<PAGE>
Filed pursuant to rule 424(b)(1)
Registration No. 333-76501
P R O S P E C T U S
[McLEODUSA LOGO]
9,000,000 Shares
McLeodUSA Incorporated
Class A Common Stock
------------
Stockholders of McLeodUSA named in this prospectus are selling 9,000,000
shares of McLeodUSA Class A common stock. McLeodUSA will not receive any
proceeds from the sale of the shares by the selling stockholders. The
underwriters named in this prospectus may purchase up to 1,350,000 additional
shares of our Class A common stock from the selling stockholders under
circumstances described in this prospectus.
Our Class A common stock is quoted on The Nasdaq Stock Market under the
symbol "MCLD." The last reported sale price of our Class A common stock on The
Nasdaq Stock Market on May 12, 1999, was $55.75 per share.
------------
Investing in our Class A common stock involves various risks. See "Risk
Factors" beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
------------
<TABLE>
<CAPTION>
Per Share Total
--------- ------------
<S> <C> <C>
Public Offering Price................................... $55.625 $500,625,000
Underwriting Discount................................... $ 1.947 $ 17,523,000
Proceeds to Selling Stockholders (before expenses)...... $53.678 $483,102,000
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about May 18,
1999.
------------
Salomon Smith Barney
Credit Suisse First Boston
Merrill Lynch & Co.
May 12, 1999
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 7
Cautionary Note Regarding Forward-Looking Statements....................... 14
Use of Proceeds............................................................ 15
Dividend Policy............................................................ 15
Market Price of Class A Common Stock ...................................... 15
Capitalization............................................................. 16
Pro Forma Financial Data................................................... 17
Principal and Selling Stockholders......................................... 20
Description of Capital Stock............................................... 24
Underwriting............................................................... 29
Legal Matters.............................................................. 31
Experts.................................................................... 31
Where You Can Find More Information........................................ 31
</TABLE>
<PAGE>
SUMMARY
The following summary highlights selected information from this prospectus.
It does not contain all of the information that is important to you. You should
carefully read this entire prospectus and the other documents to which this
prospectus refers you. In addition, you should carefully consider the factors
set forth under the caption "Risk Factors." Unless otherwise indicated, dollar
amounts over $1 million have been rounded to one decimal place and dollar
amounts less than $1 million have been rounded to the nearest thousand.
Our Company
We provide communications services to business and residential customers in the
Midwestern and Rocky Mountain regions of the United States. We offer local,
long distance, Internet access, data, voice mail and paging services, from a
single company on a single bill. We believe we are the first company 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 communications 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
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. special access, private line and data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
mobile radio, paging services and Web site development and hosting
In most of our markets, we compete with the existing local phone company by
leasing its lines and switches. In other markets, primarily in east central
Illinois and southeast South Dakota, we operate our own lines and switches. We
provide long distance services by using our own communications network
facilities and leasing capacity from long distance and local communications
providers. We are constructing fiber optic communications networks in Iowa,
Illinois, Wisconsin, Indiana, Missouri, Minnesota, South Dakota, North Dakota,
Colorado and Wyoming to carry additional communications traffic on our own
network.
Our Strategy
We want to be the leading and most admired provider of communications services
in our markets. To achieve this goal, we are:
. aggressively capturing customer share and generating revenue using leased
communications network capacity
. concurrently building our own communications network
. migrating customers to our communications network to provide enhanced
services and to reduce our operating costs
The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly penetrate
1
<PAGE>
our target markets and build customer loyalty by providing an integrated
product offering to business and residential customers.
Build customer share through branding. We believe we will create and strengthen
brand awareness in our target markets by branding our communications services
with the trade name McLeodUSA in combination with the distinctive black-and-
yellow motif of our telephone directories.
Provide outstanding customer service. Our customer service representatives are
available 24 hours a day, seven days a week, to answer customer calls. Our
customer-focused software and systems allow our representatives immediate
access to our customer and network data, enabling a rapid and effective
response to customer requests.
Emphasize small and medium sized businesses. We primarily target small and
medium sized businesses because we believe we can rapidly capture customer
share by providing face-to-face business sales and strong service support to
these customers.
Expand our fiber optic communications network. We are building a state-of-the-
art fiber optic communications network to deliver multiple services and reduce
operating costs.
Expand our intra-city fiber optic communications network. Within selected
cities, we plan to extend our network directly to our customers' locations.
This will allow us to provide expanded services and reduce the expense of
leasing communications facilities from the existing local telephone company.
Explore acquisitions and strategic alliances. We plan to pursue acquisitions,
joint ventures and strategic alliances that expand or complement our business.
Leverage proven management team. Our executive management team consists of
veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
----------------
As of December 31, 1998, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our planned capital
expenditures and operating expenses. Our estimated aggregate capital
requirements include the projected cost of:
. building our fiber optic communications network, including intra-city fiber
optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating recent acquisitions
. constructing, acquiring, developing or improving telecommunication assets
We expect to use the following to address our capital needs:
. approximately $487.8 million in net proceeds from the sale of $500 million
of senior notes on February 22, 1999
. approximately $591.7 million of cash and investments on hand at December 31,
1998
. projected operating cash flow
. additional issuances of debt or equity securities
Our 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 our future
capital requirements is subject to risks and uncertainties and may differ
materially from our estimates. Accordingly, we may need additional capital to
continue to expand our markets, operations, facilities, network and services.
See "Risk Factors--Failure to Raise Necessary Capital Could Restrict Our
Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions."
----------------
Our principal executive offices are located at McLeodUSA Technology Park, 6400
C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone number
is (319) 364-0000.
2
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The Offering
<TABLE>
<S> <C>
Class A common stock offered by the selling
stockholders............................................ 9,000,000 shares
Class A common stock outstanding before and after the
offering................................................ 74,440,894 shares
Use of proceeds.......................................... McLeodUSA will not
receive any proceeds
from the sale of shares
of Class A common stock
by the selling
stockholders.
The Nasdaq Stock Market symbol........................... "MCLD"
</TABLE>
The number of shares of Class A common stock outstanding does not take into
account 15,812,328 shares of Class A common stock subject to outstanding
options and 1,300,688 shares of Class B common stock subject to outstanding
options, both as of March 31, 1999.
Risk Factors
You should consider carefully all of the information contained and
incorporated by reference in this prospectus, including the information set
forth under the caption "Risk Factors," before making an investment in the
shares.
3
<PAGE>
Recent Developments
February 1999 Financing
On February 22, 1999, we completed a private offering of $500 million
aggregate principal amount of our 8 1/8% senior notes in which we received net
proceeds of approximately $487.8 million. Interest on the 8 1/8% senior notes
accrues at the rate of 8 1/8% per annum and is payable in cash semi-annually in
arrears on February 15 and August 15, starting August 15, 1999. The 8 1/8%
senior notes will mature on February 15, 2009.
Acquisition of Ovation Communications, Inc.
On March 31, 1999, we acquired Ovation Communications, Inc. for an aggregate
of 5,596,617 shares of our Class A common stock and $121.3 million in cash. We
paid approximately $105.6 million of the outstanding debt of Ovation at the
time of the transaction.
Ovation is a diversified communications services company serving business
customers primarily in larger metropolitan areas in Minnesota, Illinois and
Wisconsin (such as Minneapolis/St. Paul, Chicago and Milwaukee) and in small to
mid-sized cities in Michigan. Ovation provides the following services:
. local and network access
. local and long distance telephone
. voice mail, teleconferencing and calling card
. Internet access
As of December 31, 1998, Ovation served approximately 32,650 business local
lines and 12,900 residential local lines to approximately 2,900 business
customers and 11,750 residential customers in 135 cities and towns. Ovation had
1998 revenues of $21.5 million, including revenues received between October 1,
1998 and December 31, 1998 as a result of Ovation's acquisition of BRE
Communications, L.L.C. d/b/a Phone Michigan on October 1, 1998. As of December
31, 1998, Ovation had four switches, approximately 564 route miles of fiber
optic communications network and 384 employees.
Announcement of Data Strategy
On April 14, 1999, we announced plans to offer high-speed digital access and
data services as part of our integrated communications product package using
DSL (Digital Subscriber Line) and other technologies. These services are
expected to include:
. basic dial tone transmitted digitally
. high-speed data communications for Internet and intranet applications
. commercial network connections for local area, metropolitan area and wide
area networks
4
<PAGE>
Summary Consolidated Financial and Operating Data
The information in the following table is based on historical financial
information included in our prior SEC filings, including our annual report on
Form 10-K for the fiscal year ended December 31, 1998. 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 is considered a part of this
document. See "Where You Can Find More Information." Our audited historical
financial statements as of December 31, 1998 and 1997, and for each of the
three years ended December 31, 1998 were audited by Arthur Andersen LLP,
independent public accountants.
