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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ______ to ______
Commission File Number: 0-20763
McLEODUSA INCORPORATED
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(Exact name of registrant as specified in its charter)
Delaware 42-1407240
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (319) 364-0000
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Class A common stock, par value $.01 per share
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing price of the registrant's common stock as of
March 22, 1999 is $1,102,713,924. */
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The number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date is:
Class A common stock, par value $.01 per share, outstanding as of March 22,
1999: 68,630,796
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:
None
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*/ Solely for the purposes of this calculation, all directors and executive
- -
officers of the registrant and all stockholders beneficially owning more than 5%
of the registrant's common stock are considered to be affiliates.
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TABLE OF CONTENTS
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PART I Item 1. Business............................................. 1
Item 2. Properties........................................... 30
Item 3. Legal Proceedings.................................... 30
Item 4. Submission of Matters to a Vote of Security Holders.. 31
PART II Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters.......................... 32
Item 6. Selected Financial Data.............................. 34
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................. 36
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk.................................... 48
Item 8. Financial Statements and Supplementary Data.......... 48
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................. 48
PART III Item 10. Directors and Executive Officers of the Registrant... 50
Item 11. Executive Compensation............................... 55
Item 12. Security Ownership of Certain Beneficial Owners
and Management....................................... 58
Item 13. Certain Relationships and Related Transactions....... 63
PART IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.................................. 65
GLOSSARY.................................................................... 74
SIGNATURES.................................................................. 77
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................. F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON THE FINANCIAL STATEMENT SCHEDULES........................................ S-1
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Unless the context suggests otherwise, references in this Form 10-K to
"we," "us," "our" and "McLeodUSA" mean McLeodUSA incorporated and its
subsidiaries and predecessors. 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. Some of the statements
contained in this Form 10-K discuss future expectations, contain projections of
results of operations or financial condition or state other forward-looking
information. These statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these so-called "forward-looking
statements" by words like "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential," or "continue"
or the negative of those words and other comparable words. You should be aware
that those statements only reflect our predictions. Actual events or results
may differ substantially. Important factors that could cause our actual results
to be materially different from the forward-looking statements are disclosed
under the heading "Business--Risk Factors" and throughout this Form 10-K. See
the "Glossary" appearing at page 74 for definitions of some of the terms used in
this Form 10-K.
PART I
Item 1. Business.
Overview
We provide communications services to business and residential customers in
the Midwestern and Rocky Mountain regions of the United States. Our
communications services include local, long distance, Internet access, data,
voice mail and paging, all from a single company on a single bill. We believe
we are the first communications provider in most of our markets to offer one-
stop shopping for communications services tailored to customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their 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 and paging services
In most of our markets, we compete with the incumbent 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.
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The following chronology highlights some of the important events in the
development of our business:
Date Event
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June 1991 McLeodUSA was incorporated in Iowa as "McLeod
Telecommunications, Inc."
November 1992 McLeodUSA began operations, providing fiber optic
maintenance services for the Iowa Communications
Network. The Iowa Communications Network is a
fiber optic communications network that links many
of the State of Iowa's schools, libraries and
other public buildings.
August 1993 McLeodUSA was reincorporated in the State of
Delaware.
December 1993 One of our wholly owned subsidiaries, McLeodUSA
Telecommunications Services, Inc., received
regulatory approvals in Iowa and Illinois to offer
local and long distance services.
January 1994 McLeodUSA began providing local and long distance
services in Iowa and Illinois.
April 1995 McLeodUSA acquired MWR Telecom, Inc., a
competitive access provider in Des Moines, Iowa.
June 1996 McLeodUSA completed its initial public offering of
Class A common stock.
July 1996 McLeodUSA acquired Ruffalo, Cody & Associates,
Inc., a telemarketing company.
September 1996 McLeodUSA acquired TelecomUSA Publishing Group,
Inc. (now known as McLeodUSA Media Group, Inc.), a
telephone directory company.
April and June 1997 The Federal Communications Commission awarded
McLeodUSA a total of 26 "D" and "E" block
frequency personal communications services ("PCS")
licenses for approximately $32.8 million.
May 1997 McLeodUSA changed its name from "McLeod, Inc." to
"McLeodUSA Incorporated."
July 1997 The FCC awarded McLeodUSA four wireless
communications services ("WCS") licenses.
September 1997 McLeodUSA acquired Consolidated Communications
Inc. ("CCI"), a diversified telecommunications
holding company offering a variety of
communications products and services, including
local exchange and long distance services and
telephone directory publishing. As part of the
acquisition of CCI, McLeodUSA acquired one
additional "E" block frequency PCS license.
As of the date hereof, we offer communications services to business and
residential customers in Iowa, Illinois, North Dakota, South Dakota, Wisconsin
and Colorado. We also offer communications services to business customers in a
number of markets in Minnesota, Missouri, Indiana, and Wyoming. Over the next
several years, depending on competitive and other factors, we intend to offer
communications services in Idaho, Montana, Nebraska and Utah. We offer long
distance service in 48 states in the continental United States.
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Our 27 PCS licenses cover areas of Iowa, Illinois, Minnesota, Nebraska and
South Dakota, encompassing approximately 110,000 square miles and a population
of approximately 6.9 million. We plan to offer PCS or other wireless services
as part of our communications services by building a wireless network, entering
into strategic acquisitions or alliances, or employing a combination of these
methods. Our four WCS licenses cover the Major Economic Areas of Milwaukee,
Wisconsin, Minneapolis/St. Paul, Minnesota, Des Moines-Quad Cities,
Iowa/Illinois and Omaha, Nebraska. We intend to use the frequency blocks
covered by these licenses to provide fixed services, such as wireless local
loop, Internet access or meter reading. See "--Proposed Wireless Services," "--
Regulation" and "--Risk Factors--We May Not Succeed in Developing or Making a
Profit from Wireless Services."
The statements in the foregoing paragraphs about our expansion plans and
proposed wireless services are forward-looking statements within the meaning of
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These plans may be revised, and our actual geographic expansion and
services may differ materially from that indicated by our current plans, in each
case as a result of a variety of factors, including:
. the availability of financing and regulatory approvals
. the number of potential customers in a target market
. the existence of strategic alliances or relationships
. technological, regulatory or other developments in our business
. changes in the competitive climate in which we operate
. the emergence of future opportunities.
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 main
phone number is (319) 364-0000.
Recent Transactions
Acquisition of Talking Directories and Info America. On February 10, 1999,
we acquired Talking Directories, Inc., a Michigan corporation, for an aggregate
of 2,556,390 shares of our Class A common stock. In a related and concurrent
transaction, on February 10, 1999, we also acquired Info America Phone Books,
Inc., a Michigan corporation, for an aggregate of 1,203,007 shares of our Class
A common stock. We also paid approximately $27 million of the outstanding
obligations of Talking Directories and Info America at the time of these
transactions.
Talking Directories and Info America are related companies, headquartered
in Grand Rapids, Michigan, that together publish and distribute proprietary
"white page" and "yellow page" telephone directories primarily in Michigan and
northwestern Ohio. In 1998, Talking Directories and Info America collectively
published and distributed approximately 2.6 million copies of 19 telephone
directories. As of December 31, 1998, Talking Directories had 257 employees and
Info America had no employees.
The Ovation Merger Agreement. On January 7, 1999, we entered into an
Agreement and Plan of Merger with Ovation Communications, Inc., a Delaware
corporation, and several stockholders of Ovation by which Ovation will be merged
with and into a newly formed wholly owned subsidiary of McLeodUSA. As a result
of the Ovation merger, (1) each share of Ovation's preferred stock will be
converted into the right to receive cash, and (2) each share of Ovation's common
stock will be converted, at the election of the stockholder, into the right to
receive cash or shares of our Class A common stock. The amount of cash into
which each share of Ovation's preferred stock will be converted and the amount
of cash or number of shares of Class A common stock into which each share of
Ovation's common stock will be converted will be determined immediately before
completion of the Ovation merger based on formulas specified in the Ovation
merger agreement. We estimate that we will be required to issue approximately
5.1 million shares of our Class A common stock and to pay approximately $141
million cash to effect the Ovation merger. We will also assume approximately
$95 million in Ovation debt. In addition, under the terms of the Ovation merger
agreement, each option to purchase Ovation common stock issued under Ovation's
stock option plan will become or be replaced by an option to purchase a number
of shares of our Class A common stock equal to the number of shares of Ovation
common stock that could have been
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purchased (assuming full vesting) under the Ovation stock option multiplied by
the exchange ratio used to convert Ovation common stock into Class A common
stock.
Consummation of the Ovation merger is subject to the satisfaction of
several conditions. Stockholders of Ovation holding in the aggregate
approximately 94% of the voting power attributable to Ovation's common stock and
preferred stock have agreed to vote all of their shares in favor of the Ovation
merger at a meeting of the stockholders of Ovation.
In connection with the execution of the Ovation merger agreement, we
entered into a revolving credit agreement with Ovation by which we agreed to
lend Ovation up to $20 million on a senior subordinated unsecured basis. In
addition, several Ovation stockholders agreed through December 31, 2001 to
restrictions on their ability to transfer the shares of Class A common stock
they will receive in the Ovation merger. See "Security Ownership of Certain
Beneficial Owners and Management--Investor Agreement and Stockholders'
Agreements."
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 cites in Michigan. Ovation provides the following services:
. local and network access
. competitive local exchange
. incumbent local exchange
. long distance
. 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 miles of fiber optic
communications network and 384 employees.
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We have obtained information regarding Talking Directories, Info America
and Ovation from each of these companies, respectively. Although we believe
this information is reliable, it has not been independently verified. The
financial information about each of these companies is unaudited.
Recent Financings. On February 22, 1999, we completed a private offering of
$500 million aggregate principal amount of our 8 1/8% senior notes due February
15, 2009, yielding net proceeds of approximately $487.8 million. The 8 1/8%
senior notes accrue interest at a rate of 8 1/8% per annum payable in cash semi-
annually in arrears on February 15 and August 15 of each year, starting August
15, 1999.
As of December 31, 1998, we estimated, based on our business plan, capital
requirements and growth projections as of that date, our aggregate capital
requirements through 2001 would be $1.4 billion. Our estimated aggregate
capital requirements include the projected cost of:
. building our fiber optic communications network, including intra-city
fiber optic communications networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate purposes
. completing recent and pending acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
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The estimated costs and incremental capital needs associated with the
acquisitions of Talking Directories, Info America and Ovation are included in
our estimated aggregate capital requirements.
