Acquiror agrees that for the entire period from the Effective Time until at
least six (6) years after the Effective Time, (a) Acquiror will cause the
Surviving Corporation to maintain the Company's current directors' and
officers' insurance and indemnification policy and related arrangements, or an
equivalent policy and related arrangements, subject in either case to terms
and conditions no less advantageous to the present and former directors and
officers of the Company than those contained in the policy and arrangements in
effect on the date hereof, for all present and former directors and officers
of the Company, covering claims made and insurable events occurring prior to
or within six (6) years after the Effective Time (provided that the Surviving
Corporation will not be required to maintain such policy except to the extent
that the aggregate annual cost of maintaining such policy is not in excess of
two hundred percent (200%) of the current annual cost, in which case the
Surviving Corporation shall maintain such policies up to an annual cost of two
hundred percent (200%) of the current annual cost); and (b) Acquiror will
cause the Surviving Corporation to maintain indemnification provisions,
including, without limitation, provisions for expense advances, for present
and former officers and directors in the Surviving Corporation's certificate
of incorporation and bylaws to the fullest extent permitted by Delaware Law.
In the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal or administrative, including, without
limitation, any such claim, action, suit proceeding or investigation in which
any of the present or former officers or directors (the "Managers") of the
Company is, or is threatened to be, made a party by reason of the fact that
such Manager is or was a director, officer, employee or agent of the Company,
or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other entity, whether before or after the Effective Time, the parties hereto
agree to cooperate and use their reasonable best efforts to defend against and
respond thereto. It is understood and agreed that the Company shall indemnify
and hold harmless, and after the Effective Time each of the Surviving
Corporation and Acquiror shall indemnify and hold harmless, as and to the full
extent that the Surviving Corporation would be permitted by applicable Law
(and as to matters arising from or relating to this Merger Agreement and the
possible change in control of the Company, to the full extent that Acquiror
would be permitted under applicable Law), each such Manager against any
losses, claims, damages, liabilities, costs, expenses (including reasonable
attorneys' fees), judgments, fines and amounts paid in settlement in
connection with any such claim, action, suit, proceeding or investigation; and
in the event of any such claim, action, suit, proceeding or
A-45
APPENDICES
<PAGE>
investigation (whether arising before or after the Effective Time), (i) the
Managers may retain counsel satisfactory to them, and the Company, or the
Surviving Corporation and Acquiror after the Effective Time, shall pay all
reasonable fees and expenses of such counsel for the Managers promptly as
statements therefor are received whether before or after final determination
of the matter, and (ii) the Company, or the Surviving Corporation and Acquiror
after the Effective Time, will use their respective reasonable best efforts to
assist in the vigorous defense of any such matter; provided that neither the
Company nor the Surviving Corporation or Acquiror shall be liable for any
settlement effected without its prior written consent (which consent shall not
be unreasonably withheld); and provided further that the Company's, the
Surviving Corporation's and Acquiror's obligations hereunder shall only be
reduced or relieved when and if a court of competent jurisdiction shall
ultimately determine, and such determination shall have become final and non-
appealable, that indemnification of such Manager in the manner contemplated is
prohibited by applicable Law.
Section 6.17. Obligations of Acquiror Sub.
Acquiror shall take all action necessary to cause Acquiror Sub to perform
its obligations under this Merger Agreement and to consummate the Merger on
the terms and conditions set forth in this Merger Agreement.
Section 6.18. Loan Agreement.
Concurrently with the execution of this Merger Agreement, the Company and
Acquiror shall enter into a Revolving Credit Agreement and Promissory Note in
the form attached hereto as Exhibit B (the "Revolving Credit Agreement"),
pursuant to which the Acquiror shall make available to the Company a loan (the
"Credit Facility") on the terms and subject to the conditions set forth
therein. In connection with the Revolving Credit Agreement, Acquiror shall,
within three (3) days of receiving executed signature pages by the Company and
AT&T Commercial Finance Corporation ("ATT CFC"), enter into a subordination
agreement with the Company and ATT CFC (the "Subordination Agreement")
substantially in the form attached as Exhibit A to the Revolving Credit
Agreement or in such other form as ATT CFC may reasonably request. Pursuant to
the Subordination Agreement, Acquiror shall subordinate the Credit Facility to
the prior payment in full of all of the Company's obligations owing to ATT
CFC. Acquiror's obligation to execute the Subordination Agreement is subject
to and conditioned upon Acquiror's receipt of a subordination agreement
executed by the Company, M/C Investors L.L.C. and Media/Communications
Partners III Limited Partnership (collectively "M/C") pursuant to which
subordination agreement the Company and M/C shall subordinate all indebtedness
of the Company to M/C, to the prior payment in full of all of the Company's
obligations owing to Acquiror to the same extent that the Acquiror
subordinates its obligations to ATT CFC.
Section 6.19 Letters of Accountants.
The Company shall use its reasonable best efforts to cause to be delivered
to Acquiror "cold comfort" letters of Ernst & Young L.L.P. dated the date on
which the Registration Statement shall become effective and the Effective
Time, respectively, and addressed to Acquiror, reasonably customary in scope
and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement
and transactions such as those contemplated by this Merger Agreement.
A-46
APPENDICES
<PAGE>
ARTICLE VII
CONDITIONS PRECEDENT
Section 7.01. Conditions to Obligations of Each Party Under This Merger
Agreement.
The respective obligations of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which
may be waived by agreement of Acquiror and the Company, in whole or in part,
to the extent permitted by applicable Law:
(a) Stockholder Approval. This Merger Agreement and the Merger shall have
been approved and adopted by the requisite vote of the Company
Stockholders.
(b) No Order. No Governmental Entity or federal or state court of
competent jurisdiction shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, executive order, decree, judgment,
injunction or other order (whether temporary, preliminary or permanent), in
any case which is in effect and which prevents or prohibits consummation of
the Merger; provided, however, that each of the parties shall use its
reasonable best efforts to cause any such decree, judgment, injunction or
other order to be vacated or lifted and provided further, that the failure
to obtain a required consent or approval of a Governmental Entity (other
than those specified in Section 7.01(c) and Section 7.01(d)) shall not form
the basis for an assertion that this condition is not satisfied.
(c) HSR Act. The applicable waiting period with respect to the Merger and
the other transactions contemplated hereby, together with any extensions
thereof, under the HSR Act shall have expired or been terminated.
(d) Certain Governmental Approvals. All consents, waivers, approvals and
authorizations required to be obtained, and all filings or notices required
to be made, by Acquiror or the Company prior to consummation of the
transactions contemplated in this Merger Agreement (other than the filing
of the Articles of Merger in accordance with Delaware Law) shall have been
obtained from and made with the FCC and each of the public utility
commissions of the states of Illinois, Michigan, Minnesota and Wisconsin.
(e) Company Securities. Other than (i) 23,971,756 shares of Company
Common Stock (which number of shares may be increased between the date of
the Merger Agreement and the Closing in connection with the exercise of
Company Stock Options described in clause (iii) below in accordance with
their terms), (ii) 240,000 shares of Series A Preferred Stock, and (iii)
Company Stock Options exercisable for 806,845 shares of Company Common
Stock (which number of Company Stock Options may be decreased between the
date of the Merger Agreement and the Closing in connection with the
exercise of Company Stock Options in accordance with their terms), there
shall be no other securities of the Company outstanding that are securities
convertible into or exchangeable for Company Common Stock or any other
equity securities of the Company and no outstanding options, rights
(preemptive or otherwise), or warrants to purchase or to subscribe for any
shares of such stock or other equity securities of the Company.
(f) Effectiveness of the Registration Statement. The Registration
Statement shall have been declared effective by the SEC under the
Securities Act. No stop order suspending the effectiveness of the
Registration Statement shall have been issued by the SEC and no proceedings
for that purpose shall have been initiated or, to the knowledge of Acquiror
or the Company, threatened by the SEC. Acquiror shall have received all
other federal or state securities permits and other authorizations
necessary to issue Acquiror Common Stock in exchange for Company Common
Stock and to consummate the Merger.
A-47
APPENDICES
<PAGE>
(g) Accountant Letters. Acquiror shall have received from the Company
"cold comfort" letters of Ernst & Young L.L.P. dated the date on which the
Registration Statement shall become effective and the Effective Time,
respectively, and addressed to Acquiror, reasonably customary in scope and
substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration
Statement and transactions such as those contemplated by this Merger
Agreement.
Section 7.02. Additional Conditions to Obligations of Acquiror and Acquiror
Sub.
The obligations of Acquiror and Acquiror Sub to effect the Merger and the
other transactions contemplated herein are also subject to the satisfaction at
or prior to the Effective Time of the following conditions, any or all of
which may be waived by Acquiror, in whole or in part, to the extent permitted
by applicable Law:
(a) Representations and Warranties. Each of the representations and
warranties of the Company and the Principal Company Stockholders contained
in this Merger Agreement shall be true and correct as of the date of this
Merger Agreement and shall be true and correct in all material respects
(except that where any statement in a representation or warranty expressly
includes a standard of materiality, such statement shall be true and
correct in all respects giving effect to such standard) as of the Effective
Time as though made as of the Effective Time, except that those
representations and warranties which address matters only as of a
particular date shall be true and correct in all material respects (except
that where any statement in a representation or warranty expressly includes
a standard of materiality, such statement shall be true and correct in all
respects giving effect to such standard) as of such date, and except (A)
for changes permitted by or consistent with this Merger Agreement, or (B)
in a representation and warranty that does not expressly include a standard
of a Company Material Adverse Effect, any untrue or incorrect statements
therein that, considered in the aggregate, do not indicate a Company
Material Adverse Effect. Acquiror shall have received a certificate of the
chief executive officer or chief financial officer of the Company to that
effect.
(b) Updated Company Disclosure Schedule. The revised versions of the
Company Disclosure Schedules delivered to Acquiror pursuant to Section
6.05(b) shall not disclose any Company Material Adverse Effect as compared
to such Sections of the Company Disclosure Schedule as of the date of this
Merger Agreement.
(c) Agreements and Covenants. The Company and the Principal Company
Stockholders shall have performed or complied in all respects with all
agreements and covenants required by this Merger Agreement to be performed
or complied with by them on or prior to the Effective Time except for such
noncompliance that does not have a Company Material Adverse Effect.
Acquiror shall have received a certificate of each Principal Company
Stockholder and the chief executive officer or chief financial officer of
the Company (as to the Company) to that effect.
(d) Opinion of Counsel. Acquiror shall have received from Edwards &
Angell, LLP, counsel to the Company, an opinion dated the Closing Date,
which is reasonable and customary for transactions of the type contemplated
by this Merger Agreement.
(e) No Challenge. There shall not be pending any enforcement action or
similar proceeding by any Government Entity that is likely to place
limitations on the ownership of shares of Company Capital Stock (or shares
of common stock of the Surviving Corporation) by Acquiror or Acquiror Sub
such that consummation of the Merger would violate any provisions of
Acquiror's indentures relating to its outstanding public indebtedness.
There shall not be pending any enforcement action or similar proceeding by
any state or federal Governmental Entity that is likely to have a Company
Material Adverse Effect or, if such action arises in connection with the
transactions contemplated hereby, an Acquiror Material Adverse Effect.
A-48
APPENDICES
<PAGE>
(f) Company Material Adverse Effect. Since December 31, 1997, there shall
not have occurred a Company Material Adverse Effect (or any development
that, insofar as reasonably can be foreseen, is reasonably likely to result
in any Company Material Adverse Effect) not disclosed in the Company
Disclosure Schedule.
(g) Tax Opinion. Acquiror shall have received the opinion of Hogan &
Hartson L.L.P., counsel to Acquiror, in the form of Exhibit C, dated the
Closing Date, to the effect that the Merger will not result in taxation to
Acquiror or Acquiror Sub under the Code. In rendering such opinion, Hogan &
Hartson L.L.P. shall require delivery of and rely upon the representation
letters delivered by Acquiror, Acquiror Sub and the Company substantially
in the forms of Exhibit D and Exhibit E hereto.
(h) Environmental Matters. The Environmental Reports shall indicate that
the Real Property does not contain any Hazardous Materials and is not
subject to any risk of contamination from any off-site Hazardous Materials,
except to the extent that the presence of any such Hazardous Materials or
the risk of such contamination would not have a Company Material Adverse
Effect or an Acquiror Material Adverse Effect. This Section 7.02(h) shall
be deemed waived by Acquiror and Acquiror Sub if Acquiror shall not have
caused the Phase I environmental reports to be prepared pursuant to Section
6.09(b) within fifteen (15) days following the date of this Merger
Agreement and the Phase II environmental reports, if requested by Acquiror,
to be prepared pursuant to Section 6.09(b) within thirty-five (35) days
following the date hereof, or if Acquiror shall have failed to give an
Environmental Problem Notice within the period provided in Section 8.01(e).
(i) Claims Certificate. The Company shall have delivered to Acquiror and
Acquiror Sub a certificate dated as of the Closing Date signed by a duly
authorized officer stating that (i) to its knowledge, except as specified
in such certificate in reasonable detail, the Company is aware of no breach
of any representation, warranty or covenant by Acquiror or Acquiror Sub
under this Merger Agreement or under any agreement or instrument executed
in connection herewith that could be reasonably expected to result in a
claim for indemnification under this Merger Agreement and (ii) the Company
and the Principal Company Stockholders irrevocably waive any and all rights
to indemnification against Acquiror and Acquiror Sub to the extent any
Damages arising from the matters described in such certificate or any other
matters of which the Company then has knowledge exceed $5,000,000 in the
aggregate.
(j) Affiliate Agreements. Acquiror shall have received, after the date of
this Merger Agreement and on or prior to the Closing Date, a signed
Affiliate Agreement from each Person listed in Section 3.41 of the Company
Disclosure Schedule and any other Person who may be deemed to have become
an affiliate of the Company (under Rule 145 of the Securities Act).
Section 7.03. Additional Conditions to Obligations of the Company.