The information in the table on the following page reflects consolidated
financial information for the following companies we have acquired:
<TABLE>
<CAPTION>
Acquired Company Date Acquired
---------------- -------------
<S> <C>
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
Telecom*USA Publishing Group Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
Ovation Communications, Inc. March 31, 1999
</TABLE>
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired.
The balance sheet data in the table include the financial position of these
companies at the end of the periods presented, beginning with the period in
which they were acquired. These acquisitions affect the comparability of the
financial data for the periods presented.
The pro forma information presented in the operations statement data and
other financial data in the table reflects the operations of Ovation as if the
Ovation acquisition had occurred on January 1, 1998 and the pro forma
information in the balance sheet data in the table includes Ovation's financial
position as of December 31, 1998.
The pro forma information presented in the operations statement data and
other financial data in the table includes the effects of the issuance of $300
million principal amount of our 8 3/8% senior notes in March 1998, $300 million
principal amount of our 9 1/2% senior notes in October 1998 and $500 million
principal amount of our 8 1/8% senior notes in February 1999 as if they had
occurred at the beginning of 1998 and the pro forma information presented in
the balance sheet data in the table includes the effects of the issuance of the
8 1/8% senior notes as if it had occurred at the end of 1998.
(table begins on the next page)
5
<PAGE>
Summary Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 625,181
-------- -------- -------- ---------- ---------- -----------
Operating expenses:
Cost of service....... 6,212 19,667 52,624 151,190 323,208 329,527
Selling, general and
administrative....... 12,373 18,054 46,044 148,158 260,931 274,420
Depreciation and
amortization......... 772 1,835 8,485 33,275 89,107 109,720
Other................. -- -- 2,380 4,632 5,575 5,575
-------- -------- -------- ---------- ---------- -----------
Total operating
expenses............. 19,357 39,556 109,533 337,255 678,821 719,242
-------- -------- -------- ---------- ---------- -----------
Operating loss......... (11,343) (10,558) (28,210) (69,369) (74,675) (94,061)
Interest income
(expense), net........ (73) (771) 5,369 (11,967) (52,234) (85,898)
Other non-operating
income................ -- -- 495 1,426 1,997 1,997
Income taxes........... -- -- -- -- -- --
-------- -------- -------- ---------- ---------- -----------
Net loss............... $(11,416) $(11,329) $(22,346) $ (79,910) $ (124,912) $ (177,962)
======== ======== ======== ========== ========== ===========
Loss per common share.. $ (.53) $ (.40) $ (.55) $ (1.45) $ (1.99) $ (2.60)
======== ======== ======== ========== ========== ===========
Weighted average common
shares outstanding.... 21,464 28,004 40,506 54,974 62,807 68,404
======== ======== ======== ========== ========== ===========
<CAPTION>
December 31,
-----------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets......... $ 4,862 $ 8,507 $224,401 $ 517,869 $ 793,192 $ 1,179,442
Working capital
(deficit)............. $ 1,659 $ (1,208) $185,968 $ 378,617 $ 613,236 $ 967,276
Property and equipment,
net................... $ 4,716 $ 16,119 $ 92,123 $ 373,804 $ 629,746 $ 706,406
Total assets........... $ 10,687 $ 28,986 $452,994 $1,345,652 $1,925,197 $ 2,738,031
Long-term debt less
current maturities.... $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170 $ 1,836,876
Stockholders' equity... $ 3,291 $ 14,958 $403,429 $ 559,379 $ 462,806 $ 651,724
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $ 3,393 $ 14,697 $173,782 $ 601,137 $ 339,660 $ 739,497
EBITDA(1).............. $(10,571) $ (8,723) $(17,345) $ (31,462) $ 20,007 $ 21,234
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996 1997 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines....................................... 35,800 65,400 282,600 397,600
Cities and towns served........................... 77 120 227 269
Route miles....................................... 218 2,352 4,908 7,120
Employees......................................... 419 2,077 4,941 5,300
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have 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.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before investing in our Class A common stock.
You should also consider the additional information set forth in our SEC
reports on Forms 10-K, 10-Q and 8-K and in the other documents considered a
part of this prospectus. See "Where You Can Find More Information."
Fluctuations in the Market Price of Our Class A Common Stock May Make it More
Difficult for Us to Raise Capital.
The market price of our Class A common stock is extremely volatile and has
fluctuated over a wide range. These fluctuations may impair our ability to
raise capital by offering equity securities. The market price may continue to
fluctuate significantly in response to various factors, including:
. market conditions in the industry
. announcements or actions by competitors
. low trading volume
. sales of large amounts of our Class A common stock in the public market
or the perception that such sales could occur
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. regulatory and judicial actions
. general economic conditions
See "Market Price of Class A Common Stock."
We May Not Be Able to Successfully Integrate Acquired Companies into Our
Operations, Which Could Slow Our Growth.
The integration of acquired companies into our operations involves a number
of risks, including:
. difficulty integrating new operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel or customers
. inability to successfully incorporate new assets and rights into our
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
connection with acquisition transactions could slow our growth or lower the
quality of our services, which could reduce customer demand.
Continued Rapid Growth of Our Network, Services and Subscribers Could Be Slowed
if We Cannot Manage this Growth.
We have rapidly expanded and developed our network, services and subscriber
base. For example, we recently announced plans to offer high-speed digital
access and data services. Our expansion and development have placed and will
continue to place significant demands on our management, operational and
financial systems and procedures and controls. We may not be able to manage our
anticipated growth effectively, which would harm our business, results of
operations and financial condition.
Further expansion and development will depend on a number of factors,
including:
. cooperation of the existing local telephone companies
. regulatory, judicial and governmental developments
. changes in the competitive climate in which we operate
. 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
7
<PAGE>
We will need to continue to improve our operational and financial systems and
our procedures and controls as we grow. We must also develop, train and manage
our employees.
We Expect to Incur Significant Losses Over the Next Several Years.
If we do not become profitable in the future, the value of our Class A common
stock may fall and we could have difficulty obtaining funds to continue our
operations. We have incurred net losses every year since we began operations.
Since January 1, 1994, our net losses have been as follows:
Net Losses
<TABLE>
<CAPTION>
Period Amount
- ------ --------------
<S> <C>
1994............................................................. $ 11.4 million
1995............................................................. $ 11.3 million
1996............................................................. $ 22.3 million
1997............................................................. $ 79.9 million
1998............................................................. $124.9 million
</TABLE>
We expect to incur net losses during the next several years while we develop
our businesses, expand our fiber optic communications network and develop
wireless services.
Failure to Raise Necessary Capital Could Restrict Our Ability to Develop Our
Network and Services and Engage in Strategic Acquisitions.
We need significant capital to continue to expand our operations, facilities,
network and services. We cannot assure you that our capital resources will
permit us to fund our planned network deployment and operations or achieve
operating profitability. Our failure to generate or raise sufficient funds may
require us to delay or abandon some of our expansion plans or expenditures,
which could harm our business and competitive position.
As of December 31, 1998, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our capital expenditures and
operating expenses. Our estimated aggregate capital requirements include the
projected costs of:
. building our fiber optic communications network, including intra-city
fiber optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating recent acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
Our 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 our future
capital requirements may differ substantially from our estimate due to factors
such as:
. strategic acquisition costs and effects of acquisitions on our business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological or competitive developments
. new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities.
We may meet any additional capital needs by issuing additional debt or equity
securities or borrowing funds from one or more lenders. We cannot assure you
that we will have timely access to additional financing sources on acceptable
terms. If we do not have such access, we may not be able to expand our markets,
operations, facilities, network and services through acquisitions as we intend.
8
<PAGE>
Our High Level of Debt Could Limit Our Flexibility in Responding to Business
Developments and Put Us at a Competitive Disadvantage.
We have substantial debt, which could adversely affect us in a number of
ways, including:
. limiting our ability to obtain necessary financing in the future
. limiting our flexibility to plan for, or react to, changes in our
business
. requiring us to use a substantial portion of our cash flow from
operations to pay our debt obligations rather than for other purposes,
such as working capital or capital expenditures
. making us more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage
. making us more vulnerable to a downturn in our business
As of December 31, 1998, we had $1.2 billion of long-term debt and $462.8
million of stockholders' equity. We incurred an additional $500 million of
long-term debt on February 22, 1999. As a result, we expect our fixed charges
to exceed our earnings for the foreseeable future.
Covenants in Debt Instruments Restrict Our Capacity to Borrow and Invest, Which
Could Impair Our Ability to Expand or Finance Our Operations.
The indentures governing the terms of our long-term debt impose operating and
financial restrictions that limit our discretion on some business matters,
which could make it more difficult for us to expand, finance our operations or
engage in other business activities that may be in our interest. These
restrictions limit or prohibit our ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge or mortgage assets
. enter into transactions with related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt could
become immediately due and payable.