We expect to use the following to address our capital needs:
. approximately $487.8 million in net proceeds from our offering of 8 1/8%
senior notes
. approximately $591.7 million of cash and investments on hand at December
31, 1998
. additional issuances of debt or equity securities
. projected operating cash flow
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."
Business 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 reduce operating costs
The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly
penetrate 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 local exchange carrier.
Explore acquisitions and strategic alliances. We plan to pursue
acquisitions, joint ventures
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and strategic alliances to 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.
Market Potential
The telecommunications industry is undergoing substantial changes due to
statutory, regulatory and technological developments. We believe that we are
well-positioned to take advantage of these fundamental changes.
Wireline Services. The market for local exchange services consists of a
number of distinct service components, including:
. local network services, which generally include basic dial tone, local
area charges, enhanced calling features and private line services
(dedicated for a customer's use between locations)
. network access services, which consist of access provided by local
exchange carriers to long distance communications network carriers
. short-haul long distance communications network services, which
include intraLATA long distance calls and private lines
. other varied services, including operator services, Internet access,
calling cards, publication of "white page" and "yellow page" telephone
directories and the sale of business telephone equipment.
Industry sources have estimated that the 1999 aggregate revenues of all
local exchange carriers will approximate $102 billion. Until recently, there
was little competition in the local exchange markets, particularly for local
network and network access services.
Before 1984, AT&T largely monopolized local and long distance telephone
services in the United States. In 1984, as the result of a court decree, AT&T
was required to divest its local telephone systems (the "Divestiture"), which
created the present structure of the telecommunications industry in the U.S.
The Divestiture and subsequent related proceedings divided the country into 201
Local Access and Transport Areas ("LATAs"). As part of the Divestiture, AT&T's
former local telephone systems were organized into seven (now five, as a result
of industry consolidation) independent regional Bell operating companies.
Regional Bell operating companies were given the right to provide local
telephone service, local access service and intraLATA long distance service, but
were prohibited from providing interLATA service. AT&T retained its long
distance services operations. The separation of the regional Bell operating
companies from AT&T's long distance business created two distinct
telecommunications market segments: local exchange and long distance. The
Divestiture decreed direct, open competition in the long distance segment, but
continued the regulated monopoly environment in local exchange services.
Subsequently, several factors began to promote competition with respect to
local exchange services, including:
. growing customer demand for an alternative to the local exchange
carrier monopoly, spurred partly by the development of competitive
activities in the long distance market
. advances in the technology for transmission of voice, data and video
requiring greater capacity and reliability levels than many local
exchange carrier networks, which principally are copper-based, can
accommodate
. the development of fiber optic and digital electronic technology,
which reduced communications network construction costs while
increasing transmission speeds, capacity
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and reliability compared to the older copper-based network typically
employed by the existing local exchange carriers
. the significant access charges long distance carriers are required to
pay to local exchange carriers to access the local exchange carriers'
networks
. statutory and regulatory initiatives in the telecommunications
industry permitting and promoting competition in the local exchange
market.
Opportunities to compete in the local exchange market expanded
substantially on February 8, 1996, when the Telecommunications Act of 1996 was
enacted. The Telecommunications Act of 1996 eliminated state legal prohibitions
against local exchange competition and requires incumbent local exchange
carriers to allow other providers of telecommunications services to purchase
elements of their local communications network offerings and to interconnect
with their communications facilities and equipment. Most significantly, it
requires the incumbent local exchange carriers to complete local calls
originated by our customers and transferred or connected by us using our own
communications network facilities, and to deliver inbound local calls to us for
connection to our customers, assuring our customers of unimpaired local calling
ability. In addition, local exchange carriers are obligated to provide local
number portability and dialing parity upon request and make their local services
available for resale by competitors. Local exchange carriers also are required
to allow competitors non-discriminatory access to local exchange carrier poles,
conduit space and other rights-of-way.
We believe that these requirements are likely, when fully implemented, to
increase competition among providers of local communications services and
simplify the process of switching from incumbent local exchange carrier services
to those offered by competitive local exchange carriers. The Telecommunications
Act of 1996 also offers important benefits to the regional Bell operating
companies, however, such as the ability to provide interLATA long distance
services under specified conditions. The process of implementing the
Telecommunications Act of 1996 is still incomplete, and important questions
remain unresolved. See "--Regulation".
A number of states have also taken regulatory and legislative action to
open local communications markets to various degrees of competition. We expect
that continuing pro-competitive regulatory changes, together with increasing
customer demand, will create more opportunities for competitive service
providers to introduce additional services, expand their networks and address a
larger customer base. However, we cannot assure you that government actions to
implement local telephone competition will be as complete or as timely as we
require to implement our business plans.
Wireless Services. Demand for wireless communications has grown rapidly
over the past decade. According to the Cellular Telecommunications Industry
Association ("CTIA"), the number of wireless telephone subscribers nationwide
has grown from approximately 680,000 in 1986 to an estimated 61 million as of
June 30, 1998, with a compound annual growth rate of approximately 40% from
1990 through 1997. Wireless communication revenues for the 12-month period ended
June 30, 1998 are estimated by CTIA to have totaled over $29.6 billion, a 16%
increase over the prior 12-month period. We believe that the demand for wireless
communications will continue to grow dramatically, and that PCS will capture a
significant share of the wireless market, due to anticipated declines in costs
of service, increased function versatility, and increased awareness of the
productivity, convenience and safety benefits associated with such services. We
also believe the rapid growth of notebook computers and personal digital
assistants, combined with emerging software applications for wireless delivery
of electronic mail, fax and database searching, will further stimulate demand
for wireless service. In addition, we expect future competition between wireline
local exchange carriers and wireless service providers as "wireless local loop"
technology and reduced wireless rates facilitate migration of wireline minutes
to wireless carriers.
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Current Products and Services
We derive our revenue from:
. our core business of providing local, long distance and related
communications services to end users, typically in a bundled package
. the sale of advertising space in telephone directories
. traditional local telephone company services through the operation of
Illinois Consolidated Telephone Company ("ICTC") in east central
Illinois and Dakota Telecommunications Group, Inc. in 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
and paging services
For the year ended December 31, 1998, we derived 44% of our total revenues
from our core business of providing local, long distance and related
communications services, 24% from the sale of advertising space in telephone
directories, and 11% from traditional local telephone company services. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
Integrated Communications Services.
Overview. As of December 31, 1998, we provided service, on a retail basis,
to over 397,000 local lines in our markets, primarily to small and medium sized
business customers and to residential customers. Since beginning sales
activities in January 1994, we have increased our revenue from the sale of local
and long distance telecommunications services from $4.6 million for the year
ended December 31, 1994 to $267.4 million for the year ended December 31, 1998.
In order to provide local communications services to most of our business
and residential customers in Iowa, Minnesota, North Dakota, South Dakota,
Colorado, Wisconsin, and Illinois, we purchase "Centrex" services through
various resale, interconnection and retail rate stability agreements with U S
WEST Communications, Inc. for our customers located in U S WEST's service
territories and Ameritech Corporation for most of our customers located in
Ameritech's service territories. These "Centrex" agreements allow us to
partition part of the central office switching equipment serving the communities
in which we provide local services, which allows us to aggregate lines, have
control over several characteristics of those lines and provide a set of
standard features on them. Our customers' telephone lines and numbers are
assigned to our portion of the switch. U S WEST or Ameritech, as the case may
be, bills us for all the lines assigned to our customers and provides us with
call detail reports, which enable us to verify our customers' bills for both
local and long distance service. These Centrex agreements protect us from
unilateral rate increases until 2002 or 2003, depending on the state. We
believe that our Centrex-based local services are superior to a standard
business or residential telephone line, since we can offer features, such as
three-way calling, consultation hold and call transfer, at no extra charge.
Other custom calling features are available at additional cost. Because we also
purchase the "Centrex Management System" and the "Centrex Mate Service" from U S
WEST and Ameritech, respectively, our personnel have on-line access to U S WEST
and Ameritech facilities and may make changes to the customers' services
electronically and quickly.
In Missouri, we have an interconnection agreement with Southwestern Bell
Telephone Company that allows us to provide local service by leasing individual
lines and switches from Southwestern Bell for
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resale to our customers. This interconnection agreement provides for a wholesale
discount from the prevailing Southwestern Bell retail price, but does not allow
us to partition a portion of Southwestern Bell's switching equipment as with
Centrex services. As of the date hereof, we are renegotiating the terms of this
interconnection agreement with Southwestern Bell.
In addition, in order to provide integrated communications services to many
of our business and residential customers in central Illinois and in the
Indianapolis, Indiana metropolitan area, we use our own switching equipment and
communications network facilities together with unbundled local "loop" elements
of Ameritech's telecommunications network that we purchase through
interconnection agreements. In Cedar Rapids, Iowa and southeast South Dakota,
we also provide communications services to some of our business and residential
customers using only our own lines and communications network facilities.
We provide most of our long distance service by purchasing communications
network capacity, in bulk, from national long distance carriers, and routing our
customers' long distance traffic over this capacity. In some service areas, we
also carry long distance traffic on our own network facilities.
Business Services. End-user business customers can obtain local, long
distance and ancillary services, such as three-way calling and call transfer,
directly from us in each of the cities and towns in which we offer
communications services today.
We generally offer business customers our integrated local communications
services at prices that are similar to the published retail rates for basic
business service provided by the incumbent local exchange carrier. We offer our
business customers a flat rate or a negotiated rate for long distance service
consistent with their particular needs and within the guidelines of our filed
tariffs. These rates are not subject to increase for the duration of the term
selected by the customer. We also offer some of our business customers long
distance rates calculated by totaling their monthly calls and comparing the
total charges that would be applicable to such calls under different pricing
plans of the major long distance carriers. The customer is then billed an
amount equal to the approximate lowest monthly charges among these plans, minus
any discount to which the customer may be entitled as a result of having made a
long-term commitment to use our services.
Business customers previously served by CCI were on different long distance
rate plans. We are transitioning these customers to our most appropriate rate
plan consistent with their needs. Furthermore, in some states, including states
outside of our target markets, we offer business customers long distance service
only, in order to enhance our ability to attract business customers that have
offices outside of our target markets.