The obligations of the Company to effect the Merger and the other
transactions contemplated herein are also subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which
may be waived by the Company, in whole or in part, to the extent permitted by
applicable Law:
(a) Representations and Warranties. Each of the representations and
warranties of Acquiror and Acquiror Sub contained in this Merger Agreement
shall be true and correct as of the date of this Merger Agreement and shall
be true and correct in all material respects (except that where any
statement in a representation or warranty expressly includes a standard of
materiality, such statement shall be true and correct in all respects
giving effect to such standard) as of the Effective Time as though made as
of the Effective Time, except that those representations and warranties
which address matters only as of a particular date shall be true
A-49
APPENDICES
<PAGE>
and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality,
such statement shall be true and correct in all respects giving effect to
such standard) as of such date, and except (A) for changes permitted by or
consistent with this Merger Agreement or (B) in a representation and
warranty that does not expressly include a standard of an Acquiror Material
Adverse Effect, any untrue or incorrect statements therein that, considered
in the aggregate, do not indicate an Acquiror Material Adverse Effect. The
Company shall have received a certificate of the chief executive officer or
chief financial officer of Acquiror to that effect.
(b) Agreements and Covenants. Acquiror and Acquiror Sub shall have
performed or complied in all respects with all agreements and covenants
required by this Merger Agreement to be performed or complied with by them
on or prior to the Effective Time except for such noncompliance that does
not have an Acquiror Material Adverse Effect. The Company shall have
received a certificate of the chief executive officer or chief financial
officer of Acquiror and Acquiror Sub to that effect.
(c) Opinion of Counsel. The Company shall have received from Hogan &
Hartson L.L.P. an opinion dated the Closing Date, which is reasonable and
customary for transactions of the type contemplated by the Merger
Agreement.
(d) Intentionally Deleted.
(e) Tax Opinion. The Company shall have received the opinion of Edwards &
Angell, LLP, counsel to the Company, in the form of Exhibit F, dated the
Closing Date, to the effect that the Merger will not result in taxation to
the Company or the Company Stockholders under the Code. In rendering such
opinion, Edward & Angell, LLP may require delivery of and rely upon the
representation letters delivered by Acquiror, Acquiror Sub and the Company
substantially in the forms of Exhibit G and Exhibit H hereto.
(f) Acquiror Material Adverse Effect. Since December 31, 1997, there
shall not have occurred an Acquiror Material Adverse Effect (or any
development that, insofar as reasonably can be foreseen, is reasonably
likely to result in any Acquiror Material Adverse Effect) not disclosed in
the Acquiror Disclosure Schedule.
(g) Claims Certificate. Acquiror and Acquiror Sub shall have delivered to
the Company a certificate dated as of the Closing Date signed by a duly
authorized officer stating that (i) to their knowledge, except as specified
in such certificate in reasonable detail, Acquiror and Acquiror Sub are
aware of no breach of any representation, warranty or covenant by the
Company or any Principal Company Stockholder under this Merger Agreement or
under any agreement or instrument executed in connection herewith that
could be reasonably expected to result in a claim for indemnification under
this Merger Agreement and (ii) Acquiror and Acquiror Sub irrevocably waive
any and all rights to indemnification against the Principal Company
Stockholders and the Company Stockholders to the extent any Damages arising
from the matters described in such certificate or any other matters of
which Acquiror or Acquiror Sub then has knowledge exceed $5,000,000 in the
aggregate.
(h) No Challenge. There shall not be pending any enforcement action or
similar proceeding by any Government Entity that is likely to place
limitations on the ownership of shares of Company Capital Stock (or shares
of common stock of the Surviving Corporation) by Acquiror or Acquiror Sub
such that consummation of the Merger would violate any provisions of
Acquiror's indentures relating to its outstanding public indebtedness.
There shall not be pending any enforcement action or similar proceeding by
any state or federal Governmental Entity that is likely to have an Acquiror
Material Adverse Effect or, if such action arises in connection with the
transactions contemplated hereby, a Company Material Adverse Effect.
A-50
APPENDICES
<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
Section 8.01. Termination.
This Merger Agreement may be terminated at any time (except where otherwise
indicated) prior to the Effective Time, whether before or after approval of
this Merger Agreement and the Merger by the Company Stockholders:
(a) by mutual written consent of Acquiror and the Company;
(b) (i) by Acquiror, if there has been a breach by the Company of any of
its representations, warranties, covenants or agreements contained in this
Merger Agreement, or any such representation and warranty shall have become
untrue, in any such case such that Section 7.02(a), Section 7.02(b) or
Section 7.02(c) will not be satisfied and such breach or condition has not
been cured such that Section 7.02(a), Section 7.02(b), or Section 7.02(c),
as the case may be, will be satisfied within twenty (20) business days
following receipt by the Company of written notice of such breach
describing the extent and nature thereof in reasonable detail;
(ii) by the Company, if there has been a breach by Acquiror or Acquiror
Sub of any of its representations, warranties, covenants or agreements
contained in this Merger Agreement, or any such representation and warranty
shall have become untrue, in any such case such that Section 7.03(a) or
Section 7.03(b) will not be satisfied and such breach or condition has not
been cured such that Section 7.03(a) or Section 7.03(b), as the case may
be, will be satisfied within twenty (20) business days following receipt by
Acquiror of written notice of such breach describing the extent and nature
thereof in reasonable detail;
(c) by either Acquiror or the Company if any decree, permanent
injunction, judgment, order or other action by any court of competent
jurisdiction or any other federal or state (but not county or municipal)
Governmental Entity preventing or prohibiting consummation of the Merger
shall have become final and non-appealable;
(d) by either Acquiror or the Company if this Merger Agreement shall fail
to receive the requisite vote for approval and adoption by the Company
Stockholders;
(e) by either Acquiror or the Company if the Merger shall not have been
consummated by the earlier to occur of the Scheduled Closing Date or May 1,
1999; provided however, that the right to terminate this Merger Agreement
under this Section 8.01(e) shall not be available to (i) Acquiror, where
Acquiror's willful failure to fulfill any obligation under this Merger
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date, or (ii) the Company, where
the Company's willful failure to fulfill any obligation under this Merger
Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date;
(f) by either the Company or the Acquiror upon written notice to the
other party if (i) having performed the Phase I and Phase II Environmental
Reports contemplated in Section 6.09(b) within the time periods provided in
Section 7.02(h) and (ii) having reasonably concluded that the Real Property
does contain Hazardous Materials or is subject to a risk of contamination
from off site Hazardous Materials that, in either case, would be reasonably
expected to have a Company Material Adverse Effect, the Acquiror notifies
the Company of such conclusion specifying the basis therefor in reasonable
detail in writing (the "Environmental Problem Notice") within two (2)
business days following the completion of such Environmental Reports;
provided, however, that this Section 8.01(f) shall be deemed waived by
Acquiror if the Company Stockholders representing at least 85% of the
Merger Consideration agree in writing to indemnify and hold harmless the
A-51
APPENDICES
<PAGE>
Indemnified Persons from and against any and all Damages actually suffered
and arising out of the existence of any Hazardous Materials on the Real
Property or the contamination of the Real Property from any off-site
Hazardous Materials (without regard to any deductibles or caps on liability
set forth in Section 6.11);
(g) by either Acquiror or the Company upon written notice to the other if
such party does not receive the certificate containing the information
specified in clause (i) of Section 7.02(i) or 7.03(g), respectively;
(h) by either Acquiror or the Company upon written notice to the other
party if such party does not receive the certificate containing the waiver
specified in clause (ii) of Sections 7.02(i) or 7.03(g), respectively.
Section 8.02. Effect of Termination.
In the event of termination of this Merger Agreement by either Acquiror or
the Company as provided in Section 8.01, this Merger Agreement shall forthwith
become void and there shall be no liability or obligation on the part of
Acquiror, Acquiror Sub or the Company or any of their respective directors or
officers except (i) nothing herein shall relieve any party from liability for
any breach hereof, (ii) each party shall be entitled to any remedies at law or
in equity for such breach and (iii) Sections 8.02 and 8.03 and Article IX
shall remain in full force and effect and survive any termination of this
Merger Agreement. Notwithstanding the foregoing, if this Merger Agreement is
terminated pursuant to (x) Section 8.01(f), then the Company shall have no
liability to Acquiror or Acquiror Sub for a breach of the representation and
warranty set forth in Section 3.33, (y) Section 8.01(g), then neither the
Company, on the one hand, nor Acquiror and Acquiror Sub, on the other hand,
shall have any liability under this Agreement or (z) Section 8.01(h), then
neither the Company, on the one hand, nor Acquiror and Acquiror Sub, on the
other hand, shall be entitled to any recovery for such liability in excess of
$750,000.
Section 8.03. Expenses.
Whether or not the Merger is consummated, all costs and expenses incurred in
connection with this Merger Agreement and the transactions contemplated hereby
shall be paid by the party incurring such expense.
Section 8.04. Amendment.
Subject to applicable Law, this Merger Agreement may be amended by the
parties hereto at any time prior to the Effective Time. This Merger Agreement
may not be amended except by an instrument in writing signed by the parties
hereto.
Section 8.05. Extension; Waiver.
At any time prior to the Effective Time, the parties hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any agreements, documents, certificates or
other instruments delivered pursuant hereto and (c) waive compliance with any
of the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby. The failure of any party to assert any of its
rights under this Merger Agreement or otherwise shall not constitute a waiver
of such rights.
A-52
APPENDICES
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
Section 9.01. Survival of Representations and Warranties.
The representations and warranties of the Company and the Principal Company
Stockholders contained in the Merger Agreement shall survive the Effective
Time for a period of eighteen (18) months; provided, however, that the
representations and warranties of the Company contained in Sections 3.16
(Pension and Benefits Plan), Section 3.17 (Taxes and Tax Matters), and Section
3.33 (Environmental Matters), shall survive until the expiration of the
applicable statute of limitations, it being understood that after the
Effective Time any claim for Damages resulting from a breach of any
representation and warranty of the Company shall be subject to the limitations
contained in Section 6.11 and Section 6.12. The representations and warranties
of Acquiror contained in the Merger Agreement shall survive the Effective Time
for a period of eighteen (18) months; it being understood that after the
Effective Time the maximum liability of Acquiror for any breach of the
representations, warranties, covenants and agreements given or made by
Acquiror in this Merger Agreement, in the Articles of Merger or in the
Exhibits or Schedules hereto or in any certificate or document delivered by or
on behalf of Acquiror pursuant hereto, shall be limited to an amount equal to
$37,000,000. Notwithstanding anything herein to the contrary, any
representation, warranty, covenant or agreement which is the subject of a
claim which is asserted in writing in compliance with Section 6.11(a) or
Section 6.11(b) prior to the expiration of the applicable period set forth
above shall survive with respect to such claim or dispute until the final
resolution thereof.
Section 9.02. Notices.
All notices and other communications given or made pursuant hereto shall be
in writing and shall be deemed to have been duly given or made as of the date
delivered, mailed or transmitted if delivered personally, mailed by registered
or certified mail (postage prepaid, return receipt requested) or sent by
overnight courier (providing proof of delivery) to the parties at the
following addresses or sent by electronic transmission to the following
telecopier numbers (or at such other address or telecopy number for a party as
shall be specified by like notice):
(a) If to Acquiror or Acquiror Sub:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW
PO Box 3177
Cedar Rapids, Iowa 52406-3177
Telecopier No.: (319) 298-7901
Attention: Randall Rings
Vice President, General Counsel and Secretary
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004
Telecopier No.: (202) 637-5910
Attention: Joseph G. Connolly, Jr.
A-53
APPENDICES
<PAGE>
(b) If to the Company:
Ovation Communications, Inc.
400 South Highway 169
Suite 750
Minneapolis, MN 55426
Telecopier No.: (612) 252-5150
Attention: Timothy T. Devine
With a copy (which shall not constitute notice) to:
Edwards & Angell, LLP
101 Federal Street
Boston, Massachusetts 02110
Telecopier No.: (617) 439-4170
Attention: Stephen O. Meredith, Esq.
(c) If to any Principal Company Stockholder, to it at the address set
forth in the Company Disclosure Schedule.
With copies (which shall not constitute notice) to:
Edwards & Angell, LLP
101 Federal Street
Boston, Massachusetts 02110
Telecopier No.: (617) 439-4170
Attention: Stephen O. Meredith, Esq.
(d) If to a Company Stockholder (other than the Principal Company
Stockholders whose notice shall be made pursuant to paragraph (c) above) to
it at the last known address on the Company's books and records.
Section 9.03. Headings.
The headings contained in this Merger Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Merger Agreement.
Section 9.04. Severability.
If any term or other provision of this Merger Agreement is invalid, illegal
or incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Merger Agreement shall nevertheless remain
in full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Merger Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner
to the end that transactions contemplated hereby are fulfilled to the extent
possible.
Section 9.05. Entire Agreement.
This Merger Agreement (together with the Exhibits, Schedules, the Company
Disclosure Schedule and the Acquiror Disclosure Schedule and the other
documents delivered pursuant hereto) and the Confidentiality Agreement (as
defined in Article X) constitute the entire agreement of the parties and
supersede all prior agreements and undertakings, both written and oral, among
the parties, or any of them, with respect to the subject matter hereof and,
except as otherwise expressly provided herein, are not intended to confer upon
any other Person any rights or remedies hereunder.
A-54
APPENDICES
<PAGE>
Section 9.06. Assignment.
This Merger Agreement shall not be assigned by operation of Law or
otherwise.
Section 9.07. Parties in Interest.
This Merger Agreement shall be binding upon and inure solely to the benefit
of each party hereto, and nothing in this Merger Agreement, express or
implied, other than the right to receive the consideration payable in the
Merger pursuant to Article II, is intended to or shall confer upon any other
Person any right, benefit or remedy of any nature whatsoever under or by
reason of this Merger Agreement.
Section 9.08. Mutual Drafting.
Each party hereto has participated in the drafting of this Merger Agreement,
which each party acknowledges is the result of extensive negotiations between
the parties.
Section 9.09. Specific Performance.