We Are Prohibited from Paying Dividends.
We have never paid any cash dividends. We do not anticipate paying any cash
dividends for the foreseeable future. The indentures governing our debt
prohibit us from paying cash dividends. You should therefore not expect to
receive cash dividends on shares of our Class A common stock you purchase in
this offering.
Our Dependence on Regional Bell Operating Companies to Provide Most of Our
Communications Services Could Make it Harder for Us to Offer Our Services at a
Profit.
We depend on the regional Bell operating companies to provide most of our
core local and some of our long distance services. Today, without using the
communications facilities of these companies, we could not provide bundled
local and long distance services to most of our customers. Because of this
dependence, our communications services are highly susceptible to changes in
the conditions for access to these facilities and we may therefore have
difficulty offering our services at profitable and competitive rates.
U S WEST Communications, Inc., Ameritech Corporation and Southwestern Bell
Telephone Company are our primary suppliers of local lines to our customers and
communications services that allow us to transfer and connect calls. Their
communications facilities allow us to provide (1) local service, (2) long
distance service and (3) private lines dedicated to our customers'
9
<PAGE>
use. If these or other companies deny or limit our access to their
communications network elements or wholesale services, we may not be able to
offer profitable communications services.
Our plans to provide local service using our own communications network
equipment also depend on the regional Bell operating companies. In order to
interconnect our network equipment and other communications facilities to
network elements controlled by the regional Bell operating companies, we must
first negotiate and enter into interconnection agreements with them.
Interconnection obligations imposed on the regional Bell operating companies by
the Telecommunications Act of 1996 have been and continue to be subject to a
variety of legal proceedings, which could affect our ability to obtain
interconnection agreements on acceptable terms. We cannot assure you that we
will succeed in obtaining interconnection agreements on terms that would permit
us to offer local services using our own communications network facilities at
profitable and competitive rates.
Actions by U S WEST May Make it More Difficult for Us to Offer Our
Communications Services.
U S WEST has introduced several measures that may make it more difficult for
us to offer our communications services. For example, in February 1996, U S
WEST filed tariffs and other notices with the public utility commissions in its
fourteen-state service region to limit future Centrex access to its switches.
Centrex access allows us to aggregate lines, have control over several
characteristics of those lines and provide a set of standard features on those
lines. We use U S WEST's Centrex services to provide most of our local
communications services in U S WEST's service territories.
In January 1997, U S WEST also proposed interconnection surcharges in several
of the states in its service region, which would increase our costs of
providing communications services in those states.
We have challenged or are challenging these actions by U S WEST before the
FCC or applicable state public utility commissions. We cannot assure you we
will succeed in our challenges to these or other actions by U S WEST that would
prevent or deter us from using U S WEST's Centrex service or communications
network elements. If U S WEST successfully withdraws or limits our access to
Centrex services in any jurisdiction, we may not be able to offer
communications services in that jurisdiction, which could harm our business.
We anticipate that U S WEST will also pursue legislation in states within our
target market area to reduce state regulatory oversight over its rates and
operations. If adopted, these initiatives could make it more difficult for us
to challenge U S WEST's actions in the future.
Competition in the Communications Services Industry Could Cause Us to Lose
Customers and Revenue and Could Make it More Difficult for Us to Enter New
Markets.
We face intense competition in all of our markets. This competition could
result in loss of customers and lower revenue for us. It could also make it
more difficult for us to enter new markets. Existing local telephone companies,
including U S WEST, Ameritech, Southwestern Bell and GTE, currently dominate
their local telecommunications markets. Three major competitors, AT&T, MCI
WorldCom and Sprint, dominate the long distance market. Hundreds of other
companies also compete in the long distance marketplace. AT&T, MCI WorldCom and
Sprint also offer local telecommunications services in many locations.
Our local and long distance services also compete with the services of other
communications services companies competing with the existing local telephone
companies in some markets.
Other competitors may include cable television companies, providers of
communications network facilities dedicated to particular customers, providers
of digital access and data services, microwave and satellite
10
<PAGE>
carriers, wireless telecommunications providers, private networks owned by
large end-users, and telecommunications management companies.
These and other firms may enter the markets where we focus our sales efforts.
Many of our existing and potential competitors have financial and other
resources far greater than our own. In addition, the trend toward mergers and
strategic alliances in the communications industry may strengthen some of our
competitors and could put us at a significant competitive disadvantage.
We May Not Succeed in Developing or Making a Profit from Wireless Services.
Our proposal to offer wireless services involves a high degree of risk and
will impose significant demands on our management and financial resources.
Developing wireless services may require us to, among other things, spend
substantial time and money to acquire, build and test a wireless infrastructure
and enter into roaming arrangements with wireless operators in other markets.
We may not succeed in developing wireless services. Even if we spend
substantial amounts to develop wireless services, we may not make a profit from
wireless operations.
Our ability to successfully offer wireless services will also depend on a
number of factors beyond our control, including:
. changes in communications service rates charged by other companies
. changes in the supply and demand for wireless services due to competition
with other wireline and wireless operators in the same geographic area
. changes in the federal, state or local regulatory requirements affecting
the operation of wireless systems
. changes in wireless technologies that could render obsolete the
technology and equipment we choose for our wireless services
Competition in the Wireless Telecommunications Industry Could Make it Harder
for Us to Successfully Offer Wireless Services.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it harder for
us to gain a share of the wireless communications market. We expect up to eight
wireless competitors in each of our target wireless markets. We could face
additional competition from mobile satellite services.
Many of our potential wireless competitors have financial and other resources
far greater than our own and have more experience testing new or improved
products and services. In addition, several wireless competitors operate or
plan to operate, wireless telecommunications systems that encompass most of the
United States, which could give them a significant competitive advantage,
particularly if we only offer regional wireless services.
The Success of Our Communications Services Will Depend on Our Ability to Keep
Pace with Rapid Technological Changes in Our Industry.
Communications technology is changing rapidly. These changes influence the
demand for our services. We need to be able to anticipate these changes and to
develop new and enhanced products and services quickly enough for the changing
market. This will determine whether we can continue to increase our revenues
and number of subscribers and be competitive.
The Loss of Key Personnel Could Weaken Our Technical and Operational Expertise,
Delay Our Introduction of New Services or Entry into New Markets and Lower the
Quality of Our Service.
We may not be able to attract, develop, motivate and retain experienced and
innovative
11
<PAGE>
personnel. There is intense competition for qualified personnel in our
business. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could cause us to make less successful
strategic decisions, which could hinder the introduction of new services or the
entry into new markets. We could also be less prepared for technological or
marketing problems, which could reduce our ability to serve our customers and
lower the quality of our services. As a result, our financial condition could
worsen.
Our future success depends on the continued employment of our senior
management team, particularly Clark E. McLeod, our Chairman and Chief Executive
Officer, and Stephen C. Gray, our President and Chief Operating Officer. We do
not have term employment agreements with these employees.
Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay
Installation of Our Networks and Interfere with Our Operations.
To obtain access to rights-of-way needed to install our fiber optic cable, we
must reach agreements with state highway authorities, local governments,
transit authorities, local telephone companies, other utilities, railroads,
long distance carriers and other parties. The failure to obtain or maintain any
rights-of-way could delay our planned network expansion, interfere with our
operations and harm our business. For example, if we lose access to a right-of-
way, we may need to spend significant sums to remove and relocate our
facilities.
Government Regulation May Increase Our Cost of Providing Services, Slow Our
Expansion into New Markets and Subject Our Services to Additional Competitive
Pressures.
Our facilities and services are subject to federal, state and local
regulation. The time and expense of complying with these regulations could slow
down our expansion into new markets, increase our costs of providing services
and subject them to additional competitive pressures. One of the primary
purposes of the Telecommunications Act of 1996 was to open the local telephone
services market to competition. While this has presented us with opportunities
to enter local telephone markets, it also provides important benefits to the
existing local telephone companies, such as the ability, under specified
conditions, to provide out-of-region long distance service to customers in
their respective regions. In addition, we need to obtain and maintain licenses,
permits and other regulatory approvals in connection with some of our services.
Any of the following could harm our business:
. 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
Our Management and Principal Stockholders Can Control McLeodUSA and May Have
Different Interests Than Those of Other Stockholders.
As of March 31, 1999, Interstate Energy Corporation, MHC Investment Company,
M/C Investors L.L.C., Media/Communications Partners III Limited Partnership,
Richard A. Lumpkin and various trusts for the benefit of his family, Clark and
Mary McLeod, and our directors and executive officers beneficially owned
approximately 54% of our outstanding Class A common stock. These stockholders
can collectively control management policy and all corporate actions requiring
a stockholder vote, including election of the board of directors. Conflicts of
interest may arise between the
12
<PAGE>
interests of these stockholders and our other stockholders. For example, the
fact that these stockholders hold so much Class A common stock could make it
more difficult for a third party to acquire us. You should expect these
stockholders to resolve any conflicts in their favor.