Residential Services. We introduced our PrimeLine(R) service in 1996 and
now offer that service to residential and small business customers in various
cities and towns in Iowa, Illinois, North Dakota, South Dakota, Wisconsin,
Wyoming and Colorado. Our basic PrimeLine(R) service includes local and long
distance telephone service, as well as enhanced features such as three-way
calling, call transfer and consultation hold. Paging, voice mail, Internet
access and travel card services are also available at the customer's option as
part of our PrimeLine(R) service. We generally price our basic PrimeLine(R)
local service slightly higher than the rates for basic local service offered by
the incumbent local exchange carrier since our basic PrimeLine(R) local service
includes enhanced features that are not typically provided as part of the
incumbent local exchange carrier's basic local service. Our customers can add
paging, voice mail and Internet access services to their basic PrimeLine(R)
service at incremental rates designed to be no higher than separately purchasing
these services from other companies. We generally offer our PrimeLine(R)
customers a choice of either long distance rates that vary with the time of the
call or flat-rate long distance pricing applicable 24 hours a day, seven days a
week.
Directory Services. In 1998, we published 156 proprietary "white page" and
"yellow page" telephone directory titles and distributed approximately 14.2
million copies of these directories to local telephone subscribers in 21 states
in the Midwestern and Rocky Mountain regions of the United States, including
most of our target markets. We also published 287 "white page" and "yellow
page" telephone directory titles for other companies and distributed
approximately 4 million copies of these directories to local telephone
subscribers in 38 states and the U.S. Virgin Islands. Our telephone directory
services generated 1998 revenues of approximately $144.9 million, primarily from
the sale of advertising space in the directories.
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Many of our telephone directories serve as "direct mail" advertising
because they contain information on how to contact us and detailed product
descriptions and step-by-step instructions on the use of our telecommunications
products. In addition, we believe that our directories' distinctive black-and-
yellow motif combined with the trade name McLeodUSA strengthens brand awareness
in our markets. See "--Sales and Marketing."
Traditional Local Telephone Services. Through ICTC and Dakota
Telecommunications, we provide regulated incumbent local exchange telephone
service to subscribers in central Illinois and southeast South Dakota.
ICTC operates in 37 exchanges, or service areas, the largest of which are
in Mattoon, Charleston, and Effingham, Illinois. As of December 31, 1998, ICTC
had over 91,000 local access lines in its existing service areas. ICTC offers a
broad range of local exchange services, including long distance carrier access
service, intraLATA toll service, local telephone service, local paging service,
national directory assistance, and equipment leasing. Local telephone service
consists of furnishing a dial tone to local subscribers, at which time
subscribers can make a local call or a long distance call. ICTC also offers
most of its local telephone subscribers custom calling features such as call
waiting, call forwarding, conference calling, speed dialing, caller
identification, and call blocking. The rates for these and other local exchange
services are regulated by the Illinois Commerce Commission and the FCC. To
provide these services, ICTC owns and operates three central office switches and
33 remote switches.
As of December 31, 1998, Dakota Telecommunications served approximately
7,350 local service access lines in 13 telephone exchanges in southeastern South
Dakota. Dakota Telecommunications provides a full range of communications
products and services, including local dial tone and enhanced services, local
private line and public telephone services, dedicated and switched data
transmission services, long distance telephone services, operator assisted
calling services, Internet access and related services.
Special Access, Private Line and Data Services. We provide, on a private
carrier basis, a wide range of special access, private line and data services to
our long distance carrier, wireless, cable television and other end-user
customers. These services include:
. POP-to-POP special access
. end user/long distance carrier special access
. private line services
POP-to-POP special access services provide telecommunications lines that
link the POPs of one long distance carrier or the POPs of different long
distance carriers in a market, allowing these POPs to exchange
telecommunications traffic for transport to final destinations.
End user/long distance carrier special access services provide
telecommunications lines that connect an end user such as a large business to
the local POP of its selected long distance carrier.
Long distance carrier special access services provide telecommunications
lines that link a long distance carrier POP to the local central office. For
example, we have agreed to furnish long distance carrier special access services
to AT&T in up to 30 Midwestern cities in Illinois, Iowa, Minnesota, North Dakota
and South Dakota, providing a catalyst for the expansion of our intra-city
networks.
Private line services provide telecommunications lines that connect various
locations of a customer's operation to transmit internal voice, video and/or
data traffic. We provide private line services by using our own communications
network facilities, leasing communications network facilities from other
telecommunications carriers, or using some combination of owned and leased
communications network facilities
Network Maintenance Services. In 1990, the State of Iowa authorized
construction of the initial fiber optic links of the Iowa Communications Network
(the "Part I and II segments"). The Part I and II segments, which are owned by
the State of Iowa, provide 3,400 miles of fiber optic communications network
connections to approximately 139 sites in Iowa and are used primarily for
interactive distance
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learning, telemedicine and the State's own long distance telephone traffic. We
have entered into a fiber optic maintenance contract with the State of Iowa to
provide maintenance services for the Part I and II segments of the Iowa
Communications Network until 2004. Our maintenance activities under this
contract are performed on a 24-hour-per-day, 365-days-per-year basis, and
consist of alarm monitoring, repair services and cable location services.
We believe that the expertise in fiber optic maintenance we have developed
through the maintenance of the Iowa Communications Network provides advantages
in maintaining our own communications network facilities. Because commercial
use of the Part I and II segments is forbidden, however, neither McLeodUSA nor
any other communications carrier may use capacity on the Part I and II segments
to provide communications services to customers.
Telephone Equipment Services. We sell, lease, install and service
telephone systems, primarily to small and medium sized businesses in Iowa,
Illinois and Minnesota. We believe these services provide valuable expertise
for and complement our communications services offerings, giving us additional
contact with the small and medium sized businesses we target in marketing our
communications services.
Video Services. We own 85% of Greene County Partners, Inc., a cable
television company that as of the date hereof provides cable television service
to approximately 16,800 subscribers in Illinois and Michigan. Through Dakota
Telecommunications, we also own and operate 26 cable television systems located
in southeastern South Dakota, northwestern Iowa and southwestern Minnesota. As
of December 31, 1998, these systems provided service to approximately 5,930
subscribers.
We have also received a franchise from the city of Cedar Rapids, Iowa to
provide cable television service. We are using this franchise to explore the
possible synergies between cable television and our advanced communications
services offerings, such as Integrated Services Digital Network ("ISDN"), low
and high speed Internet, video and other advanced services. Depending on the
results of this preliminary initiative and on other factors, including
technological, regulatory or other developments in our business, changes in the
competitive climate in which we operate, and the emergence of future
opportunities, we may elect to offer cable service on an expanded basis in the
future.
Telemarketing Services. We provide direct marketing and telemarketing
services for third parties, as well as a variety of fund-raising services for
colleges, universities and other non-profit organizations throughout the United
States. We believe that these services provide valuable marketing opportunities
and expertise for our communications services, particularly with respect to
potential residential customers. In addition to providing telemarketing
services for third parties, we also use our telemarketing sales personnel for
sales of our PrimeLine(R) residential services. See "--Sales and Marketing."
Computer Networking Services. Through Dakota Telecommunications, we
provide customized, integrated solutions for computing networks in some markets
in South Dakota. Typical services include review of customer system
requirements; selection, design and planning of system components and networks;
and operating and network support services.
Other Communications Services. We provide pay telephone service, operator
services and paging services in some markets. In addition, we own a minority
interest in a partnership that provides cellular service in central Illinois.
Expansion of Services Using Our Own Communications Network Facilities
As of the date hereof, we are providing service to over 2,300 local lines
in Cedar Rapids, Iowa and southeast South Dakota using only our own switching
and fiber optic communications network facilities connected directly to our
customers' locations. We are extending our intra-city fiber optic
communications network and switching capacity to enable us to provide expanded
services directly to our customers and reduce the expense of leasing
communications facilities from the existing telephone company.
As of the date hereof, we are also offering service to over 7,000 local
lines located in central
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Illinois and in Indianapolis, Indiana using our own switches and fiber optic
communications network facilities combined with network elements purchased from
Ameritech through interconnection agreements. We are building a state-of-the-art
fiber optic communications network to enable us to serve additional end-user
customers in this manner, using our communications network facilities in
combination with network elements of existing telephone companies. Our
communications network and switching capacity is also designed to serve other
wireline and wireless carriers on a wholesale basis.
We have received state regulatory approval to offer local switched services
using our own communications network facilities in Colorado, Idaho, Iowa,
Illinois, Indiana, Minnesota, Missouri, Nebraska, North Dakota, South Dakota,
Utah, Wisconsin and Wyoming. We intend to offer additional local switched
services using our own network facilities, either alone or in combination with
network elements purchased from existing telephone companies, in Des Moines,
Waterloo, Cedar Falls, Dubuque, Sioux City, Council Bluffs, and Iowa City, Iowa
and the Quad Cities of Iowa/Illinois (Davenport, Bettendorf, Rock Island and
Moline), among other places. We then plan to expand these facilities-based
services to other cities as our communications network develops and our market
penetration increases.
Our plans to provide local switched services using our own communications
network facilities will depend upon obtaining favorable interconnection
agreements and terms for leasing network elements from existing telephone
companies. In August 1996, the FCC released a decision (the "Interconnection
Decision") implementing the interconnection portions of the Telecommunications
Act of 1996. The Interconnection Decision has been the subject of significant
legal dispute. In January 1999, the U.S. Supreme Court rejected challenges to
the Interconnection Decision and affirmed the authority of the FCC to establish
rules governing interconnection. We believe that additional disputes regarding
the Interconnection Decision and other related FCC actions are likely. 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. See "--Regulation."
The foregoing statements are forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 and where we actually
provide such services will depend on factors such as:
. the outcome of the judicial proceedings regarding the Interconnection
Decision
. technological, regulatory or other developments in our business
. changes in the competitive climate in which we operate
. the emergence of future opportunities
For a detailed description of the expansion of our fiber optic
communications network, see "--Network Facilities."