In addition to any other remedies which any party may have at law or in
equity, (a) the Company hereby acknowledges that the Company Capital Stock and
the Company and the Subsidiaries are unique, and that the harm to Acquiror
resulting from breaches by the Company of its obligations cannot be adequately
compensated by damages and (b) Acquiror and Acquiror Sub hereby acknowledge
that the Acquiror Common Stock and Acquiror and Acquiror Sub are unique, and
that the harm to the Company resulting from breaches by the Acquiror or
Acquiror Sub of their respective obligations cannot be adequately compensated
by damages. Accordingly, (i) the Company agrees that Acquiror and Acquiror Sub
shall have the right to have all obligations, undertakings, agreements,
covenants and other provisions of this Merger Agreement specifically performed
by the Company and that Acquiror and Acquiror Sub shall have the right to
obtain an order or decree of such specific performance in any of the courts of
the United States of America or of any state or other political subdivision
thereof and (ii) Acquiror and Acquiror Sub agree that the Company shall have
the right to have all obligations, undertakings, agreements, covenants and
other provisions of this Merger Agreement specifically performed by Acquiror
and Acquiror Sub and that the Company shall have the right to obtain an order
or decree of such specific performance in any of the courts of the United
States of America or of any state or other political subdivision thereof.
Section 9.10. Governing Law.
This Merger Agreement shall be governed by, and construed in accordance
with, the Laws of the State of Delaware, regardless of the Laws that might
otherwise govern under applicable principles of conflicts of law.
Section 9.11. Counterparts.
This Merger Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed and delivered shall be deemed to be an original
but all of which taken together shall constitute one and the same agreement.
Section 9.12. Confidentiality.
All information delivered to or obtained by or on behalf of any party to
this Merger Agreement shall be held pursuant to the Confidentiality Agreement.
A-55
APPENDICES
<PAGE>
Section 9.13. General Exclusion.
(a) Company Exclusion. Notwithstanding anything to the contrary set forth in
this Agreement, in no event shall it constitute a breach of any
representation, warranty or covenant of the Company set forth herein, or a
failure of any condition to Acquiror's or Acquiror Sub's obligations herein if
any fact, matter or thing referred to herein changes or results in the failure
of any condition to Acquiror's or Acquiror Sub's obligations to the extent
that such change or failure of condition results from (i) changes that are
applicable to the competitive local exchange carrier industry generally in the
states in which the Company or its Subsidiaries operate (including, without
limitation, changes in federal or state Law) or (ii) any act or omission
following the date of this Merger Agreement on the part of any incumbent local
exchange carrier with which the Company or any of its Subsidiaries has an
Agreement, against or affecting the Company or its Subsidiaries, whether (aa)
in connection with an effective or anticipated change in Law (such as the
cessation of reciprocal compensation payments), (bb) as a result of the
transactions contemplated in this Merger Agreement or (cc) otherwise; provided
that the Company or the Subsidiaries are otherwise materially in compliance
with their Agreement with such incumbent local exchange carrier.
(b) Acquiror and Acquiror Sub Exclusion. Notwithstanding anything to the
contrary set forth in this Agreement, in no event shall it constitute a breach
of any representation, warranty or covenant of Acquiror or Acquiror Sub set
forth herein, or a failure of any condition to the Company's obligations
herein if any fact, matter or thing referred to herein changes or results in
the failure of any condition to the Company's obligations to the extent that
such change or failure of condition results from (i) changes that are
applicable to the telecommunications or directory publishing industries
generally (including, without limitation, changes in federal or state Law),
(ii) any act or omission following the date of this Merger Agreement on the
part of any incumbent local exchange carrier with which Acquiror or any of its
subsidiaries has an Agreement, against or affecting Acquiror or its
subsidiaries, whether (aa) in connection with an effective or anticipated
change in Law (such as the cessation of reciprocal compensation payments),
(bb) as a result of the transactions contemplated in this Merger Agreement or
(cc) otherwise; provided that Acquiror or its subsidiaries are otherwise
materially in compliance with their Agreement with such incumbent local
exchange carrier, or (iii) any decrease in the trading price of the Acquiror
Common Stock on The Nasdaq Stock Market's National Market System as reported
by Nasdaq.
ARTICLE X
DEFINITIONS
For purposes of this Merger Agreement, the following terms, and the singular
and plural thereof, shall have the meanings set forth below:
"Acquiror" is defined in the Preamble to this Merger Agreement.
"Acquiror Common Stock" is defined in Section 2.01.
"Acquiror Common Stock Closing Price" is defined in Section 2.01(a)(iv).
"Acquiror Disclosure Schedule" is defined in Article IV.
"Acquiror Material Adverse Effect" means any event, change or effect that,
individually or when taken together with any and all other events, changes or
effects, is or is reasonably likely to be materially adverse to the business,
operations, condition (financial or otherwise), Assets or liabilities of
Acquiror and its subsidiaries, taken as a whole; provided, however, the
parties expressly agree that an Acquiror Material Adverse Effect shall not
mean or be deemed to include any event, change or effect described in Section
9.13(b).
A-56
APPENDICES
<PAGE>
"Acquiror Options" is defined in Section 2.04.
"Acquiror Post-Signing SEC Documents" is defined in Section 6.10.
"Acquiror SEC Documents" is defined in Section 4.07.
"Acquiror Sub" is defined in the Preamble to this Merger Agreement.
"Affiliate" means: (a) with respect to an individual, any member of such
individual's family; (b) with respect to an entity, any officer, director,
stockholder, partner or investor of or in such entity or of or in any
Affiliate of such entity; and (c) with respect to a Person, any Person which
directly or indirectly, through one or more intermediaries, Controls, is
Controlled by, or is under common Control with such person or entity.
"affiliate" means, with respect to any Person, a Person that directly or
indirectly, through one or more intermediaries, Controls, is Controlled by, or
is under common Control with, such Person.
"Agreement" means any agreement between two or more Persons with respect to
their relative rights and/or obligations or with respect to a thing done or to
be done, including, without limitation, agreements denominated as contracts,
leases, promissory notes, covenants, easements, rights of way, covenants,
commitments, arrangements and understandings.
"Articles of Merger" is defined in Section 1.02.
"Assets" means assets of every kind and everything that is or may be
available for the payment of liabilities (whether inchoate, tangible or
intangible), including, without limitation, real and personal property.
"Audited Balance Sheet" is defined in Section 3.08(a).
"Audited Statements" is defined in Section 3.08(a)
"Average Trading Price" is defined in Section 2.02(e).
"beneficial owner" means, with respect to any shares of Company Common Stock
or Company Preferred Stock, a Person who shall be deemed to be the beneficial
owner of such shares (i) which such Person or any of its affiliates or
associates beneficially owns, directly or indirectly, (ii) which such Person
or any of its affiliates or associates (as such term is defined in Rule 12b-2
under the Exchange Act) has, directly or indirectly, (A) the right to acquire
(whether such right is exercisable immediately or subject only to the passage
of time), pursuant to any Agreement or upon the exercise of conversion rights,
exchange rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any Agreement, (iii) which are beneficially owned, directly or
indirectly, by any other Persons with whom such Person or any of its
affiliates or associates has any Agreement for the purpose of acquiring,
holding, voting or disposing of any such shares, or (iv) pursuant to Section
13(d) of the Exchange Act and any rules or regulations promulgated thereunder.
"business day" means a day other than a Saturday, a Sunday or any other day
on which commercial banks in the State of Minnesota and in the State of Iowa
are authorized or obligated to be closed.
"Blue Sky Laws" means state securities or blue sky laws and the rules and
regulations thereunder.
"Cash Election" is defined in Section 2.01(a)(i).
"Cash Election Shares" is defined in Section 2.01(a)(i).
A-57
APPENDICES
<PAGE>
"Certificates" is defined in Section 2.02(b).
"Claims" is defined in Section 6.12.
"Closing" is defined in Section 2.05.
"Closing Date" is defined in Section 1.02.
"Code" is defined in the Preamble to this Merger Agreement.
"Common Control Entity" means any trade or business under common control (as
such term is defined in Section 414(b) or 414(c) of the Code) with the Company
or any Subsidiary.
"Common Stock Cash Amount" means the result of:
(A) the total of $289 million minus (1) the amount to payoff the
subordinated debt owed by the Company to M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership (collectively,
"M/C"); and, minus (2) the amount paid in exchange for the conversion of
all of the Company Series A Preferred Stock pursuant to Section
2.01(a)(ii); and, minus (3) costs incurred by the Company in connection
with the transactions contemplated by this Merger Agreement;
(B) divided by the number of shares of Company Common Stock validly
issued and outstanding and fully paid and nonassessable at the close of
business on the business day before the Closing Date.
"Common Stock Exchange Ratio" means the ratio with:
(A) the numerator being the result of (1) the total of $289 million minus
(a) the amount to payoff the subordinated debt owed by the Company to M/C
Investors L.L.C. and Media/Communications Partners III Limited Partnership
(collectively, "M/C"); and, minus (b) the amount paid in exchange for the
conversion all of the Company Series A Preferred Stock pursuant to Section
2.01(a)(ii); and, minus (c) costs incurred by the Company in connection
with the transactions contemplated by this Merger Agreement; divided by (2)
$29.00; and,
(B) the denominator being the number of shares of Company Common Stock
validly issued and outstanding and fully paid and nonassessable at the
close of business on the business day before the Closing Date.
"Common Stock Merger Consideration" means the Common Stock Cash Amount
together with the Common Stock Exchange Ratio.
"Communications Act" means the Communications Act of 1934, as amended, and
all Laws promulgated pursuant thereto or in connection therewith.
"Company" is defined in the Preamble to this Merger Agreement.
"Company Affiliates" is defined in Section 3.41.
"Company Capital Stock" is defined in Section 3.04.
"Company Common Stock" is defined in Section 2.01(a).
"Company Contracts" is defined in Section 3.14(a).
"Company Disclosure Schedule" is defined in Article III.
A-58
APPENDICES
<PAGE>
"Company Dissenting Shares" means shares of Company Capital Stock held by
any Company Stockholder who elects to exercise appraisal rights in compliance
with Delaware Law.
"Company Dissenting Stockholder" is defined in Section 2.06.
"Company Licenses" is defined in Section 3.07(a).
"Company Material Adverse Effect" means any event, change or effect that,
individually or when taken together with any and all other events, changes or
effects, is or is reasonably likely to be materially adverse to the business,
operations, condition (financial or otherwise), Assets or liabilities of the
Company and the Subsidiaries, taken as a whole; provided, however, the parties
expressly agree that a Company Material Adverse Effect shall not mean or be
deemed to include any event, change or effect described in Section 9.13(a).
"Company Series A Preferred Stock" is defined in Section 2.01.
"Company Stock Options" is defined in Section 2.04.
"Company Stockholders" is defined in the Preamble to this Merger Agreement.
"Company Tax Returns" means all Tax Returns required to be filed by the
Company or any of the Subsidiaries (without regard to extensions of time
permitted by law or otherwise).
"Company Year 2000 Review" is defined in Section 3.40(b).
"Competing Transaction" is defined in Section 5.05(a).
"Confidentiality Agreement" means the letter agreement, signed in December
1998, between Acquiror and the Company relating to the exchange of
confidential information.
"Control" (including the terms "Controlled by" and "under common Control
with") means, as used with respect to any Person, possession, directly or
indirectly or as a trustee or executor, of power to direct or cause the
direction of management or policies of such Person (whether through ownership
of voting securities, as trustee or executor, by Agreement or otherwise).
"Damages" is defined in Section 6.11.
"Defined Benefit Plan" means a Plan that is or was a "defined benefit plan"
as such term is defined in Section 3(35) of ERISA.
"Delaware Law" is defined in the Preamble to this Merger Agreement.
"DOL" means the United States Department of Labor and its successors.
"Effective Time" is defined in Section 1.02.
"Encumbrance" means any mortgage, lien, pledge, encumbrance, security
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, Agreement, claim or equity of any
kind.
"Environmental Laws" means any Laws (including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act),
including any plans, other criteria, or guidelines promulgated pursuant to
such Laws, now or hereafter in effect relating to Hazardous Materials
generation, production, use, storage, treatment, transportation or disposal,
or noise control, or the protection of human health or the environment.
A-59
APPENDICES
<PAGE>
"Environmental Reports" is defined in Section 6.09(b).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"ESOP" means an "employee stock ownership plan" as such term is defined in
Section 407(d)(6) of ERISA or Section 4975(e)(7) of the Code.
" Exchange Agent" is defined in Section 2.02(a).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
all Laws promulgated pursuant thereto or in connection therewith.
"Exchange Fund" is defined in Section 2.02(a).
"FAA" means the United States Federal Aviation Administration and its
successors.
"FCC" means the United States Federal Communications Commission and its
successors.
"Federal Aviation Act" means the Federal Aviation Act of 1958, as amended,
and all Laws promulgated pursuant thereto or in connection therewith.
"Financial Statements" is defined in Section 3.08.
"Form of Election" is defined in Section 2.01(a)(i).
"GAAP" means United States generally accepted accounting principles.
"Governmental Entities" (including the term "Governmental") means any
governmental, quasi-governmental or regulatory authority, whether domestic or
foreign.
"group" is defined in Section 5.05(a).
"Hazardous Discharge" means any emission, spill, release or discharge
(whether on Real Property, on property adjacent to the Real Property, or at
any other location or disposal site) into or upon the air, soil or
improvements, surface water or groundwater, or the sewer, septic system, or
waste treatment, storage or disposal systems servicing the Real Property, in
each case of Hazardous Materials used, stored, generated, treated or disposed
of at the Real Property.
"Hazardous Materials" means any wastes, substances, radiation or materials
(whether solids, liquids or gases) that are regulated by a Governmental Entity
or defined or listed by a Governmental Entity as hazardous, toxic, pollutants
or contaminants, including, without limitation, substances defined as
"hazardous wastes," "hazardous substances," "toxic substances," "radioactive
materials," or other similar designations in, or otherwise subject to
regulation under, any Environmental Laws. "Hazardous Materials" includes
polychlorinated biphenyls (PCBs), asbestos, lead-based paints, and petroleum
and petroleum products (including, without limitation, crude oil or any
fraction thereof).
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"Indemnified Persons" is defined in Section 6.11.
"Individual Account Plan" means a Plan that is or was an "individual account
plan" as such term is defined in Section 3(34) of ERISA.
A-60
APPENDICES
<PAGE>
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
all rights to database information, and all applications, registrations, and
renewals in connection therewith, (d) all mask works and all applications,
registrations, and renewals in connection therewith, (e) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals), (f) all computer software (including data and related
documentation), (g) all rights, including rights of privacy and publicity, to
use the names, likenesses and other personal characteristics of any
individual, (h) all other proprietary rights, and (i) all copies and tangible
embodiments thereof (in whatever form or medium) existing in any part of the
world.