Computer Systems May Malfunction and Interrupt Our Services if We and Our
Suppliers Do Not Attain Year 2000 Readiness.
We and our major suppliers of communications services and network elements
rely greatly on computer systems and other technological devices. These may not
be capable of recognizing January 1, 2000 or subsequent dates. This problem
could cause any or all of our systems or services to malfunction or fail.
We are reviewing our computer systems and programs and other technological
devices 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 our
operations and is centrally managed. This review may not be sufficient,
however, to prevent interruptions to our systems and services.
Some of our critical operations and services depend on other companies. For
example, we depend on the existing local telephone companies, primarily the
regional Bell operating companies, to provide most of our local and some of our
long distance services. To the extent U S WEST, Ameritech or Southwestern Bell
fail to address Year 2000 issues which might interfere with their ability to
fulfill their obligations to us, it could interfere with our operations. If we,
our major vendors, our material service providers or our customers fail to
address Year 2000 issues in a timely manner, our business, results of
operations and financial condition could be significantly harmed.
Future Sales of Our Class A Common Stock in the Public Market Could Adversely
Affect Our Stock Price and Our Ability to Raise Funds in New Stock Offerings.
Future sales of substantial amounts of our Class A common stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of our Class A common stock and could impair our
ability to raise capital through future offerings of equity securities. Several
of our principal stockholders hold a significant portion of our Class A common
stock, and a decision by one or more of these stockholders to sell their
shares, or the perception that such sales could occur, could adversely affect
the market price of our Class A common stock.
There were 74.4 million shares of our Class A common stock outstanding as of
March 31, 1999. There were also options to purchase 15.8 million shares of
Class A common stock outstanding as of March 31, 1999. Including the shares
offered by this prospectus, Interstate Energy, MHC Investment, M/C Investors,
Media/Communications Partners III, Richard A. Lumpkin and various trusts for
the benefit of his family, Clark and Mary McLeod, and our directors and
executive officers owned approximately 40.2 million shares as of March 31,
1999, all of which were eligible for sale in the public market either in
accordance with Rule 144 under the Securities Act of 1933 or otherwise. If all
the shares offered by this prospectus are sold in the offering the ownership by
these stockholders will be reduced to 31.2 million shares. In addition, we are
required to file in May 1999 a registration statement to register for resale by
two other stockholders up to approximately 940,000 shares of our Class A common
stock.
13
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans, our future capital requirements, forecasted
demographic and economic trends relating to our industry, our ability to
complete acquisitions, to realize anticipated cost savings and other benefits
from acquisitions and to recover acquisition-related costs, and similar matters
are forward-looking statements. These statements are subject to known and
unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these statements by our use of
forward-looking words such as "may," "will," "should," "anticipate,"
"estimate," "expect," "plan," "believe," "predict," "potential" or "intend."
You should be aware that these 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 our expectations include
those discussed in this prospectus under the caption "Risk Factors." We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
14
<PAGE>
USE OF PROCEEDS
The selling stockholders will sell all of the shares offered by this
prospectus. We will not receive any of the proceeds from the sale of these
shares. We estimate that we will pay approximately $500,000 of the expenses
relating to the offering.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying dividends in the foreseeable future. Restrictions
contained in the indentures that govern the terms of our debt prohibit us from
paying cash dividends. Future dividends, if any, will be at the discretion of
our board of directors and will depend upon, among other things, our
operations, capital requirements and surplus, general financial condition,
contractual restrictions in financing agreements and such other factors as our
board of directors may deem relevant.
MARKET PRICE OF CLASS A COMMON STOCK
We completed the initial public offering of our Class A common stock on June
10, 1996 at a price per share of $20.00. Since that date, our Class A common
stock has been quoted on The Nasdaq Stock Market under the symbol "MCLD." The
following table sets forth for the periods indicated the high and low sales
price per share of our Class A common stock as reported by The Nasdaq Stock
Market.
<TABLE>
<CAPTION>
1996 High Low
---- ------- -------
<S> <C> <C>
Second Quarter (from June 10, 1996)...................... $26.750 $22.250
Third Quarter............................................ 39.500 23.500
Fourth Quarter........................................... 34.500 25.000
<CAPTION>
1997
----
<S> <C> <C>
First Quarter............................................ 28.750 17.375
Second Quarter .......................................... 34.250 16.375
Third Quarter............................................ 40.000 28.625
Fourth Quarter........................................... 41.750 32.000
<CAPTION>
1998
----
<S> <C> <C>
First Quarter............................................ 46.375 30.500
Second Quarter .......................................... 48.312 38.000
Third Quarter............................................ 40.125 21.375
Fourth Quarter........................................... 38.500 15.250
<CAPTION>
1999
----
<S> <C> <C>
First Quarter............................................ 44.250 30.375
Second Quarter (through May 12, 1999).................... 61.875 42.375
</TABLE>
On May 12, 1999, the last reported sale price of our Class A common stock on
The Nasdaq Stock Market was $55.75 per share.
15
<PAGE>
CAPITALIZATION
The following table shows our actual capitalization as of December 31, 1998,
and our capitalization on that date as adjusted to reflect the application of
the net proceeds of approximately $487.8 million from our issuance of our 8
1/8% senior notes in February 1999 and the Ovation acquisition in March 1999.
You should read this table together with our consolidated financial statements
and related notes and the other financial data appearing elsewhere, or
incorporated by reference, in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------
Actual As Adjusted
---------- -----------
(audited) (unaudited)
(in thousands)
<S> <C> <C>
Cash and cash equivalents.............................. $ 455,067 $ 822,917
Investments in available-for-sale securities........... 136,585 136,585
---------- ----------
Total cash, cash equivalents and investments in
available-for-sale securities..................... 591,652 959,502
========== ==========
Short-term debt........................................ 8,236 30,390
Long-term debt......................................... 1,245,170 1,836,876
---------- ----------
Stockholders' equity:
Class A common stock, $.01 par value, 250,000,000
shares authorized; 63,679,175 shares issued and
outstanding, actual; 69,275,792 shares issued and
outstanding, as adjusted............................ 637 693
Class B common stock, convertible, $.01 par value,
22,000,000 shares authorized; none issued or
outstanding......................................... -- --
Additional paid-in capital........................... 716,475 905,337
Accumulated deficit.................................. (252,647) (252,647)
Accumulated other comprehensive income............... (1,659) (1,659)
---------- ----------
Total stockholders' equity......................... 462,806 651,724
---------- ----------
Total capitalization............................... $1,716,212 $2,518,990
========== ==========
</TABLE>
16
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to:
. the issuance of $300 million aggregate principal amount of our 8 3/8%
senior notes in March 1998
. the issuance of $300 million aggregate principal amount of our 9 1/2%
senior notes in October 1998
. the issuance of $500 million aggregate principal amount of our 8 1/8%
senior notes in February 1999
. the Ovation acquisition in March 1999
The Unaudited Pro Forma Condensed Consolidated Balance Sheet assumes that the
Ovation acquisition and the issuance of the 8 1/8% senior notes were
consummated on December 31, 1998. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations reflects the Ovation acquisition using
the purchase method of accounting, and assumes that the Ovation acquisition and
the issuance of the 8 3/8% senior notes, the 9 1/2% senior notes and the 8 1/8%
senior notes were consummated at the beginning of 1998. The unaudited pro forma
financial information is derived from and should be read in conjunction with
our consolidated financial statements, Ovation's consolidated financial
statements and the related notes thereto incorporated by reference in this
prospectus. The pro forma adjustments are based upon available information and
assumptions that management believes to be reasonable. Depreciation and
amortization were adjusted to include amortization of intangibles acquired in
the Ovation acquisition. The acquired intangibles will be amortized over
periods ranging from 3 to 30 years. For purposes of this pro forma
presentation, the issuance of the 8 3/8% senior notes, the 9 1/2% senior notes
and the 8 1/8% senior notes are collectively referred to as the "Notes
Offerings."
The adjustments for the Ovation acquisition reflect the preliminary
allocation of the net purchase price of Ovation to the assets of Ovation,
including intangible assets, and record the payment of $121.3 million in cash
and the issuance of 5,596,617 shares of our Class A common stock valued at
$33.76 per share. The value of $33.76 per share represents the average closing
price of our Class A common stock on The Nasdaq Stock Market for the eleven
trading days beginning five days prior to the date the agreement was announced,
January 7, 1999, and ending five days after such announcement. The adjustments
include the elimination of the Ovation equity components, including common
stock, treasury stock, other capital and retained deficit.
We have provided this unaudited pro forma financial data for informational
purposes only. This data does not necessarily indicate the operating results
that would have occurred had the Ovation acquisition been consummated at the
beginning of 1998, nor does it necessarily indicate future operating results or
financial position.