Proposed Wireless Services
As of the date hereof, we do not offer wireless services, although we do
own a minority interest in a cellular telephone partnership serving parts of
east central Illinois. In April and June 1997, the FCC awarded us a total of 26
"D" and "E" block frequency PCS licenses, each covering 10 MHz of radio
spectrum, and in September 1997 we acquired CCI and its "E" block frequency PCS
license, giving us a total of 27 PCS licenses in 25 markets covering areas of
Illinois, Iowa, Minnesota, Nebraska and South Dakota. We paid approximately
$32.8 million for the 26 PCS licenses awarded to us by the FCC. CCI paid the
FCC for its PCS license before we acquired CCI. Our PCS licenses encompass
approximately 110,000 square miles and a population of approximately 6.9
million. We plan to offer PCS or other wireless services as part of our
communications services by building a wireless network, entering into strategic
acquisitions or alliances, or employing a combination of these methods.
PCS differs from traditional cellular telephone service principally in that
PCS systems operate at a higher frequency band and employ advanced digital
technology. Compared to existing cellular service, these features are expected
to enable PCS system operators to offer customers lower cost service options,
lighter handsets with longer battery lives, and new and enhanced service
offerings.
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We will need to spend significant time and money to develop wireless
services. To implement a wireless system, we will need to build or otherwise
acquire access to wireless infrastructure. The infrastructure of a wireless
system generally consists of switches, base station transmitters and receivers,
and related equipment. We may also incur costs related to site acquisition and
preparation, installation services, zoning approval or other permits, frequency
planning, construction and equipment procurement, installation and testing.
Furthermore, we believe that our ability to successfully offer wireless services
will depend on our ability to offer roaming service to our customers so they can
use their handsets outside our service area. This will require us to establish
suitable roaming arrangements with other wireless operators in other markets
constructing systems compatible with our own. We cannot predict when, or
whether, we will be able to enter into such roaming agreements with local
providers.
We have entered into long-term agreements with our electric utility
stockholders (Alliant Energy Investments Inc. (collectively with its
predecessors and affiliates, "Alliant Energy"), and MHC Investment Company
(collectively with its predecessors and affiliates, "MidAmerican")) and with
Wisconsin Power and Light Company, Illinois Power Company and Illinois Central
Railroad Corporation, that will enable us to install base stations and other
equipment on such companies' towers. See "--Network Facilities." We expect the
use of these existing towers and other facilities occupied by other
telecommunications service providers and utility companies to facilitate our
development of wireless services.
On July 21, 1997, the FCC also awarded us four WCS licenses covering
Milwaukee, Wisconsin, Minneapolis/St. Paul, Minnesota, Des Moines-Quad Cities,
Iowa/Illinois and Omaha, Nebraska. We expect to use the frequency blocks
covered by such licenses to provide fixed services, such as wireless local loop,
Internet access or meter reading.
As the wireline and wireless markets converge, we believe that we can
identify other opportunities to generate revenues from the wireless industry on
both a retail and a wholesale basis. On a retail basis, we believe that we will
be able to enter into strategic arrangements with both cellular and PCS
companies on favorable economic terms to allow us to offer wireless services as
part of our integrated communications services offerings. On a wholesale basis,
these opportunities may include (1) leasing tower sites to wireless providers,
(2) connecting or transferring wireless traffic through our communications
network facilities and (3) transporting wireless traffic using our fiber optic
communications network to interconnect wireless providers' cell sites or to
connect such sites to either our communications network facilities or to
communications network facilities of other providers of wireline services. For
example, we have entered into agreements with five wireless companies to provide
access to several of the towers we control.
The statements in the foregoing paragraphs about our plans to offer
wireless services are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These plans may be revised,
and our actual wireless services may differ materially from that indicated by
our current plans, in each case as a result of a variety of factors, including:
. the availability of financing and regulatory approvals
. the number of potential customers in a target market
. the existence of strategic alliances or relationships
. technological, regulatory or other developments in our business
. changes in the competitive climate in which we operate
. the emergence of future opportunities
See "--Risk Factors--We May Not Succeed in Developing or Making a Profit from
Wireless Service" and "--Risk Factors--Competition in the Wireless
Telecommunications Industry Could Make it Harder for Us Successfully to Offer
Wireless Services."
Network Facilities
As the incumbent local exchange carriers are compelled, by regulatory
changes and competitive forces, to unbundle their network components and to
permit resale of their network elements and products, we expect to be able to
provide our customers with a full range of communications services
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using a combination of our own communications network, the networks of the
incumbent local exchange carriers and the networks of other competitive
carriers.
As of December 31, 1998, we owned approximately 7,100 route miles of fiber
optic communications network and expect to add approximately 2,000
additional route miles of fiber optic network during 1999. We will decide
whether to begin construction of fiber optic network in a market based on
various economic factors, including:
. the number of our customers in a market
. the anticipated operating cost savings associated with such
construction
. any strategic relationships with owners of existing infrastructure
(e.g., utilities and cable operators)
. strategic acquisitions of providers of wireless services or owners of
existing infrastructure
We are installing backbone communications network facilities that form a
series of fiber optic "self-healing rings" and intra-city communications network
facilities that provide access directly to customer locations. These
communications network facilities are intended to enable us to provide local and
long distance service using our own facilities in selected cities and towns in
Iowa, Illinois, Indiana, Wisconsin and Minnesota, and in Sioux Falls, South
Dakota. Our communications networks are designed to support a wide range of
communications services, provide increased network reliability and reduce costs.
Our communications network consists of fiber optic cables, which typically
contain between 24 and 144 fiber strands, each of which is capable of providing
many telecommunications circuits. A single pair of fibers on our network can
transmit 32,256 simultaneous voice conversations, whereas a typical pair of
copper wires can carry a maximum of 24 digitized simultaneous voice
conversations. We expect that continuing developments in compression technology
and multiplexing equipment will increase the capacity of each fiber, providing
greater capacity at relatively low incremental cost.
In 1995, the Iowa General Assembly passed legislation to extend the Iowa
Communications Network to 543 more endpoints (which are usually located in
schools or public libraries) throughout the State of Iowa (the "Part III
segments"). The majority of these fiber optic links, unlike the Part I and II
segments of the Iowa Communications Network, will be leased to the State of
Iowa, from a private entity, such as McLeodUSA. As of December 31, 1998, we had
contracts to build and then lease capacity to the State of Iowa on 235 of such
segments. Under our lease agreements with the State of Iowa, we are
constructing a "fiber-rich" broadband communications network on which the State
of Iowa has agreed to lease one DS-3 circuit for a period of seven years for a
total aggregate lease cost of approximately $27.0 million. Upon completion of
installation of each segment, the leases provide that the State of Iowa will
make a one-time up-front lease payment to us for the capacity, with nominal
monthly lease payments thereafter. At the end of a seven-year period, the
leases may be extended, upon terms to be mutually agreed upon. During the term
of the leases, the State of Iowa may order additional DS-3 circuits at a
mutually agreed upon price.
In September 1997, as a result of our acquisition of CCI, we acquired
approximately 900 route miles of fiber optic network facilities, parts of which
are currently connected to Ameritech unbundled network elements through an
interconnection agreement. We believe that CCI's experience in serving end user
local lines under the interconnection agreement will substantially assist our
technical abilities in interconnection to the unbundled network elements of
incumbent local exchange carriers.
In March 1999, as a result of our acquisition of Dakota Telecommunications,
we acquired approximately 290 additional route miles of fiber optic
communications network facilities.
We have reached agreements with our electric utility stockholders
(MidAmerican and Alliant Energy) and with Wisconsin Power and Light Company,
Illinois Power and Illinois Central Railroad that allow us to make use of those
companies' rights-of-way, underground conduits, distribution poles, transmission
towers and building entrances in exchange for rights by such companies to use
capacity on our network. These agreements give us access to rights-of-way in
parts of Iowa, Illinois and Wisconsin for installation of our wireline and
wireless networks. We expect our access to these rights-of-way to have a
significant positive impact on our capital costs for network construction and
the speed with which we can
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construct our networks. We believe that our strategic relationships with our
electric utility stockholders and other companies that own rights-of-way and
infrastructure give us a competitive advantage.
Sales and Marketing
Until June 1996, we directed our communications sales efforts primarily
toward small and medium sized businesses. In June 1996, we began marketing our
PrimeLine(R) services to residential customers.
Marketing of our integrated communications services to business customers
is conducted by direct sales personnel, located at our headquarters in Cedar
Rapids, Iowa and in branch sales offices in Iowa, Illinois, North Dakota, South
Dakota, Minnesota, Missouri, Wisconsin, Indiana, Colorado, Nebraska and Wyoming.
Sales activities in our branch sales offices are organized and managed by
region.
Marketing of our integrated communications services to residential
customers is conducted by telemarketers. The telemarketers emphasize the
PrimeLine(R) integrated package of communications services and its flat-rated
per minute pricing structure for long distance service. We also use Ruffalo
Cody's information database to identify attractive sales opportunities and
pursue those opportunities through a variety of methods, including calls from
our telemarketing personnel.
Our sales force is trained to emphasize our customer-focused sales and
service efforts, including our 24-hours-per-day, 365-days-per-year customer
service center. Our employees answer customer service calls directly rather
than requiring customers to use an automated queried message system. We believe
that our emphasis on a single point of contact for meeting our customer's
communications needs is very appealing to our current and prospective customers.
We have also developed and installed customer-focused software for providing
integrated communications services. This software permits us to present our
customers with one fully integrated monthly billing statement for local, long
distance, 800, international, voice mail, paging, Internet access and travel
card services, and will permit us to include additional services, such as
wireless services, when available. We believe that our customer-focused
software platform is an important element in the marketing of our communications
services and gives us a competitive advantage in the marketplace.
We believe our strategic acquisitions have enhanced our sales and marketing
efforts and increased our penetration of existing markets. We believe these
acquisitions will also help accelerate our entry into new markets. For example,
we began publishing and distributing telephone directories as a result of
acquisitions. We can use our proprietary telephone directories as direct mail
advertising simply by including detailed product descriptions and information
about our communications products in them. We believe that these telephone
directories provide us with a long-term marketing presence in the millions of
households and businesses that receive them. We also believe that combining our
directories' distinctive black-and-yellow motif with the trade name McLeodUSA
strengthens brand awareness in all of our markets.