"Inventory" means all new materials, work in progress and finished goods and
inventorable supplies.
"IRS" means the United States Internal Revenue Service and its successors.
"IT" is defined in Section 3.40(b).
"knowledge" will be deemed to be present with respect to the Company and the
Subsidiaries when the matter in question (i) is actually known to M/C
Investors L.L.C. or Media/Communications Partners III Limited Partnership or
(ii) was brought to the attention of or, if due diligence had been exercised
by the persons named in this clause (ii), would have been brought to the
attention of any of Timothy T. Devine, Kenneth A. Kirley, Nicholas Lenoci,
Jr., Charles M. Osborne, Scott A. Rediger or John Biasetti; "knowledge" will
be deemed to be present with respect to Acquiror when the matter in question
was brought to the attention of or, if due diligence had been exercised by the
persons named in this clause (ii), would have been brought to the attention
of, any of Stephen C. Gray, J. Lyle Patrick, John Wray, Randall Rings, Laura
J. Hahn or Joseph H. Ceryanec.
"Laws" means all foreign, federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, tariffs, determinations,
writs, injunctions, awards (including, without limitation, awards of any
arbitrator), judgments and decrees applicable to the specified Person and to
the businesses and Assets thereof (including, without limitation, Laws
relating to securities registration and regulation; the sale, leasing,
ownership or management of real property; employment practices, terms and
conditions, and wages and hours; building standards, land use and zoning;
safety, health and fire prevention; and environmental protection, including
Environmental Laws).
"License" means any franchise, grant, authorization, license, tariff,
permit, easement, variance, exemption, consent, certificate, approval or order
of any Governmental Entity, except non-material Agreements allowing the
installation, maintenance or operation of the Company's or the Subsidiaries'
fiber optic network on, over, under or across a specific parcel of real
property.
"Managers" is defined in Section 6.15.
"Merger" is defined in the Preamble to this Merger Agreement.
"Merger Agreement" is defined in the Preamble to this Merger Agreement.
A-61
APPENDICES
<PAGE>
"Merger Consideration" means the aggregate Common Stock Merger Consideration
together with the aggregate Preferred Stock Cash Amount.
"Minimum-Funding Plan" means a Pension Plan that is subject to Title I,
Subtitle B, Part 3, of ERISA (concerning "funding").
"Multiemployer Plan" means a "multiemployer plan" as such term is defined in
Section 3(37) of ERISA.
"NASD" means the National Association of Securities Dealers, Inc.
"Ordinary Course of Business" means ordinary course of business consistent
with past practices and reasonable business operations.
"Other Arrangement" means a benefit program or practice providing for
bonuses, incentive compensation, vacation pay, severance pay, insurance,
restricted stock, stock options, employee discounts, company cars, tuition
reimbursement or any other perquisite or benefit (including, without
limitation, any fringe benefit under Section 132 of the Code) to employees,
officers or independent contractors that is not a Plan.
"PBGC" means the Pension Benefit Guaranty Corporation or its successors.
"Pension Plan" means an "employee pension benefit plan" as such term is
defined in Section 3(2) of ERISA.
"Permitted Encumbrance" means (i) easements, rights of way, minor
irregularities of title, and liens for taxes not yet due and payable, (ii)
landlord, warehouse and materialmen's liens and (ii) other Encumbrances
similar to clauses (i) and (ii); provided, however, that any or all of the
foregoing do not materially affect the utility or value of the Assets or other
matters to which they relate.
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, trust, unincorporated organization or other entity, or
a Governmental Entity.
"Plan" means any plan, program or arrangement, whether or not written, that
is or was an "employee benefit plan" as such term is defined in Section 3(3)
of ERISA and (a) which was or is established or maintained by the Company or
any Subsidiary; (b) to which the Company or any Subsidiary contributed or was
obligated to contribute or to fund or provide benefits; or (c) which provides
or promises benefits to any person who performs or who has performed services
for the Company or any Subsidiary and because of those services is or has been
(i) a participant therein or (ii) entitled to benefits thereunder.
"Post-Signing Returns" is defined in Section 5.03.
"Preferred Liquidation Preference" means the amount to be paid upon
liquidation of the Series A Preferred Stock in accordance with the Company's
Certificate of Incorporation.
"Principal Company Stockholders" means the following stockholders of the
Company; M/C Investors L.L.C., Media/Communications Partners III Limited
Partnership, Timothy T. Devine, Kenneth A. Kirley, Nicholas Lenoci, Jr.,
Charles M. Osborne and Scott A. Rediger.
"Proxy Statement" is defined in Section 6.01(a).
"Qualified Plan" means a Pension Plan that satisfies, or is intended by the
Company to satisfy, the requirements for Tax qualification described in
Section 401 of the Code.
A-62
APPENDICES
<PAGE>
"Real Property" means the real property owned in fee by the Company or any
of the Subsidiaries as of December 31, 1996, and any additional real property
owned since that date, and, for purposes of Section 3.33, any real property
formerly owned by the Company or any of the Subsidiaries, except non-material
Agreements allowing the installation, maintenance or operation of the
Company's or the Subsidiaries' fiber optic network on, over, under or across a
specific parcel of real property.
"Registration Statement" is defined in Section 6.01(a).
"Representative" is defined in Section 2.01(a)(i).
"Scheduled Closing Date" is defined in Section 2.05.
"SEC" means the United States Securities and Exchange Commission and its
successors.
"Securities Act" means the Securities Act of 1933, as amended, and all Laws
promulgated pursuant thereto or in connection therewith.
"Significant Subsidiary" means any subsidiary of Acquiror disclosed in its
most recent Annual Report on Form 10-K, and any other subsidiary that would
constitute a "Significant Subsidiary" of Acquiror within the meaning of Rule
1-02 of Regulation S-X of the SEC.
"Statutory-Waiver Plan" means a Pension Plan that is not subject to Title I,
Subtitle B, Part 3, of ERISA (concerning "funding").
"Stock Adjustment Amount" is defined in Section 2.01(a)(iv).
"Stockholders' Agreement" is defined in the Preamble to the Agreement.
"Stock Option Exchange Ratio" is defined in Section 2.04.
"Subsidiary" means a corporation, partnership, joint venture or other entity
of which the Company owns, directly or indirectly, at least 50% of the
outstanding securities or other interests the holders of which are generally
entitled to vote for the election of the board of directors or other governing
body or otherwise exercise Control of such entity.
"Survey" means a current, as-built survey of each parcel of the Real
Property.
"System" means the telecommunication system described in the Confidential
Offering Memorandum (relating to certain senior credit facilities) dated
December 1998.
"Taxes" (including the terms "Tax" and "Taxing") means all federal, state,
local and foreign taxes (including, without limitation, income, profit,
franchise, sales, use, real property, personal property, ad valorem, excise,
employment, social security and wage withholding taxes) and installments of
estimated taxes, assessments, deficiencies, levies, imports, duties, license
fees, registration fees, withholdings, or other similar charges of every kind,
character or description imposed by any Governmental Entity, and any interest,
penalties or additions to tax imposed thereon or in connection therewith but
does not include municipal or county franchise fees or similar payments due or
payable in connection with the construction of the System.
"Tax Returns" means all federal, state, local, foreign and other applicable
returns, declarations, reports and information statements with respect to
Taxes required to be filed with the IRS or any other Governmental Entity or
Tax authority or agency, including, without limitation, consolidated, combined
and unitary tax returns.
"Title I Plan" means a Plan that is subject to Title I of ERISA.
A-63
APPENDICES
<PAGE>
"Unaudited Balance Sheets" is defined in Section 3.08(a).
"Unaudited Financial Statements" is defined in Section 3.08(a).
"Welfare Plan" means an "employee welfare benefit plan" as such term is
defined in Section 3(1) of ERISA.
"Year 2000 Compliant" means that neither performance nor functionality is
affected by dates prior to, during or after the year 2000; in particular (i)
no value for current date will cause any interruption in operation; (ii) date-
based functionality must behave consistently for dates before, during and
after the year 2000; (iii) in all interfaces and data storage, the century in
any date is specified either explicitly or by unambiguous algorithms or
inferencing rules; and (iv) the year 2000 must be recognized as a leap year.
A-64
APPENDICES
<PAGE>
In Witness Whereof, Acquiror, Acquiror Sub, the Company and each of the
Principal Company Stockholders have only executed and delivered or have caused
this Merger Agreement to be duly executed and delivered as of the date first
written above.
McleodUSA Incorporated
/s/ Stephen C. Gray
By: _________________________________
Name: Stephen C. Gray
Title: President
Bravo Acquisition Corporation
/s/ Stephen C. Gray
By: _________________________________
Name: Stephen C. Gray
Title: President
Ovation Communications, Inc.
/s/ Timothy T. Devine
By: _________________________________
Name: Timothy T. Devine
Title: President and CEO
M/C Investors L.L.C.
/s/ James F. Wade
By: _________________________________
Name: James F. Wade
Title:
A-65
APPENDICES
<PAGE>
Media/Communications Partners III Limited
Partnership
By: M/C III L.L.C., its General Partner
/s/ James F. Wade
_____________________________________
James F. Wade
Title:
/s/ Timothy T. Devine
_____________________________________
Timothy T. Devine
/s/ Kenneth A. Kirley
_____________________________________
Kenneth A. Kirley
/s/ Nicholas Lenoci, Jr.
_____________________________________
Nicholas Lenoci, Jr.
/s/ Charles M. Osborne
_____________________________________
Charles M. Osborne
/s/ Scott A. Rediger
_____________________________________
Scott A. Rediger
A-66
APPENDICES
<PAGE>
APPENDIX B
SECTION 262 OF THE DELAWARE
GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS - (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to 251 (other than a merger effected pursuant to (S)251(g) of
this title), (S)252, (S)254, (S)257, (S)258, (S)263 or (S)264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to (S)(S)251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
B-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S)253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to (S)228 or (S)
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has
B-2
<PAGE>
demanded appraisal of such holder's shares in accordance with this subsection.
An affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting
B-3
<PAGE>
corporation or by any stockholder entitled to participate in the appraisal
proceeding, the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
B-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of McLeodUSA (the
''McLeodUSA Certificate'') contains provisions that provide that no director of
McLeodUSA shall be liable for breach of fiduciary duty as a director except for
(1) any breach of the directors' duty of loyalty to McLeodUSA or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director derived
an improper personal benefit. The McLeodUSA Certificate contains provisions that
further provide for the indemnification of directors and officers to the fullest
extent permitted by the DGCL. Under the Bylaws of McLeodUSA, McLeodUSA is
required to advance expenses incurred by an officer or director in defending any
such action if the director or officer undertakes to repay such amount if it is
determined that the director or officer is not entitled to indemnification. In
addition, McLeodUSA has entered into indemnity agreements with each of its
directors pursuant to which McLeodUSA has agreed to indemnify the directors as
permitted by the DGCL. McLeodUSA has obtained directors and officers liability
insurance against certain liabilities, including liabilities under the
Securities Act.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated April 28, 1995 among
Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod, Inc. (Filed
as Exhibit 2.1 to Registration Statement on Form S-1, File No. 333-
3112 ("Initial Form S-1"), and incorporated herein by reference).
2.2 Agreement and Plan of Reorganization dated as of July 12, 1996 among
Ruffalo, Cody & Associates, Inc., certain shareholders of Ruffalo,
Cody & Associates, Inc. and McLeod, Inc. (Filed as Exhibit 2 to
Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on July 29, 1996 and incorporated herein by reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 1996
among TelecomUSA Publishing Group, Inc. and McLeod, Inc. (Filed as
Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, filed with
the Commission on August 26, 1996 and incorporated herein by
reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997
among McLeod, Inc., Digital Communications of Iowa, Inc., Clark E.
McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current Report on
Form 8-K, File No. 0-20763, filed with the Commission on February 24,
1997 and incorporated herein by reference).
2.5 Asset Purchase Agreement dated as of May 30, 1997 by and among
McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI Communications,
Inc., ESI Communications/ SW, Inc., ESI Communications/West, Inc.,
ESI Communications Downtown, Inc., ESI Communications North, Inc.,
and Michael Reichert, Peter Jones, John Pupkes and Jeff Meehan.
(Filed as Exhibit 2.1 to Current Report on Form 8-K, File No. 0-20763
(the "June 1997 Form 8-K"), filed with the Commission on June 26,
1997 and incorporated herein by reference).
2.6 Agreement and Plan of Reorganization dated as of June 14, 1997 among
McLeodUSA Incorporated, Eastside Acquisition Co. and Consolidated
Communications Inc. (Filed as Exhibit 2.2 to the June 1997 Form 8-K
and incorporated herein by reference).
2.7 Agreement and Plan of Merger dated as of October 27, 1998 among
McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
Telecommunications Group, Inc. (Filed as Exhibit 2.7 to the
Registration Statement on Form S-4, File No. 333-68891 (the "December
1998 Form S-4"), and incorporated herein by reference).
2.8 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, Bravo Acquisition Corporation, Ovation
Communications, Inc. and certain stockholders of Ovation
Communications, Inc. (Filed as Exhibit 2.1 to current Report on Form
8-K, File No. 0-20763 (the "January 1999 Form 8-K"), filed with the
Commission on January 14, 1999 and incorporated herein by reference).
</TABLE>
II-2
<PAGE>
2.9 Agreement and Plan of Merger, dated as of January 7, 1999, among
McLeodUSA Incorporated, McLeodUSA Publishing Company, Pubco Merging
Co., Talking Directories, Inc. and the stockholders of Talking
Directories, Inc. (Filed as Exhibit 2.2 to the January 1999 Form 8-K
and incorporated herein by reference).
2.10 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, McLeodUSA Publishing Company, Publication
Merge Co., Info America Phone Books, Inc. and certain stockholders of
Info America Phone Books, Inc. (Filed as Exhibit 2.3 to the January
1999 Form 8-K and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Initial Form S-1 and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the "November
1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod, Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4")
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on
Form 10-K, File No. 0-20763, filed with the Commission on March 6,
1998 (the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10- 1/2%
Senior Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2
to Annual Report on Form 10-K, File No. 0-20763, filed with the
Commission on March 31, 1997 (the "1996 Form 10-K") and incorporated
herein by reference).
4.3 Initial Global 10- 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10- 1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc.,
Salomon Brothers Inc and Morgan Stanley & Co. Incorporated. (Filed as
Exhibit 4.5 to the 1996 Form 10-K and incorporated herein by
reference).