17
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheets
(In thousands)
As of December 31, 1998
<TABLE>
<CAPTION>
Pro Adjustments Pro Forma
Adjustments Forma for the 8 for the 8
for the for the 1/8% Senior 1/8% Senior
Ovation Ovation Notes Notes
McLeodUSA Ovation Acquisition Acquisition Offering Offering
---------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 455,067 $ 1,310 $(121,260) $ 335,117 $487,800 $ 822,917
Investment in
available-for-sale
securities............ 136,585 -- -- 136,585 -- 136,585
Other current assets... 201,540 18,400 -- 219,940 -- 219,940
---------- -------- --------- ---------- -------- ----------
Total current assets.. 793,192 19,710 (121,260) 691,642 487,800 1,179,442
Property and equipment,
net................... 629,746 76,660 -- 706,406 -- 706,406
Intangible assets...... 402,018 58,881 277,939 738,838 -- 738,838
Other assets........... 100,241 904 -- 101,145 12,200 113,345
---------- -------- --------- ---------- -------- ----------
Total assets.......... $1,925,197 $156,155 $ 156,679 $2,238,031 $500,000 $2,738,031
========== ======== ========= ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities.... $ 179,956 $ 22,210 $ 10,000 $ 212,166 $ -- $ 212,166
Long-term debt, less
current maturities.... 1,245,170 91,706 -- 1,336,876 500,000 1,836,876
Other long-term
liabilities........... 37,265 -- -- 37,265 -- 37,265
---------- -------- --------- ---------- -------- ----------
Total liabilities..... 1,462,391 113,916 10,000 1,586,307 500,000 2,086,307
---------- -------- --------- ---------- -------- ----------
Stockholders' equity:
Preferred stock........ -- 2 (2) -- -- --
Common stock........... 637 240 (184) 693 -- 693
Additional paid-in
capital............... 716,475 49,487 139,375 905,337 -- 905,337
Deferred compensation.. -- (425) 425 -- -- --
Retained earnings
(deficit)............. (252,647) (7,065) 7,065 (252,647) -- (252,647)
Accumulated other
comprehensive income.. (1,659) -- -- (1,659) -- (1,659)
---------- -------- --------- ---------- -------- ----------
Total stockholders'
equity............... 462,806 42,239 146,679 651,724 -- 651,724
---------- -------- --------- ---------- -------- ----------
Total liabilities and
stockholders'
equity............... $1,925,197 $156,155 $ 156,679 $2,238,031 $500,000 $2,738,031
========== ======== ========= ========== ======== ==========
</TABLE>
18
<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, 1998
----------------------------------------------------------------
Adjustments Pro Forma Adjustments
for the for the for the
Notes Notes Ovation
McLeodUSA Offerings Offerings Ovation Acquisition Total
--------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 604,146 $ -- $ 604,146 $21,035 $ -- $ 625,181
--------- -------- --------- ------- -------- ---------
Operating expenses:
Cost of service........ 323,208 -- 323,208 6,319 -- 329,527
Selling, general and
administrative........ 260,931 -- 260,931 13,489 -- 274,420
Depreciation and
amortization.......... 89,107 -- 89,107 5,383 15,230 109,720
Other.................. 5,575 -- 5,575 -- -- 5,575
--------- -------- --------- ------- -------- ---------
Total operating
expenses............. 678,821 -- 678,821 25,191 15,230 719,242
--------- -------- --------- ------- -------- ---------
Operating loss......... (74,675) -- (74,675) ( 4,156) (15,230) (94,061)
Interest expense, net.. (52,234) (32,056) (84,290) ( 1,608) -- (85,898)
Other non-operating
income................ 1,997 -- 1,997 -- -- 1,997
Income taxes........... -- -- -- -- -- --
--------- -------- --------- ------- -------- ---------
Net loss............... $(124,912) $(32,056) $(156,968) $(5,764) $(15,230) $(177,962)
========= ======== ========= ======= ======== =========
Loss per common share.. $ (1.99) $ (2.50) $ (2.60)
========= ========= =========
Weighted average common
shares outstanding.... 62,807 62,807 68,404
========= ========= =========
Other Financial Data:
EBITDA(1).............. $ 20,007 $ -- $ 20,007 $ 1,227 $ -- $ 21,234
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have 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.
19
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following beneficial ownership table shows beneficial ownership of our
Class A common stock as of March 31, 1999 by:
. our directors and executive officers
. each person believed by management to be the beneficial owner of more
than five percent of our outstanding Class A common stock
. each selling stockholder
Under the Securities Exchange Act, a person will be deemed to be a
"beneficial owner" of shares of our Class A common stock if he or she has or
shares the power to vote or direct the voting of such shares or the power to
dispose or direct the disposition of such shares. A person will also be deemed
to be a beneficial owner of shares of our Class A common stock over which that
person has the right to acquire beneficial ownership within 60 days. More than
one person may be deemed to be a beneficial owner of the same shares of our
Class A common stock. The percentage ownership of each stockholder is
calculated based on the total number of outstanding shares of our Class A
common stock as of March 31, 1999 plus those shares of Class A common stock
that such stockholder has the right to acquire within 60 days. Consequently,
the denominator for calculating such percentage may be different for each
stockholder.
The table on the following page is based on information supplied by our
directors, executive officers and stockholders or contained in the most recent
reports on Schedule 13D or Schedule 13G filed by them. Unless otherwise
indicated in the footnotes to the table, each of the stockholders listed has
sole voting and dispositive power with respect to the shares of our Class A
common stock shown as beneficially owned.
The number of option shares includes shares of our Class A common stock that
the individuals named on the following page have the right to acquire within 60
days from March 31, 1999 upon exercise of options.
20
<PAGE>
<TABLE>
<CAPTION>
Beneficial
Beneficial Ownership Ownership
Prior to Offering After Offering
---------------------------- -----------------
Number of Number of
Shares Shares
Number of Including Number of Including
Option Option Shares Option
Name of Beneficial Owner Shares Shares Percent Offered(11) Shares Percent
- ------------------------ --------- ---------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interstate Energy
Corporation(1)(2)................. 1,300,688 10,323,288 13.6% 939,692 9,383,596 12.6%
Clark E. McLeod(1)(3).............. 235,623 9,570,285 12.8 -- 9,570,285 12.8
MHC Investment Company(1)(4)....... 64,624 6,769,240 9.1 6,741,116 28,124 *
Mary E. McLeod(1)(3)............... -- 4,746,471 6.4 -- 4,746,471 6.4
Richard A. Lumpkin(1)(5)........... 11,250 5,067,778 6.8 -- 4,128,086 5.5
Fidelity Management & Research
Company(6)........................ -- 5,106,800 6.9 -- 5,106,800 6.9
Putnam Investments, Inc.(7)........ -- 7,646,357 10.3 -- 7,646,357 10.3
Media/Communications Partners III
Limited Partnership(1)(8)......... -- 3,728,608 5.0 -- 3,728,608 5.0
Stephen C. Gray(9)................. 529,072 737,032 1.0 123,000 614,032 *
Blake O. Fisher, Jr................ 189,562 222,133 * 30,000 192,133 *
J. Lyle Patrick.................... 18,250 18,841 * -- 18,841 *
Arthur L. Christoffersen........... 61,467 61,467 * -- 61,467 *
Timothy T. Devine.................. -- 581,950 * -- 581,950 *
Kirk E. Kaalberg................... 117,438 232,831 * 40,000 192,831 *
Stephen K. Brandenburg............. 150,171 151,913 * 5,000 146,913 *
David M. Boatner................... 185,750 187,653 * 20,000 167,653 *
Albert P. Ruffalo.................. 22,223 64,916 * 10,000 54,916 *
Dennis L. Erickson................. 13,250 13,835 * 7,500 6,335 *
Steven J. Shirar................... 11,375 11,764 * -- 11,764 *
Michael J. Brown................... 99,171 165,231 * 50,000 115,231 *
Randall Rings...................... 5,125 5,408 * -- 5,408 *
Thomas M. Collins.................. 77,344 269,618 * 50,000 219,618 *
Robert J. Currey................... 37,500 37,500 * 10,000 27,500 *
Lee Liu............................ 27,344 39,544 * 20,000 19,544 *
Paul D. Rhines..................... 77,344 114,920 * 7,000 107,920 *
Rhines Family Limited Partnership.. -- 80,000 * 7,000 73,000 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Joseph John Keon III (10)... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Katherine S. Keon (10)...... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Lisa Anne Keon (10)......... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Margaret Lynley Keon (10)... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Pamela Keon Vitale (10)..... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Susan Tamara Keon DeWyngaert
(10).............................. -- 75,037 * 58,631 16,406 *
R.A. Lumpkin 1990 Personal Inc.