In 1998, we expanded our communications sales and marketing efforts
primarily by opening new branch sales offices in North Dakota, South Dakota,
Minnesota, Colorado, Missouri, Wisconsin and Wyoming and continuing to expand
our sales and marketing efforts in Iowa and Illinois. Over the next several
years, depending on competitive and other factors, we also intend to begin sales
and marketing efforts in Montana, Idaho and Utah. The foregoing statements are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 and the results of our actual expansion efforts
may be materially different, depending on a variety of other factors, including:
. the availability of financing and regulatory approvals
. the number of potential customers in a target market
. the existence of strategic alliances or relationships
. technological, regulatory or other developments in our business
. changes in the competitive climate in which we operate
. the emergence of future opportunities
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Competition
Wireline Competition. The communications services industry is highly
competitive. We face intense competition from local exchange carriers, including
the regional Bell operating companies (primarily U S WEST, Ameritech and
Southwestern Bell) and GTE, which currently dominate their respective local
telecommunications markets. Our long distance services also compete with the
services of hundreds of other companies in the long distance marketplace. AT&T,
MCI WorldCom and Sprint currently dominate the long distance market. Our local
and long distance services also compete with the services of other competitive
local exchange carriers in some markets. Other competitors may include cable
television companies, competitive access providers, microwave and satellite
carriers, wireless telecommunications providers, and private networks owned by
large end-users. In addition, we compete with the regional Bell operating
companies and other local exchange carriers, numerous direct marketers and
telemarketers, equipment vendors and installers, and telecommunications
management companies with respect to portions of our business. Many of our
existing and potential competitors have financial and other resources far
greater than our own.
We believe that the distinction between the local and long distance markets
is eroding, and other competitors will begin to offer integrated communications
services similar to our own. For example, each of AT&T, MCI WorldCom and Sprint
has begun to offer local telecommunications services using their own network
facilities, network elements obtained from incumbent local exchange carriers, or
the facilities of other parties. AT&T has announced its plan to enter into
exclusive arrangements with cable operators to use their local network
facilities for telecommunications services. These and other companies currently
hold state regulatory certificates to offer local and long distance service in
Iowa, Illinois and other states within our target markets. We cannot assure you
that these firms, and others, will not enter the markets or target the small and
medium sized businesses where we focus our sales efforts.
A continuing trend toward business combinations and strategic alliances in
the telecommunications industry may strengthen our competitors. For example,
WorldCom acquired MCI in September 1998 and AT&T acquired Teleport
Communications Group Inc. in July 1998 and Tele-Communications, Inc. in March
1999. In addition, merger plans have been announced by Southwestern Bell and
Ameritech and by Bell Atlantic and GTE. U S WEST and Ameritech also announced
in May 1998 that each had entered into a marketing arrangement with Qwest
Communications, a long distance company. The FCC ruled that these marketing
arrangements violate the Telecommunications Act of 1996, but both U S WEST and
Ameritech have appealed this ruling. In addition, Southwestern Bell and
Williams Communications, Inc., a long distance company, have announced a
strategic alliance to supply services to each other. These or other alliances
or combinations between our competitors could put us at a significant
competitive disadvantage.
We depend on incumbent local exchange carriers to provide access service
for the origination and termination of most of our toll long distance traffic
and interexchange private lines. Historically, charges for such access service
made up a significant percentage of the overall cost of providing long distance
service. The FCC and various states are considering changes to access charge
rate levels and related issues involving support for universal service and other
public policy objectives. The impact of these changes on us and our competitors
is not yet clear. We could be adversely affected if we do not experience access
cost reductions proportionally equivalent to those of our competitors, if our
competitors receive a disproportionate share of universal service revenues, or
if regulation of incumbent local exchange carriers' access services is reduced.
As long as new Internet-based competitors continue to be exempt from these
charges, they could enjoy a significant cost advantage in this area.
We also depend on incumbent local exchange carriers to provide our local
telephone service through access to local communications network elements,
termination service or local central office switching, or through wholesale
purchase of the local telephone services of such carriers that we then resell to
end users. Any successful effort by the incumbent local exchange carriers to
deny or substantially limit our access to their network elements or wholesale
services would have a material adverse effect on our ability to provide local
telephone services. Although the Telecommunications Act of 1996 imposes
interconnection obligations on incumbent local exchange carriers, we cannot
assure you that we will be able to obtain access to their communications network
elements or services at rates, and on terms and conditions, that will permit us
to offer local services at rates that are both profitable and competitive.
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The Telecommunications Act of 1996 also provides the incumbent local
exchange carriers with new competitive opportunities. For example, under the
Telecommunications Act of 1996, the regional Bell operating companies will, upon
the satisfaction of various conditions, be able to offer interLATA long distance
services to local telephone service customers in their regions. The regional
Bell operating companies are actively engaged in proceedings and other
activities by which they are seeking to satisfy those conditions. We believe
that we have advantages over the incumbent local exchange carriers in providing
our telecommunications services, including our management's prior experience in
the competitive telecommunications industry and our emphasis on marketing
(primarily using a direct sales force for sales to business customers and
telemarketing for sales to residential customers) and on responsive customer
service. However, the regional Bell operating companies may be allowed to offer
interLATA long distance services before their local exchange markets are
completely open to competition. Under such circumstances in particular,
additional competition from the incumbent local exchange carriers could have a
material adverse effect on our business, results of operations and financial
condition.
Competition for local and special access telecommunications services is
based principally on price, quality, network reliability, customer service and
service features. We believe that our management expertise and emphasis on
customer service allows us to compete effectively with the incumbent local
exchange carriers in providing these services. In addition, our fiber optic
communications networks provide both diverse access routing and redundant
electronics, which design features are not widely deployed by the local exchange
carriers' networks. However, if the incumbent local exchange carriers,
particularly the regional Bell operating companies, charge alternative providers
such as McLeodUSA unreasonably high fees for interconnection to their networks,
significantly lower their rates for access and private line services, or offer
significant volume and term discount pricing options to their customers, we
could be at a significant competitive disadvantage.
In the future, an important element of providing competitive services may
be the ability to offer customers high-speed broadband local connections. The
FCC is considering a proposal that would allow incumbent local exchange carriers
to offer these and other services through separate affiliates, in which case
their network elements for providing these services would not need to be made
available to us or other competitors. AT&T has announced that it is entering
into arrangements with cable companies for the exclusive use of their local
networks for broadband telecommunications and several cable companies are
offering broadband Internet access over their network facilities. As of the
date hereof, we offer such broadband local access to our customers only in
limited areas in Cedar Rapids, Iowa and southeast South Dakota. If we are
unable to meet future demands of our customers for broadband local access or
other services on a timely basis at competitive rates, we may be at a
significant competitive disadvantage.
For more information about the regulatory environment in which we operate,
see "--Regulation."
Wireless Competition. The wireless telecommunications industry is
experiencing significant technological change, as evidenced by the increasing
pace of improvements in the capacity and quality of digital technology, shorter
cycles for new products and enhancements, and changes in consumer preferences
and expectations. We believe the market for wireless telecommunications
services is likely to expand significantly as equipment costs and service rates
continue to decline, equipment becomes more convenient and functional, wireless
services become more diverse, technology improves and new competitors enter the
market. We also believe providers of wireless services increasingly will offer,
in addition to products that supplement a customer's wireline communications
like cellular telephone services in use today, wireline replacement products
that may result in wireless services becoming the customer's primary mode of
communication. Accordingly, we expect competition in the wireless
telecommunications business to be dynamic and intense as a result of the
entrance of new competitors and the development of new technologies, products
and services. We anticipate that in the future there could potentially be eight
wireless competitors in each of our proposed PCS markets: two existing cellular
providers, five other PCS providers and Nextel Communications Inc., an ESMR
provider. There are over ten principal cellular providers and over 20 principal
PCS licensees in our proposed PCS markets. In addition, we could face
competition from mobile satellite services which are under development.
Competition with these or other providers of wireless telecommunications
services may be intense. Many of our potential wireless competitors have
substantially greater financial, technical, marketing, sales, manufacturing and
distribution resources than our own and have significantly greater experience
than us in testing new or improved wireless telecommunications products and
services. Some
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competitors, particularly WCS carriers, are expected to market other services,
such as cable television access, with their wireless telecommunications service
offerings. We do not currently offer wireless cable television access. In
addition, several of our potential wireless competitors are operating or
planning to operate, through joint ventures and affiliation arrangements,
wireless telecommunications systems that encompass most of the United States. We
cannot assure you that we will be able to compete successfully in this
environment or that new technologies and products that are more commercially
effective than our technologies and products will not be developed. See
"--Wireless Services."
Regulation
Overview. Our services are subject to federal, state and local
regulation. The FCC exercises jurisdiction over our facilities and services to
the extent they are used to provide, originate or terminate interstate or
international common carrier communications. State regulatory commissions
retain jurisdiction over the same facilities and services to the extent they are
used to originate or terminate intrastate common carrier communications. Local
governments may require us to obtain licenses, permits or franchises regulating
use of public rights-of-way necessary to install and operate our networks. In
addition, the licensing, construction, operation, sale and interconnection
arrangements of wireless telecommunications systems are regulated to varying
degrees by the FCC. The construction and operation of wireless systems also may
be subject to state and local regulation.
Through our subsidiaries, we hold various federal and state regulatory
authorizations. We often join other industry members in seeking regulatory
reform at the federal and state levels to open additional telecommunications
markets to competition.
Through our wholly owned subsidiary McLeodUSA Network Services, we provide
competitive access services as a private carrier on a non-regulated basis. In
general, a private carrier is one that provides service to customers on an
individually negotiated contractual basis, as opposed to a common carrier that
provides service to the public on the basis of generally available rates, terms
and conditions. We believe that McLeodUSA Network Services' private carrier
status is consistent with applicable federal and state laws, as well as
regulatory decisions interpreting and implementing those laws as of the date
hereof. Should such laws and/or regulatory interpretations change in the future
to reclassify McLeodUSA Network Services' regulatory status, we believe that
compliance with such reclassification would not have a material adverse effect
on us.
Through our wholly owned subsidiaries, we are also subject to federal and
state regulatory requirements, including, in some states, bonding requirements,
due to our direct marketing, telemarketing and fund-raising activities.