4.6 Investor Agreement dated as of April 1, 1996 among McLeod, Inc., IES
Investments Inc., Midwest Capital Group Inc., MWR Investments Inc.,
Clark and Mary McLeod, and certain other stockholders. (Filed as
Exhibit 4.8 to Initial Form S-1 and incorporated herein by
reference).
II-3
<PAGE>
4.7 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod.
(Filed as Exhibit 4.3 to the November 1996 Form S-1 and incorporated
herein by reference).
4.8 Form of 10- 1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.9 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9- 1/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed
as Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
reference).
4.10 Form of Initial Global 9- 1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
4.11 Registration Agreement dated July 21, 1997 among McLeodUSA
Incorporated, Salomon Brothers Inc, Morgan Stanley Dean Witter and
Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11 to the July 1997 Form
S-4 and incorporated herein by reference).
4.12 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard A.
Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.13 Amendment No. 1 to Stockholders' Agreement dated as of September 19,
1997 by and among McLeodUSA Incorporated, IES Investments Inc.,
Midwest Capital Group, Inc., MWR Investments Inc., Clark E. McLeod,
Mary E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in Schedule I
thereto. (Filed as Exhibit 4.1 to the Quarterly Report on Form 10-Q,
File No. 0-20763, filed with the Commission on November 14, 1997 and
incorporated herein by reference).
4.14 Form of 9- 1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.15 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 8- 3/8% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
Exhibit 4.15 to Registration Statement on S-4, File No. 333-52793
(the "May 1998 Form S-4") and incorporated herein by reference).
4.16 Form of Global 8- 3/8% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.15).
II-4
<PAGE>
4.17 Registration Agreement dated March 16, 1998 among McLeodUSA
Incorporated, Solomon Brothers Inc, Bear, Stearns & Co. Inc., Morgan
Stanley & Co. Incorporated and Chase Securities Inc. (Filed as
Exhibit 4.17 to the May 1998 Form S-4 and incorporated herein by
reference).
4.18 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA Incorporated; IES Investments Inc., Clark E. McLeod; Mary
E. McLeod; and Richard A. Lumpkin and each of the former shareholders
of Consolidated Communications Inc. ("CCI") and certain permitted
transferees of the former CCI shareholders. (Filed as Exhibit 99.1 to
the Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on November 19, 1998 and incorporated herein by
reference).
4.19 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.19).
4.20 Registration Agreement dated October 30, 1998 among McLeodUSA
Incorporated, Salomon Smith Barney Inc., Bear, Stearns & Co.
Incorporated and Chase Securities Inc.
*5.1 Opinion of Hogan & Hartson L.L.P.
*8.1 Opinion of Edwards & Angell, LLP regarding certain tax matters.
10.1 Agreement for Construction Related Services dated as of October 17,
1995 between City Signal Fiber Services, Inc. and McLeod Network
Services, Inc. (Filed as Exhibit 10.17 to Initial Form S-1 and
incorporated herein by reference).
10.2 Construction Services Agreement dated March 27, 1996 between City
Signal Fiber Services, Inc. and McLeod Network Services, Inc. (Filed
as Exhibit 10.18 to Initial Form S-1 and incorporated herein by
reference).
10.3 Fiber Optic Use Agreement dated as of February 14, 1996 between
McLeod Network Services, Inc. and Galaxy Telecom, L.P. (Filed as
Exhibit 10.19 to Initial Form S-1 and incorporated herein by
reference).
10.4 Agreement dated as of July 11, 1994 between McLeod Network Services,
Inc. and KLK Construction. (Filed as Exhibit 10.20 to Initial Form S-
1 and incorporated herein by reference).
10.5 Lease Agreement dated September 5, 1995 between State of Iowa and MWR
Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1 and
incorporated herein by reference).
10.6 Lease Agreement dated September 5, 1995 between State of Iowa and
McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial Form
S-1 and incorporated herein by reference).
10.7 Contract dated September 5, 1995 between Iowa Telecommunications and
Technology Commission and MWR Telecom, Inc. (Filed as Exhibit 10.23
to Initial Form S-1 and incorporated herein by reference).
II-5
<PAGE>
10.8 Contract dated June 27, 1995 between Iowa National Guard and McLeod
Network Services, Inc. (Filed as Exhibit 10.24 to Initial Form S-1
and incorporated herein by reference).
10.9 Addendum Number One to Contract dated September 5, 1995 between Iowa
National Guard and McLeod Network Services, Inc. (Filed as Exhibit
10.25 to Initial Form S-1 and incorporated herein by reference).
10.10 U S WEST Centrex Plus Service Rate Stability Plan dated October 15,
1993 between McLeod Telemanagement, Inc. and U S WEST Communications,
Inc. (Filed as Exhibit 10.26 to Initial Form S-1 and incorporated
herein by reference).
10.11 U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993
between McLeod Telemanagement, Inc. and U S WEST Communications, Inc.
(Filed as Exhibit 10.27 to Initial Form S-1 and incorporated herein
by reference).
10.12 Ameritech Centrex Service Confirmation of Service Orders dated
various dates in 1994, 1995 and 1996 between McLeod Telemanagement,
Inc. and Ameritech Information Industry Services. (Filed as Exhibit
10.28 to Initial Form S-1 and incorporated herein by reference).
10.13 Lease Agreement dated as of December 28, 1993 between 2060
Partnership and McLeod Telemanagement, Inc., as amended by Amendments
First to Ninth dated as of July 3, 1994, March 25, 1994, June 22,
1994, August 12, 1994, September 12, 1994, September 20, 1994,
November 16, 1994, September 20, 1995 and January 6, 1996,
respectively. (Filed as Exhibit 10.29 to Initial Form S- 1 and
incorporated herein by reference).
10.14 Lease Agreement dated as of May 24, 1995 between 2060 Partnership and
McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial Form
S-1 and incorporated herein by reference).
10.15 Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial
Form S-1 and incorporated herein by reference).
10.16 First Amendment to Lease Agreement dated as of November 20, 1995
between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc. (Filed
as Exhibit 10.32 to Initial Form S-1 and incorporated herein by
reference).
10.17 Master Right-of-Way Agreement dated July 27, 1994 between McLeod
Network Services, Inc. and IES Industries Inc. (Filed as Exhibit
10.34 to Initial Form S-1 and incorporated herein by reference).
10.18 Master Right-of-Way and Tower Use Agreement dated February 13, 1996
between IES Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35
to Initial Form S-1 and incorporated herein by reference).
10.19 Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Iowa and South
Dakota). (Filed as Exhibit 10.36 to Initial Form S-1 and incorporated
herein by reference).
II-6
<PAGE>
10.20 Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Illinois).
(Filed as Exhibit 10.37 to Initial Form S-1 and incorporated herein
by reference).
10.21 Settlement Agreement dated March 18, 1996 between U S WEST
Communications, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.38 to Initial Form S-1 and incorporated herein by
reference).
10.22 Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.39 to Initial Form S-1 and
incorporated herein by reference).
10.23 McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan.
(Filed as Exhibit 10.40 to Initial Form S-1 and incorporated herein
by reference).
10.24 McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit
10.41 to Initial Form S-1 and incorporated herein by reference).
10.25 McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit
10.42 to Initial Form S-1 and incorporated herein by reference).
10.26 McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as
Exhibit 10.43 to Initial Form S-1 and incorporated herein by
reference).
10.27 Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1 and
incorporated herein by reference).
10.28 Promissory Note dated March 29, 1996 between Stephen K. Brandenburg
and McLeod, Inc. (Filed as Exhibit 10.45 to Initial Form S-1 and
incorporated herein by reference).
**10.29 Telecommunications Services Agreement dated March 14, 1994 between
WiITeI, Inc. and McLeod Telemanagement, Inc., as amended. (Filed as
Exhibit 10.47 to Initial Form S-1 and incorporated herein by
reference).
10.30 Amendment to Contract Addendum A to Contract No. 2102 dated March 31,
1993 between the Iowa Department of General Services and McLeod
Telecommunications, Inc. (Filed as Exhibit 10.48 to Initial Form S-1
and incorporated herein by reference).
10.31 Construction Services Agreement dated June 30, 1995 between MFS
Network Technologies, Inc. and MWR Telecom, Inc. (Filed as Exhibit
10.49 to Initial Form S-1 and incorporated herein by reference).
10.32 First Amendment to Agreement Regarding Support Agreement dated May
14, 1996 among McLeod, Inc., IES Diversified Inc. and IES Investments
Inc. (Filed as Exhibit 10.50 to Initial Form S-1 and incorporated
herein by reference).
10.33 First Amendment to Agreement Regarding Guarantee dated May 14, 1996
among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
(Filed as Exhibit 10.51 to Initial Form S-1 and incorporated herein
by reference).
10.34 Amended and Restated Directors Stock Option Plan of McLeod, Inc.
(Filed as Exhibit 10.52 to Initial Form S-1 and incorporated herein
by reference).
II-7
<PAGE>
10.35 Forms of Employment, Confidentiality and Non-Competition Agreement
between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as
Exhibit 10.53 to Initial Form S-1 and incorporated herein by
reference).
10.36 Form of Change-of-Control Agreement between McLeod, Inc. and certain
employees of McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form S-1
and incorporated herein by reference).
10.37 McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed as
Exhibit 10.55 to the November 1996 Form S-1 and incorporated herein
by reference).
10.38 McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as
Exhibit 10.56 to the 1996 Form 10-K and incorporated herein by
reference).
10.39 Form of Indemnity Agreement between McLeod, Inc. and certain officers
and directors of McLeod, Inc. (Filed as Exhibit 10.57 to Initial Form
S-1 and incorporated herein by reference).
10.40 License Agreement dated April 24, 1996 between PageMart, Inc. and MWR
Telecom, Inc. (Filed as Exhibit 10.58 to Initial Form S-1 and
incorporated herein by reference).
10.41 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the November
1996 Form S-1 and incorporated herein by reference).
10.42 Amended and Restated Credit Agreement dated as of May 5, 1996 among
TelecomUSA Publishing Group, Inc., TelecomUSA Publishing Company and
TelecomUSA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association. (Filed as Exhibit 10.64 to the November 1996
Form S- 1 and incorporated herein by reference).
10.43 First Amendment to Amended and Restated Credit Agreement dated as of
January 31, 1996 by and between TelecomUSA Publishing Group, Inc.,
TelecomUSA Publishing Company and TelecomUSA Neighborhood
Directories, Inc. and Norwest Bank Iowa, National Association. (Filed
as Exhibit 10.65 to the November 1996 Form S-1 and incorporated
herein by reference).
10.44 Lease Agreement dated as of September 26, 1994 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.66 to the November 1996 Form S-1 and incorporated herein
by reference).
10.45 First Lease Amendment dated as of April 12, 1995 between Ryan
Properties, Inc. and Ruffalo, Cody & Associates, Inc. (Filed as
Exhibit 10.67 to the November 1996 Form S-1 and incorporated herein
by reference).
10.46 Lease Agreement dated as of July 18, 1995 between 2060 Partnership,
L.P. and TelecomUSA Publishing Company. (Filed as Exhibit 10.68 to
the November 1996 Form S-1 and incorporated herein by reference).
10.47 Lease Agreement dated April 26, 1995 by and between A.M. Henderson
and TelecomUSA Publishing Company. (Filed as Exhibit 10.69 to the
November 1996 Form S-1 and incorporated herein by reference).
II-8
<PAGE>
10.48 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and TelecomUSA Publishing Company.
(Filed as Exhibit 10.70 to the November 1996 Form S-1 and
incorporated herein by reference).
10.49 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and TelecomUSA Publishing Company. (Filed as
Exhibit 10.71 to the November 1996 Form S-1 and incorporated herein
by reference).
10.50 Form of McLeod, Inc. Directors Stock Option Plan Option Agreement.
(Filed as Exhibit 10.72 to the November 1996 Form S-1 and
incorporated herein by reference).
10.51 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive Stock
Option Agreement. (Filed as Exhibit 10.73 to the November 1996 Form
S-1 and incorporated herein by reference).
10.52 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive
Stock Option Agreement. (Filed as Exhibit 10.74 to the November 1996
Form S-1 and incorporated herein by reference).
10.53 Option Agreement dated April 27, 1995 between Fronteer Directory
Company, Inc. and TelecomUSA Publishing Company. (Filed as Exhibit
10.75 to the November 1996 Form S-1 and incorporated herein by
reference).
10.54 Promissory Note dated May 5, 1995 between TelecomUSA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.76
to the November 1996 Form S-1 and incorporated herein by reference).
10.55 Security Agreement dated May 5, 1995 between TelecomUSA Publishing
Company and Fronteer Directory Company, Inc. (Filed as Exhibit 10.77
to the November 1996 Form S-1 and incorporated herein by reference).
10.56 Design/Build Construction Contract dated September 17, 1996 between
Ryan Construction Company of Minnesota, Inc. and McLeod, Inc. (Filed
as Exhibit 10.78 to the November 1996 Form S-1 and incorporated
10.57 Guaranty Agreement dated as of October 17, 1996 by McLeod, Inc. in
favor of Kirkwood Community College. (Filed as Exhibit 10.79 to the
November 1996 Form S-1 and incorporated herein by reference).
10.58 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.80 to the November 1996 Form S-1 and
incorporated herein by reference).
10.59 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Telecommunications,
Inc. (Filed as Exhibit 10.81 to the November 1996 Form S- 1 and
incorporated herein by reference).
10.60 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod Network Services, Inc.
(Filed as Exhibit 10.82 to the November 1996 Form S-1 and
incorporated herein by reference).
II-9
<PAGE>
10.61 Industrial New Jobs Training Agreement dated as of October 31, 1996
between Kirkwood Community College and McLeod, Inc. (Filed as Exhibit
10.83 to the November 1996 Form S-1 and incorporated herein by
reference).
10.62 Change Order No. 1 to the Construction Services Agreement dated
November 22, 1995 by and between MWR TeIecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.84 to the November 1996 Form
S-1 and incorporated herein by reference).
10.63 Change Order No. 2 to the Construction Services Agreement dated
August 14, 1996 between MWR Telecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.85 to the November 1996 Form
S-1 and incorporated herein by reference).