Trust f/b/o Benjamin Iverson
Lumpkin (10) ..................... -- 724,601 * 137,037 587,564 *
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Beneficial
Beneficial Ownership Ownership
Prior to Offering After Offering
--------------------------- -----------------
Number of Number of
Shares Shares
Number of Including Number of Including
Option Option Shares Option
Name of Beneficial Owner Shares Shares Percent Offered(11) Shares Percent
- ------------------------ --------- --------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
R.A. Lumpkin 1990
Personal Inc. Trust
f/b/o Elizabeth
Arabella Lumpkin (10).. -- 724,601 * 137,037 587,564 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o Anne Romayne
Sparks (10) ........... -- 150,224 * 78,308 71,916 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o Barbara Lee
Sparks (10) ........... -- 150,224 * 78,308 71,916 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o Christina L.
Sparks (10) ........... -- 150,224 * 78,308 71,916 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o John W. Sparks
(10) .................. -- 150,224 * 78,308 71,916 *
M.L. Keon 1978 Trust
(12) .................. -- 506,461 * 600 505,861 *
---------
9,000,000(11)
=========
</TABLE>
- --------
* Less than one percent.
(1) Richard Anthony Lumpkin, Gail G. Lumpkin, Margaret L. Keon, Mary Lee
Sparks and all of their children, along with Steven L. Grissom, David R.
Hodgman and BankOne, Texas, N.A., individually, or as trustees or settlors
for trusts for the benefit of members of the family of Richard Adamson
Lumpkin, MHC Investment Company, Interstate Energy Corporation,
Media/Communications Partners III Limited Partnership, M/C Investors
L.L.C., Clark E. McLeod and Mary E. McLeod are parties to one or more
stockholders' agreements and, accordingly, may constitute a group within
the meaning of Section 13(d)(3) of the Securities Exchange Act. As of
March 31, 1999, these stockholders beneficially owned an aggregate of
37,798,143 shares of our Class A common stock, including 1,300,688 shares
that Interstate Energy Corporation has the right to acquire upon exercise
of options, and 235,623 and 11,250 shares that Messrs. McLeod and Lumpkin,
respectively, have the right to purchase upon exercise of options, within
60 days from March 31, 1999, representing an ownership interest of 50.8%.
See "Description of Capital Stock--Stockholders' Agreements."
(2) Includes 1,300,688 shares of Class A common stock that Alliant Energy
Investments, Inc., a wholly owned subsidiary of Interstate Energy
Corporation, has the right to acquire upon exercise of options; 8,037,908
shares of Class A common stock of which Alliant Energy Investments is the
holder of record; 639,692 shares of Class A common stock held of record
by Heartland Properties, Inc., a wholly owned subsidiary of Interstate
Energy; and 300,000 shares of Class A common stock held of record by the
Alliant Energy Foundation, Inc. Interstate Power Company, a wholly owned
subsidiary of Interstate Energy Corporation, is the record holder of an
additional 45,000 shares of Class A common stock. The address of
Interstate Energy Corporation is 222 West Washington Avenue, P.O.
Box 192, Madison, WI 53701
(3) Includes 4,746,471 shares of Class A common stock held of record by Mary
E. McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared voting
power and 200,000 shares of Class A common stock held by the McLeod
Charitable Foundation for which Mr. McLeod is a director and over which
Mr. McLeod has shared voting and dispositive power. Also includes 125,000
shares of Class A common stock held by the Clark E. McLeod Unitary Trust
and 125,000 shares of Class A common stock held by the Mary E. McLeod
Unitary Trust for which Mr. McLeod is a trustee and over which Mr. McLeod
has shared voting and investment power. Mr. McLeod's address is c/o
McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O.
Box 3177, Cedar Rapids, IA 52406-3177.
(4) MHC Investment Company is a wholly owned indirect subsidiary of
MidAmerican Energy Holdings Company. The address of MHC Investment is c/o
MidAmerican Energy Holdings Company, 666 Grand Ave., Des Moines, IA
50309. Includes 42,188 shares of Class A common stock held of record by
each of Ronald W.
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<PAGE>
Stepien and Russell E. Christiansen, an officer and a retired officer,
respectively, of MidAmerican Energy Company and former directors of
McLeodUSA. Includes 32,812 shares of Class A common stock that Mr. Stepien
and 32,812 shares of Class A common stock that Mr. Christiansen have the
right to purchase within 60 days from March 31, 1999 upon exercise of
options. MHC Investment Company has the power to direct the disposition of
such shares.
(5) Includes 311,127 shares of Class A common stock held of record by Gail
G. Lumpkin, Mr. Lumpkin's wife, over which Mr. Lumpkin has shared voting
power. Includes 2,245,081 shares of Class A common stock held by various
trusts for the benefit of the family of Richard Adamson Lumpkin over
which Mr. Lumpkin has shared voting and investment power. Includes
2,500,320 shares of Class A common stock held by various trusts for the
benefit of the family of Richard Adamson Lumpkin over which Mr. Lumpkin
has shared investment power. Includes 11,250 shares of Class A common
stock that Mr. Lumpkin has the right to acquire upon exercise of
options. Mr. Lumpkin's address is c/o McLeodUSA Incorporated, McLeodUSA
Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, IA
52406-3177. The shares to be sold are held in (i) twelve 1990 Personal
Income Trusts established by Margaret L. Keon, Mary Lee Sparks and
Richard A. Lumpkin, each dated April 20, 1990, as described further in
footnote 10 below and (ii) a trust for the benefit of M. L. Keon, dated
May 13, 1978, as described further in footnote 12 below.
(6) Fidelity Management & Research Company is a wholly owned subsidiary of
FMR Corp. The address of FMR Corp. is 82 Devonshire Street, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by FMR Corp. on February 12, 1999.
(7) The address of Putnam Investment, Inc. is One Post Office Square, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by Putnam Investment, Inc. on April 9, 1999.
(8) Excludes shares owned by M/C Investors L.L.C. M/C III L.L.C. is the
general partner of Media/Communications Partners III Limited Partnership
and controls the voting and dispositive power of the shares of Class A
common stock held by it. Pursuant to the limited liability company
agreement of M/C III L.L.C., David D. Croll, James F. Wade, Stephen
Gormley, John Hayes and Christopher Gaffney together share the voting and
dispositive power of the shares of Class A common stock held by
Media/Communications Partners III Limited Partnership. The address of
Media/Communications Partners III Limited Partnership, M/C III L.L.C. and
each of Messrs. Croll, Wade, Gormley, Hayes and Gaffney is 75 State
Street, Boston, MA 02109.
(9) Includes 3,750 shares of Class A common stock held of record by the
Stephen Samuel Gray Irrevocable Trust, and 3,750 shares of Class A
common stock held of record by the Elizabeth Mary Fletcher Gray
Education Trust, of which Mr. Gray is the trustee. Includes 26,250
shares of Class A common stock held of record by Morgan Stanley Dean
Witter & Co. for the benefit of Mr. Gray.
(10) David R. Hodgman and Steven L. Grissom are the trustees for each of these
trusts. Mr. Lumpkin also shares investment power over each of these
trusts.
(11) If the over-allotment option is exercised in full by the underwriters,
the following selling stockholders will sell an aggregate of 1,350,000
additional shares of Class A common stock in the stated amounts: MHC
Investment Company (28,124), Media/Communications Partners III Limited
Partners (544,515), M/C Investors L.L.C. (27,053), Stephen C. Gray
(17,000), Blake O. Fisher (20,000), J. Lyle Patrick (10,000), Arthur L.
Christoffersen (35,000), Kirk E. Kaalberg (20,000), David M. Boatner
(15,000), Michael J. Brown (20,000), Thomas M. Collins (50,000), Rhines
Family Limited Partnership (3,000), M. L. Keon 1990 Personal Inc. Trust
f/b/o Joseph John Keon III (16,406), M. L. Keon 1990 Personal Inc. Trust
f/b/o Katherine S. Keon (16,406), M. L. Keon 1990 Personal Inc. Trust
f/b/o Lisa Anne Keon (16,406), M. L. Keon 1990 Personal Inc. Trust f/b/o
Margaret Lynley Keon (16,406), M. L. Keon 1990 Personal Inc. Trust f/b/o
Pamela Keon Vitale (16,406), M. L. Keon 1990 Personal Inc. Trust f/b/o
Susan Tamara Keon DeWyngaert (16,406), R. A. Lumpkin 1990 Personal Inc.
Trust f/b/o Benjamin Iverson Lumpkin (81,713), R. A. Lumpkin 1990
Personal Inc. Trust f/b/o Elizabeth Arabella Lumpkin (81,713), M. L.
Sparks 1990 Personal Inc. Trust f/b/o Anne Romayne Sparks (46,692), M.