Federal Regulation. The FCC classifies us as a non-dominant carrier. As
a non-dominant carrier, our interstate and international services are not
subject to material federal regulation, although we are required to file tariffs
with the FCC for our common carrier services. The FCC also imposes prior
approval requirements on transfers of control and assignments of radio licenses
and operating authorizations. The FCC has the authority to condition, modify,
cancel, terminate or revoke such licenses and authorizations for failure to
comply with federal laws or the rules, regulations and policies of the FCC. The
FCC may also impose fines or other penalties for such violations. While we
believe we are in compliance with applicable laws and regulations, we cannot
assure you that the FCC or third parties will not raise issues with regard to
our compliance.
The FCC's role with respect to local telephone competition arises
principally from the Telecommunications Act of 1996, which became effective
February 8, 1996. The Telecommunications Act of 1996 preempts state and local
laws to the extent that they prevent competitive entry into the provision of any
telecommunications service and gives the FCC jurisdiction over important issues
related to local competition. However, state and local governments retain
authority over significant aspects of the provision of local telecommunications.
The Telecommunications Act of 1996 imposes a variety of new duties on local
exchange carriers, including non-incumbent local exchange carriers like
McLeodUSA, in order to promote competition in local exchange and access
services. These duties include requirements to:
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. complete calls originated by competing carriers on a reciprocal basis
. permit resale of services
. permit users to retain their telephone numbers when changing carriers
. provide competing carriers access to poles, ducts, conduits and
rights-of- way at regulated prices
Incumbent local exchange carriers are also subject to additional
requirements. These duties include obligations of the incumbent local exchange
carriers to:
. interconnect their networks with competitors
. offer collocation of competitors' equipment at their premises
. make available elements of their networks (including network
facilities, features and capabilities) on non-discriminatory,
cost-based terms
. offer wholesale versions of their retail services for resale at
discounted rates
Collectively, these requirements recognize that local exchange competition
is dependent upon cost-based and non-discriminatory interconnection with and use
of incumbent local exchange carrier networks. Failure to achieve such
interconnection arrangements could have an adverse impact on the ability of
McLeodUSA or other entities to provide competitive local exchange services.
Under the Telecommunications Act of 1996, incumbent local exchange carriers are
required to negotiate in good faith with carriers requesting any or all of the
above arrangements. In addition, in the Interconnection Decision and related
actions the FCC has adopted more specific rules to implement these requirements.
The Interconnection Decision has been the subject of significant legal dispute.
In January 1999, the U.S. Supreme Court rejected challenges to the
Interconnection Decision and affirmed the authority of the FCC to establish
rules governing interconnection. We believe that additional disputes regarding
the Interconnection Decision and other related FCC actions are likely.
The Telecommunications Act of 1996 also eliminates previous prohibitions on
the provision of interLATA long distance services by the regional Bell operating
companies and the general telephone operating companies. The regional Bell
operating companies are permitted to provide interLATA long distance service
outside those states in which they provide local exchange service ("out-of-
region long distance service") upon receipt of any necessary state and/or
federal regulatory approvals that are otherwise applicable to the provision of
intrastate and/or interstate long distance service. Under the
Telecommunications Act of 1996, the regional Bell operating companies will be
allowed to provide long distance service within the regions in which they also
provide local exchange service ("in-region service") on a state-by-state basis
upon specific approval of the FCC and satisfaction of other conditions,
including a checklist of interconnection requirements intended to open local
telephone markets to competition. As of the date hereof, the FCC has not found
that any regional Bell operating company has met these interconnection
requirements. If the FCC does permit U S WEST, Ameritech or Southwestern Bell
to provide long distance service in their local service regions before they meet
our local interconnection needs, they would be able to offer integrated local
and long distance services and could have a significant competitive advantage in
marketing those services to their existing local customers.
The Telecommunications Act of 1996 imposes restrictions on the regional
Bell operating companies in connection with their entry into the interLATA long
distance services market. Among other things, for the first three years (unless
extended by the FCC) the regional Bell operating companies must pursue such
activities only through separate subsidiaries with separate books and records,
financing, management and employees. In addition, affiliate transactions with
these subsidiaries must be conducted on a non-discriminatory basis.
In the future, an important element of providing competitive services may
be the ability to offer customers high-speed broadband local connections. The
FCC is considering a proposal that would allow incumbent local exchange carriers
to offer these and other services through separate affiliates, in which case
their network elements for providing these services would not need to be made
available to us or other competitors. AT&T has announced that it is entering
into arrangements with cable companies for the exclusive use of their local
networks for broadband telecommunications and several cable companies are
offering broadband Internet access over their network facilities. As of the
date hereof, we offer such broadband local access to our customers only in
limited areas in Cedar Rapids, Iowa and southeast South
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Dakota. If we are unable to meet future demands of our customers for broadband
local access or other services on a timely basis at competitive rates, we may be
at a significant competitive disadvantage.
The FCC also regulates the interstate access rates charged by incumbent
local exchange carriers for the origination and termination of interstate long
distance traffic. Those access rates make up a significant portion of the cost
of providing long distance service. The FCC has implemented changes to its
interstate access rules that result in restructuring of the access charge system
and changes in access charge rate levels. These and related actions may reduce
access rates, and hence the cost of providing long distance service, especially
to business customers. The impact of these new changes will not be known until
they are fully implemented over the next several years. In a related
proceeding, the FCC has adopted changes to the methodology by which access has
been used in part to subsidize universal telephone service and other public
policy goals. Telecommunications providers like McLeodUSA will pay a fee
calculated as a percentage of their revenues to support these goals. The full
implications of these changes also remain uncertain and subject to change.
In addition, the FCC and the states are considering related questions
regarding the applicability of access charge and universal service fees to
Internet service providers. Currently, Internet service providers are not
subject to these expenses. Many incumbent local exchange carriers and other
parties have argued that this exemption unfairly advantages Internet service
providers, particularly when they provide data, voice or other services in
direct competition with conventional telecommunications.
In connection with its interconnection decisions, the FCC has granted local
exchange carriers additional flexibility in pricing their interstate special and
switched access services on a central office specific basis. Under this pricing
scheme, local exchange carriers may establish pricing zones based on access
traffic density and charge different prices for central offices in each zone.
We anticipate that the FCC will grant local exchange carriers increasing pricing
flexibility as the number of interconnection agreements and competitors
increases. The potential impact of such pricing flexibility on McLeodUSA and
other competitors is unclear at this time.
As of the date hereof, we do not offer PCS services, although we do own a
minority interest in a cellular telephone partnership serving parts of east
central Illinois. In April and June 1997, the FCC awarded us a total of 26 "D"
and "E" block frequency PCS licenses and in September 1997 we acquired CCI and
its "E" block frequency PCS license, giving us a total of 27 PCS licenses in 25
markets covering areas of Iowa, Illinois, Minnesota, Nebraska and South Dakota.
We paid approximately $32.8 million for the 26 PCS licenses awarded to us by the
FCC. Our PCS licenses encompass approximately 110,000 square miles and a
population of approximately 6.9 million. In July 1997, the FCC also awarded us
four WCS licenses in the Major Economic Areas of Milwaukee, Wisconsin,
Minneapolis/St. Paul, Minnesota, Des Moines-Quad Cities, Iowa/Illinois and
Omaha, Nebraska. We are evaluating proposed wireless systems and expect to
utilize our PCS licenses as part of a network or a strategic combination to add
PCS or other wireless services to our integrated communications services. We
intend to use the frequency blocks covered by our WCS licenses to provide fixed
services such as wireless local loop, Internet access or meter reading.
All PCS licenses are awarded for a ten-year period, at the end of which,
absent prior revocation or a violation of the FCC's rules by the licensee, they
will be renewed. As a PCS licensee, we are subject to "build-out" requirements
which require that specified levels of service be available by specified times.
If we fail to meet these coverage requirements, we may be subject to forfeiture
of our PCS licenses.
PCS licenses permit use of radio spectrum that may be currently occupied by
fixed microwave systems. The existing licensees of such systems retain the
right to continue to operate their systems until 2005. To secure a sufficient
amount of unencumbered spectrum to operate a PCS system efficiently, we may need
to relocate many of these existing licensees. In an effort to balance the
competing interests of existing microwave users and newly authorized PCS
licensees, the FCC has adopted a transition plan to relocate such microwave
operators to other spectrum blocks. This transition plan allows most microwave
users to operate in the PCS spectrum for a one-year voluntary negotiation period
and an additional one-year mandatory negotiation period. For public safety
entities dedicating a majority of their system communications for police, fire
or emergency medical services operations, the voluntary negotiation period is
three years. Parties unable to reach agreement within these time periods may
refer the matter to the FCC for resolution, but the existing microwave user is
permitted to continue its operations until final FCC
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resolution of the matter. We estimate that we would be required to pay to
relocate approximately 50 microwave links operated by 19 different microwave
licensees in order to develop a PCS system in our target wireless markets. In
addition, the FCC has imposed new universal service requirements on wireless
carriers, as well as new number portability and enhanced "911" obligations on
commercial mobile radio service providers including PCS carriers, which may
require us to invest in advanced technology over the next few years.
Wireless systems are also subject to Federal Aviation Administration
regulations respecting the location, lighting and construction of transmitter
towers and antennas and may be subject to regulation under the National
Environmental Policy Act and the environmental regulations of the FCC. Wireless
providers also must satisfy a variety of FCC requirements relating to technical
and reporting matters. One such requirement is the coordination of proposed
frequency usage between adjacent systems. In addition, the height and power of
base station transmitting facilities and the type of signals they emit must fall
within specified parameters.
The Communications Act of 1934 requires the FCC's prior approval of the
assignment or transfer of control of a PCS or other radio license. In addition,
the FCC has established transfer disclosure requirements that require licensees
who transfer control of or assign a PCS license within the first three years to
file associated contracts for sale, option agreements, management agreements or
other documents disclosing the total consideration that the applicant would
receive in return for the transfer or assignment of its license. Non-
controlling interests in an entity that holds a PCS license or PCS system
generally may be bought or sold by U.S. companies or individuals without prior
FCC approval, but subsequent notice must be provided to the FCC.
The Telecommunications Act of 1996 imposes restrictions on investment in
McLeodUSA by foreign persons or corporations arising from our ownership of
common carrier radio licenses. However, these restrictions generally do not
apply to investment by nationals of member countries of the World Trade
Organization. As of the date hereof, we have no knowledge of any ownership by
or affiliation with foreign persons or telecommunications carriers in violation
of the Communications Act or the FCC's rules.