10.64 Change Order No. 3 to the Construction Services Agreement dated
October 31, 1996 between MWR Telecom, Inc. and MFS Network
Technologies, Inc. (Filed as Exhibit 10.86 to the November 1996 Form
S-1 and incorporated herein by reference).
10.65 Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA
Publishing Company, Fronteer Financial Holdings, Ltd., Classified
Directories, Inc., Larry A. Scott, James Greff, Randall L. Gowin and
Edwin Dressler and certain directors, officers and shareholders of
Fronteer Financial Holdings, Ltd. (Filed as Exhibit 10.90 to the 1996
Form 10-K and incorporated herein by reference).
10.66 Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA
Publishing Company, Indiana Directories, Inc., John Morgan, Hank
Meijer, Jack Hendricks, Brad Nelson and Talking Directories, Inc.
(Filed as Exhibit 10.91 to the 1996 Form 10-K and incorporated herein
by reference).
10.67 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories, Inc.
(Filed as Exhibit 10.92 to the 1996 Form 10-K and incorporated herein
by reference).
10.68 Ameritech Centrex Service Confirmation of Service Orders dated August
21, 1996 between McLeod Telemanagement, Inc. and Ameritech
Information Industry Services. (Filed as Exhibit 10.93 to the 1996
Form 10-K and incorporated herein by reference).
**10.69 Amended and Restated Program Enrollment Terms dated November 1, 1996
between WorldCom Network Services, Inc. d/b/a WilTel and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual Report on Form
10-K/A, File No. 0-20763, filed with the Commission on April 8, 1997
and incorporated herein by reference).
10.70 Letter Agreement dated April 15, 1997 between U S WEST Communications
and McLeodUSA Network Services, Inc. (Filed as Exhibit 10.1 to
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
Commission on May 14, 1997 and incorporated herein by reference).
II-10
<PAGE>
10.71 Network Agreement dated April 7, 1997, between Wisconsin Power and
Light Company and McLeodUSA Telecommunications Services, Inc. (Filed
as Exhibit 10.96 to the July 1997 Form S-4 and incorporated herein by
reference).
10.72 Agreement dated July 7, 1997 between McLeodUSA Telecommunications
Services, Inc. and U S WEST Communications, Inc. (Filed as Exhibit
10.97 to the July 1997 Form S-4 and incorporated herein by
reference).
10.73 Agreement dated August 14, 1997 between McLeodUSA Incorporated and
Taylor Ball, Inc. (Filed as Exhibit 10.98 to Registration Statement
on Form S-4, File No. 333-34227 (the "November 1997 Form S-4") and
incorporated herein by reference).
10.74 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of October 28, 1996 between
Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.99 to the
November 1997 Form S-4 and incorporated herein by reference).
10.75 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of July 17, 1997 between
Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.100 to the
November 1997 Form S-4 and incorporated herein by reference).
11.1 Statement regarding Computation of Per Share Earnings (Filed as
Exhibit 11.1 to the Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on November 16, 1998 and incorporated
herein by reference).
16.1 Letter regarding Change in Certifying Accountant (Filed as Exhibit
16.1 to the 1997 Form 10-K and incorporated herein by reference).
21.1 Subsidiaries of McLeodUSA Incorporated (Filed as Exhibit 21.1 to the
1997 Form 10-K and incorporated herein by reference).
*23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP.
*23.3 Consent of Edwards & Angell, LLP (included in Exhibit 8.1).
*23.4 Consent of Ernst & Young L.L.P.
*24.1 Power of attorney (included on signature page).
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Quarterly
Report on Form 10-Q, File No. 0-20763, filed with the Commission on
November 16, 1998 and incorporated herein by reference).
*99.1 Form of Proxy Card
*99.2 Form of Election
II-11
<PAGE>
____________
* Filed herewith.
** Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
(B) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedule was filed with McLeodUSA's Annual
Report on Form 10-K for the year ended December 31, 1997 (File No. 0-20763),
filed with the Commission on March 9, 1998, and is incorporated herein by
reference:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the Consolidated Financial Statements of
McLeodUSA or notes thereto.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which,
II-12
<PAGE>
individually or in the aggregate, represents a fundamental change in the
information set forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with
the Securities and Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by Form S-4 with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for by the
other items of Form S-4.
The undersigned registrant hereby undertakes that every prospectus (i) that
is filed pursuant to the immediately preceding paragraph, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the Registration Statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act, McLeodUSA has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cedar Rapids, Iowa, on this 4th day of
February, 1999.
McLEODUSA INCORPORATED
By /s/ Clark E. McLeod
----------------------------
Clark E. McLeod
Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clark E. McLeod, Stephen C. Gray and Blake O.
Fisher, Jr., jointly and severally, each in his own capacity, his true and
lawful attorneys-in-fact, with full power of substitution, for him and his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents with full power and authority to do so
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons, in the capacities
indicated below, on this 4th day of February, 1999.
SIGNATURE TITLE
- --------- -----
/s/ Clark E. McLeod
- ---------------------------- Chairman, Chief Executive Officer and Director
Clark E. McLeod (Principal Executive Officer)
/s/ Richard A. Lumpkin
- ---------------------------- Vice Chairman and Director
Richard A. Lumpkin
/s/ Stephen C. Gray
- ---------------------------- President, Chief Operating Officer and
Stephen C. Gray Director
II-14
<PAGE>
/s/ Blake O. Fisher, Jr.
- ------------------------ Group Vice President, Regional President--Iowa
Blake O. Fisher, Jr. and Minnesota and Director
/s/ J. Lyle Patrick
- ------------------------ Group Vice President--Finance and Accounting and
J. Lyle Patrick Chief Financial and Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Thomas M. Collins
- ------------------------ Director
Thomas M. Collins
/s/ Robert J. Currey
- ------------------------ Director
Robert J. Currey
/s/ Lee Liu
- ------------------------ Director
Lee Liu
/s/ Paul D. Rhines
- ------------------------ Director
Paul D. Rhines
/s/ Ronald W. Stepien
- ------------------------ Director
Ronald W. Stepien
II-15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated April 28, 1995 among
Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod, Inc. (Filed
as Exhibit 2.1 to Registration Statement on Form S-1, File No. 333-
3112 ("Initial Form S-1"), and incorporated herein by reference).
2.2 Agreement and Plan of Reorganization dated as of July 12, 1996 among
Ruffalo, Cody & Associates, Inc., certain shareholders of Ruffalo,
Cody & Associates, Inc. and McLeod, Inc. (Filed as Exhibit 2 to
Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on July 29, 1996 and incorporated herein by reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 1996 among
TelecomUSA Publishing Group, Inc. and McLeod, Inc. (Filed as Exhibit 2
to Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on August 26, 1996 and incorporated herein by reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997
among McLeod, Inc., Digital Communications of Iowa, Inc., Clark E.
McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current Report on
Form 8-K, File No. 0-20763, filed with the Commission on February 24,
1997 and incorporated herein by reference).
2.5 Asset Purchase Agreement dated as of May 30, 1997 by and among
McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI Communications,
Inc., ESI Communications/ SW, Inc., ESI Communications/West, Inc., ESI
Communications Downtown, Inc., ESI Communications North, Inc., and
Michael Reichert, Peter Jones, John Pupkes and Jeff Meehan. (Filed as
Exhibit 2.1 to Current Report on Form 8-K, File No. 0-20763 (the "June
1997 Form 8-K"), filed with the Commission on June 26, 1997 and
incorporated herein by reference).
2.6 Agreement and Plan of Reorganization dated as of June 14, 1997 among
McLeodUSA Incorporated, Eastside Acquisition Co. and Consolidated
Communications Inc. (Filed as Exhibit 2.2 to the June 1997 Form 8-K
and incorporated herein by reference).
2.7 Agreement and Plan of Merger dated as of October 27, 1998 among
McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
Telecommunications Group, Inc. (Filed as Exhibit 2.7 to the
Registration Statement on Form S-4, File No. 333-68891 (the "December
1998 Form S-4"), and incorporated herein by reference).
2.8 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, Bravo Acquisition Corporation, Ovation
Communications, Inc. and certain stockholders of Ovation
Communications, Inc. (Filed as Exhibit 2.1 to current Report on Form
8-K, File No. 0-20763 (the "January 1999 Form 8-K"), filed with the
Commission on January 14, 1999 and incorporated herein by reference).
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
2.9 Agreement and Plan of Merger, dated as of January 7, 1999,
among McLeodUSA Incorporated, McLeodUSA Publishing Company,
Pubco Merging Co., Talking Directories, Inc. and the
stockholders of Talking Directories, Inc. (Filed as Exhibit 2.2
to the January 1999 Form 8-K and incorporated herein by
reference).
2.10 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, McLeodUSA Publishing Company,
Publication Merge Co., Info America Phone Books, Inc. and
certain stockholders of Info america Phone Books, Inc. (Filed
as Exhibit 2.3 to the January 1999 Form 8-K and incorporated
herein by reference).
3.1 Amended and Restated Certificate of Incorporation of McLeod,
Inc. (Filed as Exhibit 3.1 to Initial Form S-1 and incorporated
herein by reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit
3.2 to Registration Statement on Form S-1, File No. 333-13885
(the ''November 1996 Form S-1''), and incorporated herein by
reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod, Inc. (Filed as Exhibit 3.3 to
Registration Statement on Form S-4, File No. 333-27647 (the
''July 1997 Form S-4'') and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office
of McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual
Report on Form 10-K, File No. 0-20763, filed with the
Commission on March 6, 1998 (the ''1997 Form 10-K'') and
incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed
as Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United
States Trust Company of New York, as Trustee, relating to the
10-1/2% Senior Discount Notes Due 2007 of McLeod, Inc. (Filed
as Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-20763,
filed with the Commission on March 31, 1997 (the ''1996 Form
10-K'') and incorporated herein by reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to
the 1996 Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1,
2007 of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-
K and incorporated herein by reference).
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc.,
Salomon Brothers Inc and Morgan Stanley & Co. Incorporated.
(Filed as Exhibit 4.5 to the 1996 Form 10-K and incorporated
herein by reference).
4.6 Investor Agreement dated as of April 1, 1996 among McLeod,
Inc., IES Investments Inc., Midwest Capital Group Inc., MWR
Investments Inc., Clark and Mary McLeod, and certain other
stockholders. (Filed as Exhibit 4.8 to Initial Form S-1 and
incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.7 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by and among McLeod, Inc.,
IES Investments Inc., Midwest Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod. (Filed as Exhibit 4.3 to the November 1996 Form S-1 and incorporated herein by
reference).
4.8 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA Incorporated. (Filed as
Exhibit 4.8 to the July 1997 Form S-4 and incorporated herein by reference).
4.9 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated and United States Trust
Company of New York, as Trustee, relating to the 9-1/4% Senior Notes Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
reference).
4.10 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA Incorporated. (Filed as Exhibit
4.10 to the July 1997 Form S-4 and incorporated herein by reference).
4.11 Registration Agreement dated July 21, 1997 among McLeodUSA Incorporated, Salomon Brothers Inc,
Morgan Stanley Dean Witter and Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11 to the July 1997
Form S-4 and incorporated herein by reference).
4.12 Stockholders' Agreement dated June 14, 1997 among McLeodUSA Incorporated, IES Investments Inc.,
Midwest Capital Group, Inc., MWR Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard
A. Lumpkin on behalf of each of the shareholders of Consolidated Communications Inc. listed on
Schedule 1 of the Stockholders' Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.13 Amendment No. 1 to Stockholders' Agreement dated as of September 19, 1997 by and among
McLeodUSA Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR Investments
Inc., Clark E. McLeod, Mary E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in Schedule I thereto. (Filed as
Exhibit 4.1 to the Quarterly Report on Form 10-Q, File No. 0-20763, filed with the Commission
on November 14, 1997 and incorporated herein by reference).
4.14 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA Incorporated. (Filed as Exhibit 4.14
to the 1997 Form 10-K and incorporated herein by reference).
4.15 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated and United States Trust
Company of New York, as Trustee, relating to the 8-3/8% Senior Notes Due 2008 of McLeodUSA
Incorporated (Filed as Exhibit 4.15 to Registration Statement on S-4, File No. 333-52793 (the
"May 1998 Form S-4") and incorporated herein by reference).
4.16 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA Incorporated (contained in the
Indenture filed as Exhibit 4.15).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.17 Registration Agreement dated March 16, 1998 among McLeodUSA Incorporated, Solomon Brothers Inc,
Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated and Chase Securities Inc. (Filed as
Exhibit 4.17 to the May 1998 Form S-4 and incorporated herein by reference).
4.18 Stockholders' Agreement dated November 18, 1998 by and among McLeodUSA Incorporated; IES
Investments Inc., Clark E. McLeod; Mary E. McLeod; and Richard A. Lumpkin and each of the
former shareholders of Consolidated Communications Inc. ("CCI") and certain permitted
transferees of the former CCI shareholders. (Filed as Exhibit 99.1 to the Current Report on
Form 8-K, File No. 0-20763, filed with the Commission on November 19, 1998 and incorporated
herein by reference).
4.19 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated (contained in the
Indenture filed as Exhibit 4.19).
4.20 Registration Agreement dated October 30, 1998 among McLeodUSA Incorporated, Salomon Smith
Barney Inc., Bear, Stearns & Co. Incorporated and Chase Securities Inc.
*5.1 Opinion of Hogan & Hartson L.L.P.
*8.1 Opinion of Edwards & Angell, LLP regarding certain tax matters.
10.1 Agreement for Construction Related Services dated as of October 17, 1995 between City Signal
Fiber Services, Inc. and McLeod Network Services, Inc. (Filed as Exhibit 10.17 to Initial Form
S-1 and incorporated herein by reference).
10.2 Construction Services Agreement dated March 27, 1996 between City Signal Fiber Services, Inc.
and McLeod Network Services, Inc. (Filed as Exhibit 10.18 to Initial Form S-1 and incorporated
herein by reference).
10.3 Fiber Optic Use Agreement dated as of February 14, 1996 between McLeod Network Services, Inc.
and Galaxy Telecom, L.P. (Filed as Exhibit 10.19 to Initial Form S-1 and incorporated herein by
reference).
10.4 Agreement dated as of July 11, 1994 between McLeod Network Services, Inc. and KLK Construction.
(Filed as Exhibit 10.20 to Initial Form S-1 and incorporated herein by reference).