L. Sparks 1990 Personal Inc. Trust f/b/o Barbara Lee Sparks (46,692), M.
L. Sparks 1990 Personal Inc. Trust f/b/o Christina Louise Sparks
(46,692), M. L. Sparks 1990 Personal Inc. Trust f/b/o John W. Sparks
(46,692) and M.L. Keon 1978 Trust (111,678).
(12) Margaret L. Keon is the trustee for this trust.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is based on the
provisions of our certificate of incorporation and bylaws and the applicable
provisions of the Delaware General Corporation Law. For information on how to
obtain copies of our certificate of incorporation and bylaws, see "Where You
Can Find More Information."
Authorized and Outstanding Capital Stock
Under our certificate of incorporation, we have authority to issue
274,000,000 shares of capital stock, consisting of 250,000,000 shares of Class
A common stock, 22,000,000 shares of Class B common stock and 2,000,000 shares
of preferred stock, par value $.01 per share. As of March 31, 1999, 74,440,894
shares of our Class A common stock, no shares of our Class B common stock and
no shares of our preferred stock were issued and outstanding.
The rights of the holders of our Class A common stock and our Class B common
stock discussed below are subject to such rights as our board of directors may
from time to time confer on holders of our preferred stock that may be issued
in the future. Such rights may adversely affect the rights of holders of our
Class A common stock or our Class B common stock, or both.
Class A Common Stock
Voting Rights. Each holder of our Class A common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of shares of our 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 our stockholders. Holders of our Class A common
stock are entitled to one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class A
common stock, the holders of our Class B common stock and holders of any class
or series of stock entitled to participate with our Class A and Class B common
stock, will become entitled to participate in the distribution of any of our
assets remaining after we have paid, or provided for payment of, all of our
debts and liabilities and after we have paid, or set aside for payment, to the
holders of any class of stock having preference over our Class A 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 our Class A common stock, our Class B
common stock and on any class or series of stock entitled to participate with
our Class A and Class B common stock when and as declared by our board of
directors.
No Preemptive or Conversion Rights. The holders of our Class A common stock
have no preemptive or subscription rights to purchase additional securities
issued by us nor any rights to convert their Class A common stock into other of
our securities or to have their shares redeemed by us.
Class B Common Stock
Voting Rights. Each holder of our Class B common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of shares of our Class A common stock and the holders of all other
classes of stock entitled to attend and vote at such meetings, to vote upon any
matter or thing, including, without limitation, the election of directors,
properly considered and acted upon by our stockholders. Holders of our Class B
common stock are entitled to .40 vote per share.
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<PAGE>
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class B
common stock, the holders of our Class A common stock and the holders of any
class or series of stock entitled to participate with our Class B and Class A
common stock, will become entitled to participate in the distribution of any of
our assets remaining after we have paid, or provided for payment of, all of our
debts and liabilities and after we have paid, or set aside for payment, to the
holders of any class of stock having preference over our 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 our Class B common stock, our Class A
common stock and on any class or series of stock entitled to participate with
our Class B and Class A common stock when and as declared by our board of
directors.
Conversion into Our Class A Common Stock; No Other Preemptive or Conversion
Rights. The shares of our Class B common stock may be converted at any time at
the option of the holder into fully paid and nonassessable shares of our Class
A common stock at the rate of one share of our Class A common stock for each
share of Class B common stock, as adjusted for any stock split. Except for this
conversion right, the holders of our Class B common stock have no preemptive or
subscription rights to purchase additional securities issued by us nor any
rights to convert their Class B common stock into other of our securities or to
have their shares redeemed by us.
Preferred Stock
Our certificate of incorporation authorizes our board of directors, from time
to time and without further stockholder action, to provide for the issuance of
up to 2,000,000 shares of our preferred stock, in one or more series, and to
fix the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date hereof, our board of directors has not provided for
the issuance of any series of such preferred stock and there are no agreements
or understandings for the issuance of any such preferred stock. Because of its
broad discretion with respect to the creation and issuance of preferred stock
without stockholder approval, our board of directors could adversely affect the
voting power of the holders of our Class A common stock and, by issuing shares
of our preferred stock with preferential voting, conversion and/or redemption
rights, could discourage any attempt to obtain control of us.
Certain Charter and Statutory Provisions
Classified Board. Our certificate of incorporation provides for the division
of our board of directors into three classes of directors, serving staggered
three-year terms. Our 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 our entire board of directors are
necessary for the alteration, amendment or repeal of certain sections of our
certificate of incorporation relating to the election and classification of our
board of directors, limitation of director liability, indemnification and the
vote requirements for such amendments to our certificate of incorporation.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of us.
Certain Statutory Provisions. We are subject to the provisions of Section 203
of the Delaware General Corporation Law. In general, this statute prohibits a
publicly held Delaware corporation like us 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
. 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,
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. 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
. on or after the date the stockholder became an interested stockholder,
the business combination is approved by the 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, other than the corporation and any direct or indirect
wholly owned subsidiary of the corporation, who together with affiliates and
associates, owns or, as an affiliate or associate, within three years prior,
did own 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the Delaware General Corporation Law, our original
certificate of incorporation provided that it would not be governed by Section
203. Several of our stockholders, including Clark E. and Mary E. McLeod,
Interstate Energy and MHC Investment, became interested stockholders within the
meaning of Section 203 while that certificate of incorporation was in effect.
Accordingly, future transactions between us and any of these stockholders will
not be subject to the requirements of Section 203.
Our certificate of incorporation empowers our board of directors to redeem
any of our outstanding capital stock at a price determined by our board of
directors, which price will be at least equal to the lesser of
. fair market value, as determined in accordance with our certificate of
incorporation, or
. 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 our capital stock 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
us or any of our subsidiaries to conduct any portion of our business or the
business of any of our subsidiaries. Under the Telecommunications Act of 1996,
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 some conditions limit the size of
investments by foreign telecommunications carriers in U.S. international
carriers.
Limitation of Liability and Indemnification
Limitations of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law 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.
Our certificate of incorporation limits the liability of our directors to us or
our stockholders to the full extent permitted by Section 102(b)(7).
Specifically, our directors are not personally liable for monetary damages to
us or our stockholders for breach of the director's fiduciary duty as a
director, except for liability for:
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<PAGE>
. any breach of the director's duty of loyalty to us or our stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law
. any transaction from which the director derived an improper personal
benefit
Indemnification. To the maximum extent permitted by law, our bylaws provide
for mandatory indemnification of our directors and officers 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, we must advance or reimburse directors and officers for expenses
incurred by them in connection with indemnifiable claims. We also maintain
directors' and officers' liability insurance.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is Norwest Bank
Minnesota, N.A.
Stockholders' Agreements
On November 18, 1998, we entered into a stockholders' agreement (the
"Stockholders' Agreement") with several of our significant stockholders
consisting of IES Investments Inc. ( a subsidiary of Interstate Energy), Clark
E. and Mary E. McLeod, and Richard A. and Gail G. Lumpkin and several other
parties related to the Lumpkins.
The Stockholders' Agreement provides, among other things, that:
. until December 31, 2001, the parties will not sell any of our equity
securities without receiving the prior written consent of our board of
directors, except for transfers specifically permitted by the
Stockholders' Agreement
. our board of directors will determine on a quarterly basis starting with
the quarter ending December 31, 1998 and ending on December 31, 2001, the
aggregate number, if any, of shares of our Class A common stock, not to
exceed in the aggregate 150,000 shares per quarter, that the parties may
sell during designated trading periods following the release of our
quarterly or annual financial results
. to the extent our board of directors grants registration rights to a
party to the agreement in connection with a sale of our securities by
such party, it will grant similar registration rights to the other
parties
. our board of directors will 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 our Class A 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
Class A common stock beneficially owned by the parties as of December 31,
1998 (the "Registrable Amount"), to be registered by us under the
Securities Act for sale by the parties
. in any underwritten offering of shares of Class A common stock by us,
other than an offering on a registration statement on Form S-4 or Form S-
8 or any other form which would not permit the inclusion of shares of our
Class A common stock owned by the parties, we will undertake to register
the shares of our Class A common stock of such parties up to the
Registrable Amount, if any, as determined by our board of directors
. we may subsequently determine not to register any shares of the parties
under the Securities Act and may either not file a registration statement
or otherwise withdraw or abandon a registration statement previously
filed
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<PAGE>
The Stockholders' Agreement terminates on December 31, 2001. If during any
Annual Period we have not provided a party a reasonable opportunity to sell an
aggregate number of shares of Class A common stock equal to not less than 15%
of the total number of shares of Class A common stock beneficially owned by
such party as of December 31, 1998, then such party may terminate the
Stockholders' Agreement as it applies to such party.