Through our wholly owned subsidiaries, we are also subject to rules
governing telemarketing that have been promulgated by both the FCC and the
Federal Trade Commission. The FCC and FTC telemarketing rules prohibit
telemarketers from engaging in deceptive telemarketing practices and require
that telemarketers make specified disclosures. For example, these telemarketing
rules:
. prohibit the use of autodialers that employ prerecorded voice messages
without the prior express consent of the dialed party
. proscribe the facsimile transmission of unsolicited advertisements
. require telemarketers to disclose clear and conspicuous information
concerning quality, cost and refunds to a customer before a customer
makes a purchase
. require telemarketers to compile lists of individuals who desire not
to be contacted
. limit telemarketers to calling residences between the hours of 8:00
a.m. and 9:00 p.m.
. require telemarketers to explicitly identify the seller and state the
purpose of the call
. prohibit product misrepresentations
State Regulation. We provide intrastate common carrier services and are
subject to various state laws and regulations. Most public utility commissions
subject providers such as McLeodUSA to some form of certification requirement,
which requires providers to obtain authority from the state public utility
commission before initiating service. In most states, including Iowa and
Illinois, we are also required to file tariffs setting forth the terms,
conditions and prices for services that are classified as intrastate. We are
required to update or amend these tariffs when we adjust our rates or add new
products, and are subject to various reporting and record-keeping requirements
in these states.
Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
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offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply with
state law or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
State utility commissions or third parties could raise issues with regard to our
compliance with applicable laws or regulations which could have a material
adverse effect on our business, results of operations and financial condition.
We hold certificates of authority to resell the local services of the
regional Bell operating companies and to offer local services using our own
communications network facilities in incumbent regional Bell operating company
exchanges in Iowa, Illinois, Wisconsin, Minnesota, North Dakota, South Dakota,
Wyoming, Idaho, Indiana, Missouri, Nebraska and Utah. We also hold certificates
of authority to resell the local services of the regional Bell operating
companies in Colorado and Montana. We intend to seek regulatory approval to
provide resale and facilities-based services in all states within our target
markets when the economic terms of interconnection with the incumbent local
exchange company make the provision of local services using our own
communications network facilities cost-effective. See "-- Expansion of Services
Using Our Own Communications Network Facilities." We are also authorized to
offer long distance service in all 48 states in the continental United States.
We have obtained authority to offer long distance service in such states,
including states outside our target markets, because we believe this capability
will enhance our ability to attract business customers that have offices outside
of our target markets. We may also apply for authority to provide services in
non-regional Bell operating company exchanges in our target market states and
other states in the futures. While we expect and intend to obtain the necessary
regulatory authority in each jurisdiction where we plan to operate, we cannot
assure you that each respective agency will grant our request for authority.
The Telecommunications Act of 1996 preserves the ability of states to
impose reasonable terms and conditions on the provision of intrastate service
and other related regulatory requirements. In the last several years, Iowa,
Illinois, Minnesota, Wisconsin, Wyoming and North Dakota have enacted broad
changes in their telecommunications laws that authorize the entry of competitive
local exchange carriers and provide for new regulations to promote competition
in local and other intrastate telecommunications services. As a general matter,
we believe the states will play a key role in the development of local exchange
competition. Consequently, we could face regulatory decisions that adversely
affect our ability to compete in particular states.
States also regulate the intrastate carrier access services of the
incumbent local exchange carriers. We are required to pay access charges to
originate and connect our intrastate long distance traffic. We could be
adversely affected by high access charges, particularly to the extent that the
incumbent local exchange carriers do not incur the same level of costs with
respect to their own intrastate long distance services. In a related
development, states also will be developing intrastate universal service charges
parallel to the interstate charges created by the FCC. For example, some
incumbent local exchange carriers are proposing that states create funds that
would be supported by potentially large payments by firms such as McLeodUSA
based on their total intrastate revenues. Another state regulatory issue that
could adversely affect our business is the approval by some state regulatory
agencies of extended local area calling for incumbent local exchange carriers,
converting otherwise competitive intrastate toll service to local service.
States also are or will be addressing various intraLATA dialing parity issues
that may affect competition. Our business could be adversely affected by these
or other developments.
We believe that, as the degree of intrastate competition increases, states
will offer the local exchange carriers increasing pricing flexibility. This
flexibility may present the local exchange carriers with an opportunity to
subsidize services that compete with our services with revenues generated from
non-competitive services, allowing incumbent local exchange carriers to offer
competitive services at prices below the cost of providing the service. We
cannot predict the extent to which this may occur or its impact on our business.
ICTC is subject to rate of return regulation by the Illinois Commerce
Commission. Under such regulation, ICTC is allowed to earn up to a fixed rate
of return on its equity. In the event that the Illinois Commerce Commission
finds that ICTC has exceeded its authorized rate of return on equity, ICTC could
be required to lower its customer rates or make refunds. While we believe ICTC
is earning less than its authorized rate of return, we cannot assure you that
the Illinois Commerce Commission will not, at some
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future date, find that ICTC has earned more than its authorized rate of return
or that such a finding would not have a material adverse effect on us.
In addition, a substantial proportion of ICTC's and Dakota
Telecommunications' revenues are derived from access charges imposed on long
distance carriers. Access charge rate structures and rate levels have been
modified by recent regulatory changes, and further changes are possible. If
such revisions result in a reduction of ICTC's and Dakota Telecommunications'
revenues and gross margins, it could have a material adverse effect on us.
Several of our subsidiaries also hold state and federal certificates and
FCC licenses in connection with the operation of wireless telecommunications
services and paging services.
Through our wholly owned subsidiaries, we engage in various direct
marketing, telemarketing and fund-raising activities. Most states have laws
that govern these activities. In states that regulate such activities, several
types of restriction have been imposed, either singly or in combination,
including requirements to:
. register with state authorities
. post professional bonds
. file operational contracts with state authorities
. respect statutory waiting periods
. register employees with state authorities
. prohibit control over funds collected from such activities
Local Government Authorizations. We are required to obtain construction
permits and licenses or franchises to install and expand our fiber optic
communications networks using municipal rights-of-way. Some municipalities
where we have installed or anticipate constructing networks are proposing and
enacting ordinances regulating use of rights-of-way and imposing various fees in
connection with such use. In some instances we have negotiated interim
agreements to authorize installation of facilities pending resolution of the fee
issue. In many markets, the local exchange carriers do not pay rights-of-way
fees or pay fees that are substantially less than the fees we are required to
pay. To the extent that competitors do not pay the same level of fees as us, we
could be at a competitive disadvantage. We must also negotiate and enter into
franchise agreements with local governments in order to operate our video
services networks. We have franchises for our existing services, but will need
additional franchises in order to expand into additional markets. If we fail to
receive necessary permits or franchise agreements on commercially reasonable
terms or are unable to obtain or maintain right-of-way authorization or license
agreements, we could be materially adversely affected. If we lose a right-of-
way, we could be required to remove our facilities from the right-of-way or
abandon our network in place.
Risk Factors
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, set forth below are cautionary statements
identifying important factors that could cause our actual results to differ
materially from those projected in any forward-looking statements made by or on
behalf of us, whether oral or written. We wish to ensure that any forward-
looking statements are accompanied by meaningful cautionary statements in order
to maximize to the fullest extent possible the protections of the safe harbor
established in the Private Securities Litigation Reform Act of 1995.
Accordingly, any such statements are qualified in their entirety by reference
to, and are accompanied by, the following important factors that could cause our
actual results to differ materially from those projected in our forward-looking
statements.
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:
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. market conditions in the industry
. announcements and actions by competitors
. low trading volume
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. regulatory and judicial actions
. general economic conditions
See "Market for Registrants' Common Equity and Related Stockholder Matters
- --Price Range 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
. inability successfully to 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
subscribers. This has 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 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
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 shares 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, 1995, our net losses have been as follows:
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Net Losses
----------
Period Amount
------ ------
1995 $ 11.3 million
1996 $ 22.3 million
1997 $ 79.9 million
1998 $ 124.9 million
We expect to incur significant operating 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. 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 planned 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
. completing recent and pending 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, we may not be
able to expand our markets, operations, facilities, network and services through
acquisitions as we intend. See "Managements' Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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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 debt 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. See "Managements' Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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. See "Managements' Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
We Are Prohibited from Paying Dividends.
We do not anticipate paying any dividends for the foreseeable future. The
indentures governing our debt prohibit us from paying cash dividends. You
should therefore not expect to receive dividends on shares of our Class A common
stock.
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.
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U S WEST, Ameritech and Southwestern Bell 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' 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 them.
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 our 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, microwave
and satellite carriers, wireless telecommunications providers, private networks
owned by large end-users, and telecommunications management companies.
27
<PAGE>
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.
For additional information, see "--Competition."
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
See "--Proposed Wireless Services."
Competition in the Wireless Telecommunications Industry Could Make it Harder for
Us Successfully to 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. See "--
Competition--Wireless Competition."
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 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
28
<PAGE>
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. See "--Regulation--Local Government Authorizations."
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
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
For additional information, see "--Regulation."
Our Management and Principal Stockholders Can Control McLeodUSA and May Have
Different Interests Than Those of Other Stockholders.
As of December 31, 1998, Alliant Energy, MidAmerican, 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 59.4% 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 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.
29
<PAGE>
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. See "Managements'
Discussion and Analysis of Financial Condition and Results of Operations--Year
2000 Date Conversion."
Employees
As of December 31, 1998, we employed a total of 5003 full-time employees
and 570 part-time employees. We believe that our future success will depend on
our continued ability to attract and retain highly skilled and qualified
employees. We believe that our relations with our employees are good.
Item 2. Properties.
We own or lease offices and space in a number of locations, primarily for
sales offices and network equipment installations. In August 1996, we purchased
approximately 194 acres of farm land in southern Cedar Rapids, Iowa for the
development of an office complex, known as the McLeodUSA Technology Park. We
have constructed our new headquarters buildings on this site, consisting of a
one-story, 160,000 square foot office building, a two-story, 320,000 square foot
office building which also houses some of our telephone switching and computer
equipment, and a 36,000 square foot maintenance building and warehouse. The
total cost of the construction of our new headquarters buildings was
approximately $35.6 million. We also purchased approximately 120 acres of
undeveloped land adjacent to the McLeodUSA Technology Park for a purchase price
of approximately $1.4 million in August 1997. As a result of our acquisition of
CCI, we also own a 60,000 square foot office building in Mattoon, Illinois, as
well as other properties in central Illinois. We also maintain 55,000 square
feet of office space at our former headquarters in Cedar Rapids, Iowa, under a
lease expiring in March 2001. In addition, we own 88 acres of undeveloped farm
and forest land in southern Cedar Rapids, Iowa.