10.5 Lease Agreement dated September 5, 1995 between State of Iowa and MWR Telecom, Inc. (Filed as
Exhibit 10.21 to Initial Form S-1 and incorporated herein by reference).
10.6 Lease Agreement dated September 5, 1995 between State of Iowa and McLeod Network Services, Inc.
(Filed as Exhibit 10.22 to Initial Form S-1 and incorporated herein by reference).
10.7 Contract dated September 5, 1995 between Iowa Telecommunications and Technology Commission and
MWR Telecom, Inc. (Filed as Exhibit 10.23 to Initial Form S-1 and incorporated herein by
reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.8 Contract dated June 27, 1995 between Iowa National Guard and McLeod Network Services, Inc.
(Filed as Exhibit 10.24 to Initial Form S-1 and incorporated herein by reference).
10.9 Addendum Number One to Contract dated September 5, 1995 between Iowa National Guard and McLeod
Network Services, Inc. (Filed as Exhibit 10.25 to Initial Form S-1 and incorporated herein by
reference).
10.10 U S WEST Centrex Plus Service Rate Stability Plan dated October 15, 1993 between McLeod
Telemanagement, Inc. and U S WEST Communications, Inc. (Filed as Exhibit 10.26 to Initial Form
S- 1 and incorporated herein by reference).
10.11 U S WEST Centrex Plus Service Rate Stability Plan dated July 17, 1993 between McLeod
Telemanagement, Inc. and U S WEST Communications, Inc. (Filed as Exhibit 10.27 to Initial Form
S- 1 and incorporated herein by reference).
10.12 Ameritech Centrex Service Confirmation of Service Orders dated various dates in 1994, 1995 and
1996 between McLeod Telemanagement, Inc. and Ameritech Information Industry Services. (Filed as
Exhibit 10.28 to Initial Form S-1 and incorporated herein by reference).
10.13 Lease Agreement dated as of December 28, 1993 between 2060 Partnership and McLeod
Telemanagement, Inc., as amended by Amendments First to Ninth dated as of July 3, 1994, March
25, 1994, June 22, 1994, August 12, 1994, September 12, 1994, September 20, 1994, November 16,
1994, September 20, 1995 and January 6, 1996, respectively. (Filed as Exhibit 10.29 to Initial
Form S- 1 and incorporated herein by reference).
10.14 Lease Agreement dated as of May 24, 1995 between 2060 Partnership and McLeod Telemanagement,
Inc. (Filed as Exhibit 10.30 to Initial Form S-1 and incorporated herein by reference).
10.15 Lease Agreement dated October 31, 1995 between I.R.F.B. Joint Venture and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.31 to Initial Form S-1 and incorporated herein by
reference).
10.16 First Amendment to Lease Agreement dated as of November 20, 1995 between I.R.F.B. Joint Venture
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.32 to Initial Form S-1 and incorporated
herein by reference).
10.17 Master Right-of-Way Agreement dated July 27, 1994 between McLeod Network Services, Inc. and IES
Industries Inc. (Filed as Exhibit 10.34 to Initial Form S-1 and incorporated herein by
reference).
10.18 Master Right-of-Way and Tower Use Agreement dated February 13, 1996 between IES Industries Inc.
and McLeod, Inc. (Filed as Exhibit 10.35 to Initial Form S-1 and incorporated herein by
reference).
10.19 Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between MidAmerican Energy
Company and McLeod, Inc. (Iowa and South Dakota). (Filed as Exhibit 10.36 to Initial Form S-1
and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.20 Master Pole, Duct and Tower Use Agreement dated February 20, 1996 between MidAmerican Energy
Company and McLeod, Inc. (Illinois). (Filed as Exhibit 10.37 to Initial Form S-1 and
incorporated herein by reference).
10.21 Settlement Agreement dated March 18, 1996 between U S WEST Communications, Inc. and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.38 to Initial Form S-1 and incorporated herein by
reference).
10.22 Agreement dated August 4, 1995 between Vadacom, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.39 to Initial Form S-1 and incorporated herein by reference).
10.23 McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan. (Filed as Exhibit 10.40 to
Initial Form S-1 and incorporated herein by reference).
10.24 McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit 10.41 to Initial Form S-1 and
incorporated herein by reference).
10.25 McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit 10.42 to Initial Form S-1 and
incorporated herein by reference).
10.26 McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed as Exhibit 10.43 to Initial
Form S-1 and incorporated herein by reference).
10.27 Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and McLeod, Inc. (Filed as Exhibit
10.44 to Initial Form S-1 and incorporated herein by reference).
10.28 Promissory Note dated March 29, 1996 between Stephen K. Brandenburg and McLeod, Inc. (Filed as
Exhibit 10.45 to Initial Form S-1 and incorporated herein by reference).
**10.29 Telecommunications Services Agreement dated March 14, 1994 between WiITeI, Inc. and McLeod
Telemanagement, Inc., as amended. (Filed as Exhibit 10.47 to Initial Form S-1 and incorporated
herein by reference).
10.30 Amendment to Contract Addendum A to Contract No. 2102 dated March 31, 1993 between the Iowa
Department of General Services and McLeod Telecommunications, Inc. (Filed as Exhibit 10.48 to
Initial Form S-1 and incorporated herein by reference).
10.31 Construction Services Agreement dated June 30, 1995 between MFS Network Technologies, Inc. and
MWR Telecom, Inc. (Filed as Exhibit 10.49 to Initial Form S-1 and incorporated herein by
reference).
10.32 First Amendment to Agreement Regarding Support Agreement dated May 14, 1996 among McLeod, Inc.,
IES Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.50 to Initial Form S-1 and
incorporated herein by reference).
10.33 First Amendment to Agreement Regarding Guarantee dated May 14, 1996 among McLeod, Inc., IES
Diversified Inc. and IES Investments Inc. (Filed as Exhibit 10.51 to Initial Form S-1 and
incorporated herein by reference).
10.34 Amended and Restated Directors Stock Option Plan of McLeod, Inc. (Filed as Exhibit 10.52 to
Initial Form S-1 and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.35 Forms of Employment, Confidentiality and Non-Competition Agreement between McLeod, Inc. and
certain employees of McLeod, Inc. (Filed as Exhibit 10.53 to Initial Form S-1 and incorporated
herein by reference).
10.36 Form of Change-of-Control Agreement between McLeod, Inc. and certain employees of McLeod, Inc.
(Filed as Exhibit 10.54 to Initial Form S-1 and incorporated herein by reference).
10.37 McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed as Exhibit 10.55 to the
November 1996 Form S-1 and incorporated herein by reference).
10.38 McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as Exhibit 10.56 to the 1996 Form
10-K and incorporated herein by reference).
10.39 Form of Indemnity Agreement between McLeod, Inc. and certain officers and directors of McLeod,
Inc. (Filed as Exhibit 10.57 to Initial Form S-1 and incorporated herein by reference).
10.40 License Agreement dated April 24, 1996 between PageMart, Inc. and MWR Telecom, Inc. (Filed as
Exhibit 10.58 to Initial Form S-1 and incorporated herein by reference).
10.41 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the November 1996 Form S-1 and
incorporated herein by reference).
10.42 Amended and Restated Credit Agreement dated as of May 5, 1996 among TelecomUSA Publishing
Group, Inc., TelecomUSA Publishing Company and TelecomUSA Neighborhood Directories, Inc. and
Norwest Bank Iowa, National Association. (Filed as Exhibit 10.64 to the November 1996 Form S- 1
and incorporated herein by reference).
10.43 First Amendment to Amended and Restated Credit Agreement dated as of January 31, 1996 by and
between TelecomUSA Publishing Group, Inc., TelecomUSA Publishing Company and TelecomUSA
Neighborhood Directories, Inc. and Norwest Bank Iowa, National Association. (Filed as Exhibit
10.65 to the November 1996 Form S-1 and incorporated herein by reference).
10.44 Lease Agreement dated as of September 26, 1994 between Ryan Properties, Inc. and Ruffalo, Cody
& Associates, Inc. (Filed as Exhibit 10.66 to the November 1996 Form S-1 and incorporated
herein by reference).
10.45 First Lease Amendment dated as of April 12, 1995 between Ryan Properties, Inc. and Ruffalo,
Cody & Associates, Inc. (Filed as Exhibit 10.67 to the November 1996 Form S-1 and incorporated
herein by reference).
10.46 Lease Agreement dated as of July 18, 1995 between 2060 Partnership, L.P. and TelecomUSA
Publishing Company. (Filed as Exhibit 10.68 to the November 1996 Form S-1 and incorporated
herein by reference).
10.47 Lease Agreement dated April 26, 1995 by and between A.M. Henderson and TelecomUSA Publishing
Company. (Filed as Exhibit 10.69 to the November 1996 Form S-1 and incorporated herein by
reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.48 License Agreement dated as of April 19, 1994, between Ameritech Information Industry Services
and TelecomUSA Publishing Company. (Filed as Exhibit 10.70 to the November 1996 Form S-1 and
incorporated herein by reference).
10.49 License Agreement dated September 13, 1993 between U S WEST Communications, Inc. and TelecomUSA
Publishing Company. (Filed as Exhibit 10.71 to the November 1996 Form S-1 and incorporated
herein by reference).
10.50 Form of McLeod, Inc. Directors Stock Option Plan Option Agreement. (Filed as Exhibit 10.72 to
the November 1996 Form S-1 and incorporated herein by reference).
10.51 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive Stock Option Agreement. (Filed
as Exhibit 10.73 to the November 1996 Form S-1 and incorporated herein by reference).
10.52 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive Stock Option Agreement.
(Filed as Exhibit 10.74 to the November 1996 Form S-1 and incorporated herein by reference).
10.53 Option Agreement dated April 27, 1995 between Fronteer Directory Company, Inc. and TelecomUSA
Publishing Company. (Filed as Exhibit 10.75 to the November 1996 Form S-1 and incorporated
herein by reference).
10.54 Promissory Note dated May 5, 1995 between TelecomUSA Publishing Company and Fronteer Directory
Company, Inc. (Filed as Exhibit 10.76 to the November 1996 Form S-1 and incorporated herein by
reference).
10.55 Security Agreement dated May 5, 1995 between TelecomUSA Publishing Company and Fronteer
Directory Company, Inc. (Filed as Exhibit 10.77 to the November 1996 Form S-1 and incorporated
herein by reference).
10.56 Design/Build Construction Contract dated September 17, 1996 between Ryan Construction Company
of Minnesota, Inc. and McLeod, Inc. (Filed as Exhibit 10.78 to the November 1996 Form S-1 and
incorporated herein by reference).
10.57 Guaranty Agreement dated as of October 17, 1996 by McLeod, Inc. in favor of Kirkwood Community
College. (Filed as Exhibit 10.79 to the November 1996 Form S-1 and incorporated herein by
reference).
10.58 Industrial New Jobs Training Agreement dated as of October 31, 1996 between Kirkwood Community
College and McLeod Telemanagement, Inc. (Filed as Exhibit 10.80 to the November 1996 Form S-1
and incorporated herein by reference).
10.59 Industrial New Jobs Training Agreement dated as of October 31, 1996 between Kirkwood Community
College and McLeod Telecommunications, Inc. (Filed as Exhibit 10.81 to the November 1996 Form
S- 1 and incorporated herein by reference).
10.60 Industrial New Jobs Training Agreement dated as of October 31, 1996 between Kirkwood Community
College and McLeod Network Services, Inc. (Filed as Exhibit 10.82 to the November 1996 Form S-1
and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.61 Industrial New Jobs Training Agreement dated as of October 31, 1996 between Kirkwood Community
College and McLeod, Inc. (Filed as Exhibit 10.83 to the November 1996 Form S-1 and incorporated
herein by reference).
10.62 Change Order No. 1 to the Construction Services Agreement dated November 22, 1995 by and
between MWR TeIecom, Inc. and MFS Network Technologies, Inc. (Filed as Exhibit 10.84 to the
November 1996 Form S-1 and incorporated herein by reference).
10.63 Change Order No. 2 to the Construction Services Agreement dated August 14, 1996 between MWR
Telecom, Inc. and MFS Network Technologies, Inc. (Filed as Exhibit 10.85 to the November 1996
Form S-1 and incorporated herein by reference).
10.64 Change Order No. 3 to the Construction Services Agreement dated October 31, 1996 between MWR
Telecom, Inc. and MFS Network Technologies, Inc. (Filed as Exhibit 10.86 to the November 1996
Form S-1 and incorporated herein by reference).
10.65 Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA Publishing Company, Fronteer
Financial Holdings, Ltd., Classified Directories, Inc., Larry A. Scott, James Greff, Randall L.
Gowin and Edwin Dressler and certain directors, officers and shareholders of Fronteer Financial
Holdings, Ltd. (Filed as Exhibit 10.90 to the 1996 Form 10-K and incorporated herein by
reference).
10.66 Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA Publishing Company, Indiana
Directories, Inc., John Morgan, Hank Meijer, Jack Hendricks, Brad Nelson and Talking
Directories, Inc. (Filed as Exhibit 10.91 to the 1996 Form 10-K and incorporated herein by
reference).
10.67 Amendment to Sale and Purchase Agreement dated February 28, 1997 between McLeodUSA Publishing
Company and Indiana Directories, Inc. (Filed as Exhibit 10.92 to the 1996 Form 10-K and
incorporated herein by reference).
10.68 Ameritech Centrex Service Confirmation of Service Orders dated August 21, 1996 between McLeod
Telemanagement, Inc. and Ameritech Information Industry Services. (Filed as Exhibit 10.93 to
the 1996 Form 10-K and incorporated herein by reference).
**10.69 Amended and Restated Program Enrollment Terms dated November 1, 1996 between WorldCom Network
Services, Inc. d/b/a WilTel and McLeod Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual
Report on Form 10-K/A, File No. 0-20763, filed with the Commission on April 8, 1997 and
incorporated herein by reference).
10.70 Letter Agreement dated April 15, 1997 between U S WEST Communications and McLeodUSA Network
Services, Inc. (Filed as Exhibit 10.1 to Quarterly Report on Form 10-Q, File No. 0-20763, filed
with the Commission on May 14, 1997 and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.71 Network Agreement dated April 7, 1997, between Wisconsin Power and Light Company and McLeodUSA
Telecommunications Services, Inc. (Filed as Exhibit 10.96 to the July 1997 Form S-4 and
incorporated herein by reference).