Under the Stockholders' Agreement, each party also agreed, until such party
owns less than 4 million shares of Class A common stock or until December 31,
2001, whichever occurs first, to vote such party's shares and take all action
within its power to:
. establish the size of our board of directors at up to 11 directors
. cause to be elected to our board of directors one director designated by
Interstate Energy for so long as IES Investments owns at least 4 million
shares of Class A common stock
. cause to be elected to our board of directors three directors who are
executive officers of McLeodUSA designated by Clark McLeod for so long as
Clark and Mary McLeod collectively own at least 4 million shares of Class
A common stock
. cause Richard Lumpkin to be elected to our board of directors for so long
as the former stockholders of Consolidated Communications, Inc. who are a
party to the agreement collectively own at least 4 million shares of
Class A common stock
. cause to be elected to our board of directors up to six non-employee
directors nominated by our board
On January 7, 1999, in connection with the Ovation acquisition, M/C Investors
L.L.C. and Media/Communications Partners III Limited Partnership (collectively,
"M/C") entered into a separate stockholders' agreement (the "Ovation
Stockholders' Agreement") with the parties to the Stockholders' Agreement.
The Ovation Stockholders' Agreement provides that, until December 31, 2001,
M/C will not sell any of our equity securities without receiving the prior
written consent of our board of directors. The Ovation Stockholders' Agreement
also contains various provisions intended to insure that M/C is treated on a
basis similar to the parties to the Stockholders' Agreement in connection with
permitted sales of our securities under the Stockholders' Agreement generally
starting December 31, 1999. In addition, for so long as M/C owns at least 2.5
million shares of our Class A common stock, M/C has agreed to vote its shares
in accordance with the voting agreement contained in the Stockholders'
Agreement and the other partries have agreed to vote their shares to cause to
be elected to our board of directors one director designated by M/C.
The Ovation Stockholders' Agreement terminates on December 31, 2001. In
addition, if (1) during each of the years ending December 31, 2000 and December
31, 2001, we have not provided M/C a reasonable opportunity to register under
the Securities Act for sale an aggregate number of shares of our Class A common
stock equal to not less than 15% of the total number of shares of Class A
common stock beneficially owned by M/C as of March 31, 1999, or (2) after
January 1, 2000, the Stockholders' Agreement has been terminated by all parties
to such agreement, then M/C may terminate the Ovation Stockholders' Agreement.
The Ovation Stockholders' Agreement will be terminated with respect to all
parties other than M/C and us at such time as the Stockholders' Agreement is
terminated.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter has severally agreed to purchase from
the selling stockholders, and the selling stockholders have agreed to sell to
the underwriters, the number of shares of Class A common stock shown opposite
its name below. The obligations of the several underwriters to purchase these
shares are subject to terms and conditions contained in the underwriting
agreement.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Salomon Smith Barney Inc. ...................................... 3,600,000
Credit Suisse First Boston Corporation ......................... 3,600,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated........................................... 1,800,000
---------
Total ........................................................ 9,000,000
=========
</TABLE>
In the underwriting agreement, the underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Class A common stock offered hereby (other than those subject to the
over-allotment option described below), if any such shares are purchased. In
the event of a default by any underwriter, the underwriting agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are
acting as representatives, propose initially to offer the shares of Class A
common stock to the public at the public offering price set forth on the cover
page of this prospectus, and to some dealers at such price less a concession
not in excess of $1.17 per share. The underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.10 per share to other dealers.
After the public offering, the public offering price and such concessions may
be changed.
The selling stockholders have granted the underwriters an option, exercisable
within 30 days of the date of this prospectus, to purchase up to 1,350,000
additional shares of our Class A common stock to cover over-allotments, if any,
at the public offering price set forth on the cover page of this prospectus. To
the extent that the underwriters exercise such option, in whole or in part,
each underwriter will have a firm commitment, subject to several conditions, to
purchase the same proportion of the option shares as the number of shares of
Class A common stock purchased by such underwriter in the above table bears to
the total number of shares of Class A common stock purchased by all of the
underwriters in the table above.
The following table shows the per share and total public offering price, the
underwriting discount to be paid to the underwriters, and the proceeds before
expenses to the selling stockholders. The totals are presented assuming either
no exercise or full exercise by the underwriters of the over-allotment option.
<TABLE>
<CAPTION>
Total
-------------------------
Per Full
Share No Exercise Exercise
------- ------------ ------------
<S> <C> <C> <C>
Public offering price ................. $55.625 $500,625,000 $575,718,750
Underwriting discount ................. $ 1.947 $ 17,523,000 $ 20,151,450
Proceeds to selling stockholders ...... $53.678 $483,102,000 $555,567,300
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of our Class A common stock in the
open market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of our Class A common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate
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<PAGE>
covering transactions involve purchases of our Class A common stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of bids or purchases of our
Class A common stock made for the purpose of preventing or retarding a decline
in the market price of our Class A common stock while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
underwriters, in covering syndicate short positions or making stabilizing
purchases, repurchase shares originally sold by that syndicate member.
Any of these activities may cause the price of our Class A common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on The Nasdaq
Stock Market or in the over-the-counter market, or otherwise and, if commenced,
may be discontinued at any time.
In addition, in connection with this offering, the underwriters (and selling
group members) may engage in passive market making transactions in our Class A
common stock on The Nasdaq Stock Market prior to the pricing and completion of
the offering. Passive market making consists of displaying bids on The Nasdaq
Stock Market no higher than the bid prices of independent market makers and
making purchases at no higher than those independent bids and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in our Class A common stock during a specified period and must
be discontinued when such limit is reached. Passive market making may cause the
price of our Class A common stock to be higher than the price that otherwise
would exist in the open market in the absence of such transactions. If passive
market making is commenced, it may be discontinued at any time.
McLeodUSA and the selling stockholders estimate that their respective
portions of the total expenses of this offering will be $500,000 and $300,000.
Salomon Smith Barney Inc. has performed investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. It may, from time to time, engage in transactions with and
perform services for us in the ordinary course of its business.
The underwriting agreement provides that McLeodUSA and the selling
stockholders will indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make in respect of such liabilities.
McLeodUSA, our directors and officers, the selling stockholders and several
other stockholders have each agreed with the underwriters that they will not
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of any shares of our Class A common stock
or any securities convertible into, or exchangeable for, shares of Class A
common stock for a period of 90 days from the date of this prospectus, without
the prior written consent of Salomon Smith Barney Inc., except:
. in the case of McLeodUSA, any such transactions in connection with
acquisitions, employee benefit or option plans, or upon conversion of
outstanding securities
. in the case of our directors, officers and stockholders, dispositions of
shares of our Class A common stock as bona fide gifts or pledges where the
recipients of such gifts or the pledgees, as the case may be, agree in
writing with the underwriters to be bound by these same restrictions
In addition, Clark E. McLeod, Mary E. McLeod, Interstate Energy, M/C, and
Richard A. Lumpkin and Gail G. Lumpkin and several other parties related to the
Lumpkins have agreed not to sell or otherwise dispose of any of our equity
securities without the consent of the board of directors of McLeodUSA. See
"Description of Capital Stock--Stockholders' Agreement."
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LEGAL MATTERS
The validity of our Class A common stock offered hereby is being passed upon
for McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
McLeodUSA. Certain legal matters relating to this offering are being passed
upon for the underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
ended December 31, 1998, 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 Ovation Communications, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 incorporated by
reference in this registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report, and are incorporated
by reference herein in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus forms a part.
The registration statement, including the attached exhibits and schedules,
contain additional relevant information about our Class A common stock. The
rules and regulations of the SEC allow us to omit some of the information
included in the registration statement from this prospectus.
In addition, we have filed reports, proxy statements and other information
with the SEC under the Securities Exchange Act. You may read and copy any of
this information at the following locations of the SEC:
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
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 Securities Exchange Act
is 0-20763.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we 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, except for any such information that is superseded by information
included directly in this document.
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This prospectus incorporates by reference the documents listed below that we
have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed on March 24, 1999, as amended by Form 10-K/A filed on April
22, 1999
. Our Current Reports on Form 8-K filed on April 15, 1999, April 16, 1999
and May 5, 1999
. All documents filed with the SEC by us under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act after the date of this
prospectus and before the offering is terminated, are considered to be a
part of this prospectus, effective the date such documents are filed
. The description of our Class A common stock set forth in our registration
statement filed under Section 12 of the Securities 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
. The consolidated financial statements of Ovation Communications, Inc. and
subsidiaries appearing on pages F-1 through F-17 of our definitive
prospectus dated March 24, 1999 and filed with the SEC on March 26, 1999
pursuant to Rule 424(b) under the Securities Act as part of our
Registration Statement on Form S-4 (Registration No. 333-71811).
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 listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone 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
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
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9,000,000 Shares
McLeodUSA Incorporated
Class A Common Stock
[LOGO OF McLEODUSA APPEARS HERE]
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P R O S P E C T U S
May 12, 1999
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Salomon Smith Barney
Credit Suisse First Boston
Merrill Lynch & Co.
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