10.72 Agreement dated July 7, 1997 between McLeodUSA Telecommunications Services, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.97 to the July 1997 Form S-4 and incorporated herein
by reference).
10.73 Agreement dated August 14, 1997 between McLeodUSA Incorporated and Taylor Ball, Inc. (Filed as
Exhibit 10.98 to Registration Statement on Form S-4, File No. 333-34227 (the ''November 1997
Form S-4'') and incorporated herein by reference).
10.74 Interconnection Agreement Under Sections 251 and 252 of the Telecommunications Act of 1996
dated as of October 28, 1996 between Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.99 to the November 1997 Form S-4 and
incorporated herein by reference).
10.75 Interconnection Agreement Under Sections 251 and 252 of the Telecommunications Act of 1996
dated as of July 17, 1997 between Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.100 to the November 1997 Form S-4 and
incorporated herein by reference).
11.1 Statement regarding Computation of Per Share Earnings (Filed as Exhibit 11.1 to the Quarterly
Report on Form 10-Q, File No. 0-20763, filed with the Commission on November 16, 1998 and
incorporated herein by reference).
16.1 Letter regarding Change in Certifying Accountant (Filed as Exhibit 16.1 to the 1997 Form 10-K
and incorporated herein by reference).
21.1 Subsidiaries of McLeodUSA Incorporated (Filed as Exhibit 21.1 to the 1997 Form 10-K and
incorporated herein by reference).
*23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP.
*23.3 Consent of Edwards & Angell, LLP (included in Exhibit 8.1).
*23.4 Consent of Ernst & Young L.L.P.
*24.1 Power of attorney (included on signature page).
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Quarterly Report on Form 10-Q, File No.
0-20763, filed with the Commission on November 16, 1998 and incorporated herein by reference).
*99.1 Form of Proxy Card
*99.2 Form of Election
</TABLE>
<PAGE>
__________________
* Filed herewith.
** Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
<PAGE>
Exhibit 5.1
February 4, 1999
Board of Directors
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street, SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Ladies and Gentlemen:
We are acting as special counsel to McLeodUSA Incorporated, a Delaware
corporation (the "Company"), in connection with its registration statement on
Form S-4 (the "Registration Statement") filed with the Securities and Exchange
Commission relating to the proposed offering of up to 5,750,000 shares (the
"Shares") of the Company's Class A common stock, par value $.01 per share (the
"McLeodUSA Class A Common Stock"), to shareholders of Ovation Communications,
Inc., a Delaware corporation ("Ovation"). The Shares are being offered in
connection with that certain merger (the "Merger") of Ovation with and into
Bravo Acquisition Corporation, a newly formed Delaware corporation and wholly
owned subsidiary of the Company ("Merger Sub"), as contemplated by the terms of
that certain Agreement and Plan of Merger among the Company, Merger Sub, Ovation
and M/C Investors L.L.C., Media/Communications Partners III Limited Partnership,
Timothy T. Devine, Kenneth A. Kirley, Nicholas Lenoci, Jr., Charles M. Osborne
and Scott Rediger, each a stockholder of Ovation, dated as of January 7, 1999
(the "Merger Agreement"). This opinion letter is furnished to you at your
request to enable you to fulfill the requirements of Item 601(b)(5) of
Regulation S-K, 17 C.F.R. (S) 229.601(b)(5), in connection with the Registration
Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Amended and Restated Certificate of Incorporation of the
Company, as certified by the Secretary of State of the State of
Delaware on October 22, 1998 and by the Secretary of the Company
on the date hereof as then being complete, accurate and in
effect.
3. The Amended and Restated Bylaws of the Company, as certified by
the Secretary of the Company on the date hereof as then being
complete, accurate and in effect.
4. An executed copy of the Merger Agreement.
<PAGE>
5. Resolutions of the Board of Directors of the Company adopted on
January 6, 1999, as certified by the Secretary of the Company on
the date hereof as then being complete, accurate and in effect,
relating to the issuance of the Shares and arrangements in
connection therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter
is given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
General Corporation Law of the State of Delaware. We express no opinion herein
as to any other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) effectiveness of the Registration Statement, (ii) the
effectiveness of the Merger under applicable law and the issuance of the Shares
pursuant to the terms of the Merger Agreement and (iii) receipt by the Company
of the consideration for the Shares specified in the resolutions of the Board of
Directors, the Shares will be validly issued, fully paid and nonassessable under
the General Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter and should not be quoted in whole
or in part or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 5.1
to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 8.1
February 2, 1999
Ovation Communications, Inc.
400 South Highway 169
Minneapolis, Minnesota 55426
RE: Merger of Ovation Communications, Inc. with and into Bravo Acquisition
Corporation
Gentlemen:
We have acted as counsel to you, Ovation Communications, Inc., a Delaware
corporation (the "Company"), in connection with the contemplated merger (the
"Merger") of the Company with and into Bravo Acquisition Corporation ("Acquiror
Sub"), a Delaware corporation and a wholly-owned subsidiary of McLeodUSA
Incorporated ("Acquiror"), a Delaware corporation. The terms and conditions of
the Merger are described in the Agreement and Plan of Merger (the "Agreement"),
dated January 7, 1999, by and among you, Acquiror, Acquiror Sub and certain
stockholders of the Company. Unless otherwise indicated, all capitalized terms
used herein shall have the meanings ascribed to them in the Agreement. This
opinion is being furnished to you in connection with Section 7.03(e) of the
Agreement.
In connection with our opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
the Agreement and such other documents as we have deemed necessary or
appropriate as a basis for our opinion set forth below. In our examination, we
have assumed the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies, and the
authenticity of the originals of such latter documents. As to any facts
material to our opinion that we did not independently establish or verify, we
have relied upon statements and representations of officers and other
representatives of the Company, Acquiror and Acquiror Sub (including the tax
certificates attached hereto). Our opinion is conditioned on, among other
things, the initial and continuing accuracy of the facts, information, covenants
and representations set forth in the documents referred to above. In addition,
we have assumed that the Merger will be consummated in accordance with the terms
and conditions contained in the Agreement, and that the Merger will qualify as a
merger under applicable state law.
In rendering our opinion, we have considered the applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), Treasury Regulations
promulgated thereunder (the "Regulations"), pertinent judicial authorities,
interpretive rulings of the Internal Revenue Service (the "Service") and such
other authorities as we have
<PAGE>
considered relevant. It should be noted that statutes, regulations, judicial
decisions and administrative interpretations are subject to change at any time
and, in some cases, with retroactive effect. A change in the authorities upon
which our opinion is based could affect our conclusions herein. Moreover, there
is no assurance that the Service will not take a position contrary to our
opinion or that a court considering the issues would not hold contrary to our
opinion. None of the parties to the Agreement have requested a ruling from the
Service with respect to any issue addressed in this opinion, and no ruling from
the Service will be sought.
Based upon and subject to the foregoing, we are of the opinion that, under
current law, the Merger will qualify as a reorganization described in Section
368(a)(2)(D) of the Code and, accordingly, that for United States federal income
tax purposes:
(i) no gain or loss will be recognized by a Company Stockholder as a
result of the receipt of solely shares of Acquiror Common Stock in exchange for
his or her Company Common Stock, except to the extent of any cash received in
lieu of fractional shares;
(ii) a Company Stockholder who receives cash as consideration for his
or her Company Common Stock, whether in whole or in part, will recognize gain
equal to the lesser of (I) the difference between (A) the fair market value of
the Acquiror Common Stock and the amount of cash received in the Merger and (B)
the holder's tax basis in the Company Common Stock exchanged (assuming the
Company Common Stock was held by such holder as a capital asset) or (II) the
amount of cash received for the Company Common Stock;
(iii) a Company Stockholder who receives cash in lieu of a fractional
share of Acquiror Common Stock will be treated as if it received such fractional
share and then sold such share back to the Acquiror. Such stockholder will
recognized gain or loss on the sale of the fractional share equal to the
difference between (A) the amount of cash received for such fractional share and
(B) the holder's tax basis in such fractional share;
(iv) a Company Stockholders' tax basis in the Acquiror Common Stock
received pursuant to the Merger in respect of Company Common Stock will
initially be (A) equal to the Company Stockholders' tax basis in his or her
Company Common Stock immediately prior to the Merger, (B) increased by the
amount of gain recognized in the Merger under paragraph (ii) above, (C) reduced
by the amount of cash received for the Company Common Stock pursuant to
paragraph (ii) above and (D) reduced by the amount of basis allocable to the
fractional share (as described in paragraph (iii) above); and
(v) a Company Stockholders' holding period for Acquiror Common Stock
received pursuant to the Merger will include the holding period of the Company
Common Stock for which it was exchanged (assuming such Company Common Stock was
held as a capital asset).
-2-
<PAGE>
Except as set forth above, we express no other opinions as to the tax
consequences of the Merger to any party under federal, state, local or foreign
law. We are furnishing this opinion to you solely in connection with the Merger
and this opinion is not to be used, circulated, quoted or otherwise referred to
by any other person or for any other purpose without our express written
consent, except as may be required by you under federal or state securities
laws. This opinion is being rendered on the basis of the facts and the law as
they exist or are understood on the date hereof. Any change in the facts or the
applicable law subsequent to such date might affect the conclusions expressed
herein. In rendering our opinion, we do not undertake to assume any obligation
whatsoever to advise you of any changes in applicable law which may occur after
the date hereof or of any changes in facts which are brought to our attention
after the date hereof.
Very truly yours,
Edwards & Angell, LLP
-3-
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Registration Statement on Form S-4 of our McLeodUSA
Incorporated reports dated January 28, 1998, our Consolidated Communications
Inc. report dated March 14, 1997 and to all references to our Firm included in
or made part of this Registration Statement.
ARTHUR ANDERSEN LLP
Chicago, Illinois
February 4, 1999
<PAGE>
Exhibit 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Selected Financial
and Operating Data of Ovation" and "Experts" and to the use of our report dated
December 11, 1998, with respect to the financial statements of Ovations
Communications, Inc. as of December 31, 1997 and for the period from March 27,
1997 (inception) to December 31, 1997 included in the Registration Statement
(Form S-4) and related Prospectus of McLeodUSA Incorporated.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 2, 1999
<PAGE>
EXHIBIT 99.1
PROXY
OVATION COMMUNICATIONS, INC.
SPECIAL MEETING OF STOCKHOLDERS
________________, 1999
THE undersigned acknowledges receipt of a Prospectus and Proxy Statement
dated ___, 1999, and appoints _______________ and _________________, or either
of them, attorneys and proxies of the undersigned, each with full power of
substitution, to vote all shares of Ovation Communications, Inc. which the
undersigned is entitled to vote at the special meeting of its stockholders to be
held on _____, 1999, and at any adjournment thereof:
1. FOR AGAINST ABSTAIN
( ) ( ) ( )
(YOUR BOARD OF DIRECTORS
RECOMMENDS A VOTE FOR THIS
---
PROPOSAL)
Proposal to adopt an Agreement and Plan
of Merger (the "Merger Agreement") and
approve the Merger and other transactions
contemplated by the Merger Agreement as
described in the Prospectus and Proxy
Statement dated , 1999.
<PAGE>
2. As said Proxies in their discretion may determine on all other matters that
may be presented at the meeting.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF OVATION COMMUNICATIONS,
INC. IF THIS PROXY IS PROPERLY EXECUTED, THE SHARES REPRESENTED BY THIS PROXY
WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION IS MADE, THIS PROXY WILL BE
VOTED FOR ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND WILL
---
BE VOTED IN THE DISCRETION OF THE PROXIES ON ANY OTHER MATTERS WHICH MAY COME
BEFORE THE MEETING.
Please sign exactly as your name(s) appear(s) below. Joint owners should each
sign personally. Executors, administrators, trustees and persons signing for
corporations or partnerships should so indicate and include title.
Dated:_____________________, 1999
x
---------------------------------
x
---------------------------------
x
---------------------------------
Signatures of Stockholders
PLEASE DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE.
<PAGE>
EXHIBIT 99.2
________, 1999
FORM OF ELECTION
Norwest Bank, N.A.,
as Exchange Agent
161 North Concord Exchange
P.O. Box 738
South St. Paul, MN 55075-0738
Attn: Mr. Kenneth P. Swanson
Shareowner Services
Re: McLeodUSA Incorporated/Ovation Communications, Inc. Merger
----------------------------------------------------------
Ladies and Gentlemen:
Reference is made to (i) that certain Agreement and Plan of Merger dated as
of January 7, 1999 (the "Merger Agreement") by and among McLeodUSA Incorporated,
Bravo Acquisition Corporation, Ovation Communications, Inc. ("Ovation") and
certain stockholders of Ovation, and (ii) the attached form of Letter of
Transmittal to be completed, signed and delivered to the Exchange Agent by the
undersigned. Capitalized terms used in this letter and not defined in this
letter have the meaning ascribed to them in the Merger Agreement.
The undersigned certifies to you as follows:
1. The undersigned is the registered holder of the number of shares of
common stock, par value $.01 per share, of Ovation set forth on
Schedule A hereto as the "No. of Shares of Company Common Stock."
2. The undersigned hereby elects to receive cash and/or shares of Acquiror
Common Stock in exchange for the No. of Shares of Company Common Stock
set forth on Schedule A hereto as follows:
. The undersigned elects to receive cash in exchange for the number of
shares of Company Common Stock shown on Schedule A hereto as the
"No. of Shares to Be Converted Into Cash"
. The undersigned elects to receive shares of Acquiror Common Stock in
exchange for the number of shares of Company Common Stock shown on
Schedule A hereto as the "No. of Shares to Be Converted Into
Acquiror Common Stock"
Please register the shares of Acquiror Common Stock and/or deliver the cash
in accordance with the enclosed instructions.
By:_____________________________________
<PAGE>
Schedule A
_____________________________
Name of Registered Holder
No. of Shares of Company Common Stock: __________
No. of Shares to Be Converted Into Cash: __________
No. of Shares to Be Converted Into Acquiror Common Stock: __________
<PAGE>
INSTRUCTIONS FOR REGISTRATION OF SHARES
AND/OR DELIVERY OF CASH