Item 3. Legal Proceedings.
We are not aware of any material litigation against McLeodUSA. We are
involved in numerous regulatory proceedings before various public utility
commissions and the FCC, particularly in connection with actions by the regional
Bell operating companies. For example, on February 5, 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. Under the
terms of these tariffs and other notices, U S WEST would permit us to use its
central office switches until April 2005, but would not allow us to expand to
new cities and would severely limit the number of new lines we could partition
onto U S WEST's switches in cities we serve.
We have challenged, or are challenging, this action by U S WEST in many of
the states where we do business or plan to do business. We have succeeded in
blocking this action in Iowa, Minnesota, South Dakota, North Dakota and
Colorado, although U S WEST could take further legal action in some of these
30
<PAGE>
states. In Montana, Nebraska and Idaho, however, similar challenges to this
action have not succeeded. In Wyoming and Utah, challenges to this action remain
pending.
U S WEST has introduced other measures that may make it more difficult or
expensive for us to use Centrex service. In January 1997, U S WEST proposed
interconnection surcharges in several of the states in its service region. In
February 1997, we joined other parties in filing a petition with the FCC
objecting to this proposal based on our belief that it violates several
provisions of the Telecommunications Act of 1996. The matter remains pending
before the FCC and various state public utility commissions.
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.
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 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
integrated communications services in that jurisdiction, which could have a
material adverse effect on our business, results of operations and financial
condition. See "Business--Risk Factors--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" and "Business--Risk Factors--
Actions by U S WEST May Make it More Difficult for Us to Offer Our
Communications Services."
Item 4. Submission of Matters to a Vote of Security Holders.
None.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Class A Common Stock
We completed our initial public offering of Class A common stock in June
1996, at a price per share of Class A common stock of $20.00. Our Class A common
stock has been quoted on The Nasdaq Stock Market's National Market System under
the symbol "MCLD" since June 11, 1996. Before June 11, 1996, no established
public trading market for the Class A common stock existed. The following table
sets forth for the periods indicated the high and low sales price per share of
our Class A common stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
1996 High Low
---- ------- -------
<S> <C> <C>
Second Quarter (from June 11, 1996)................................ $26.75 $22.25
Third Quarter...................................................... $39.50 $23.50
Fourth Quarter..................................................... $34.50 $25.00
1997
----
First Quarter...................................................... $28.75 $17.375
Second Quarter..................................................... $34.25 $16.375
Third Quarter...................................................... $40.00 $28.625
Fourth Quarter..................................................... $41.75 $32.00
1998
----
First Quarter...................................................... $46.375 $30.50
Second Quarter..................................................... $48.312 $38.00
Third Quarter...................................................... $40.125 $21.375
Fourth Quarter..................................................... $38.50 $15.25
</TABLE>
On March 22, 1999, the last reported sale price of our Class A common stock
on The Nasdaq Stock Market was $41.0625 per share. On March 22, 1999, there were
826 holders of record of our Class A common stock and no holders of record of
our Class B common stock, $.01 par value per share.
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 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 (including the indentures that govern the
terms of our debt) and such other factors as our board of directors may deem
relevant. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Recent Sales of Unregistered Securities
During 1998, we offered and sold the following equity securities that were
not registered under the Securities Act of 1933, as amended:
(1) On April 24, 1998, we issued an aggregate of 70,508 shares of Class A
common stock and paid approximately $1 million to the stockholders of NewCom
Technologies, Inc. and NewCom OSP Services, Inc. (collectively, "NewCom") in
exchange for all of the outstanding shares of capital stock of NewCom. The
transaction was valued at approximately $4.2 million based on the average
closing sales price of our Class A common stock on The Nasdaq Stock Market at
the time of the transaction.
(2) On June 29, 1998, we issued 151,019 shares of Class A common stock to
Communications Cable-Laying Company, Inc. ("CCC") in exchange for the assets of
CCC. The transaction was valued at approximately $6 million based on the
average closing sales price of our Class
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<PAGE>
A common stock on The Nasdaq Stock Market at the time of the transaction and
including $78,000 of cash acquisition costs.
(3) On August 21, 1998, we paid an aggregate of approximately $20 million
and issued an option to acquire 245,536 shares of Class A common stock at an
exercise price of $37.25 per share to the stockholders of QST Communications,
Inc. in exchange for all of the share of capital stock of QST.
(4) On November 25, 1998, we issued an aggregate of 70,672 shares of Class
A common stock and an option to acquire 10,414 shares of Class A common stock at
an exercise price of $34.50 per share to Inlet, Inc. in exchange for
substantially all of the assets of Inlet. The transaction was valued at
approximately $2.4 million based on the average closing sales price of our Class
A common stock on The Nasdaq Stock Market at the time of the transaction.
Each issuance of securities described above was made in reliance upon the
exemption from registration provided by Section 4(2) of the Securities Act or
Regulation D promulgated thereunder for transactions by an issuer not involving
any public offering. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for distribution in connection with such transactions. All
recipients had adequate access to information about us through their
relationship with us or through information about us made available to them.
See "Executive Compensation" for information regarding the grant of options
to purchase shares of Class A common stock to some of our employees under our
1996 Employee Stock Option Plan as partial consideration for the execution of
employment, confidentiality and non-competition agreements.
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<PAGE>
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data and
should be read in conjunction with and is qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements, the notes thereto and the
other financial data contained elsewhere in this Form 10-K.
The information in the following table reflects financial information for
the following companies we have acquired:
Acquired Company Date Acquired
---------------- -------------
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
TelecomUSA Publishing Group, Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
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 information in the table also reflects the following debt securities
that McLeodUSA has issued:
<TABLE>
<CAPTION>
Description of Debt Securities Principal Amount at Maturity Date Issued
------------------------------ ---------------------------- -----------
<S> <C> <C>
10 1/2% senior discount notes due March 1, 2007 $500 million March 4, 1997
9 1/4% senior notes due July 15, 2007 $225 million July 21, 1997
8 3/8% senior notes due March 15, 2008 $300 million March 10, 1998
9 1/2% senior notes due November 1, 2008 $300 million October 30, 1998
</TABLE>
The operations statement data and other financial data in the table reflect the
issuance of the 10 1/2% senior discount notes, the 9 1/4% senior notes, the
8 3/8% senior notes and the 9 1/2% senior notes beginning on the dates the notes
were issued. The balance sheet data in the table include the effects of these
issuances at the end of the periods presented, beginning with the period in
which they occurred.
(table begins on the next page)
34
<PAGE>
(In thousands except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue..................................... $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 604,146
-------- -------- -------- --------- ---------
Operating expenses:
Cost of service............................ 6,212 19,667 52,624 151,190 323,208
Selling, general and
administrative............................ 12,373 18,054 46,044 148,158 260,931
Depreciation and
amortization.............................. 772 1,835 8,485 33,275 89,107
Other...................................... -- -- 2,380 4,632 5,575
-------- -------- -------- --------- ---------
Total operating
Expenses.................................. 19,357 39,556 109,533 337,255 678,821
-------- -------- -------- --------- ---------
Operating loss.............................. (11,343) (10,558) (28,210) (69,369) (74,675)
Interest income (expense),
Net........................................ (73) (771) 5,369 (11,967) (52,234)
Other income............................... -- -- 495 1,426 1,997
Income taxes................................ -- -- -- -- --
-------- -------- -------- --------- ---------
Net loss.................................... $(11,416) $(11,329) $(22,346) $ (79,910) $(124,912)
======== ======== ======== ========= =========
Loss per common share....................... $ (.53) $ (.40) $ (.55) $ (1.45) $ (1.99)
======== ======== ======== ========= =========
Weighted average common
Shares outstanding......................... 21,464 28,004 40,506 54,974 62,807
======== ======== ======== ========= =========
December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ------------ ----------
Balance Sheet Data:
Current assets.............................. $ 4,862 $ 8,507 $224,401 $ 517,869 $ 793,192
Working capital (deficit)................... $ 1,659 $(1,208) $185,968 $ 378,617 $ 613,236
Property and equipment, net................. $ 4,716 $16,119 $ 92,123 $ 373,804 $ 629,746
Total assets................................ $10,687 $28,986 $452,994 $1,345,652 $1,925,197
Long-term debt.............................. $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170
Stockholders' equity........................ $ 3,291 $14,958 $403,429 $ 559,379 $ 462,806
Year Ended December 31,
------------------------------------------------------------
1994 1995 1996 1997 1998
---------- ---------- ---------- ------------ ----------
Other Financial Data:
Capital expenditures, includ-
ing business acquisitions.................... $ 3,393 $14,697 $173,782 $601,137 $339,660
EBITDA(1)..................................... $(10,571) $(8,723) $(17,345) $(31,462) $ 20,007
</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.
35
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis should be read together with our
consolidated financial statements and the notes thereto and the other financial
data appearing elsewhere in this Form 10-K.
Overview
We derive our revenue from:
. our core business of providing local, long distance and related
communications services to end users, typically in a bundled package
. the 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 and telephone equipment
sales, leasing, service and installation
. telemarketing services
. other communications services, including video, computer networking,
cellular, operator, payphone, mobile radio and paging services
We began providing traditional local telephone company services and other
communications services as a result of our acquisition of CCI in September 1997,
telephone directory advertising as a result of our acquisition of TelecomUSA
Publishing in September 1996, and telemarketing services as a result of our
acquisition of Ruffalo Cody in July 1996. The table set forth below summarizes
our percentage of revenues from these sources:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997 1998
-------- ------- -------
<S> <C> <C> <C>
Local and long distance communications services............... 51% 41% 44%
Telephone directory advertising............................... 19 30 24
Traditional local telephone company services.................. -- 6 11
Special access, private line and data services................ 13 6 7
Network maintenance and equipment services.................... 7 8 6
Telemarketing services........................................ 10 5 3
Other communications services................................. -- 4 5
---- ---- ----
100% 100% 100%
==== ==== ====
</TABLE>
We began offering local and long distance services to business customers in
January 1994. At the end of 1995, we began offering, on a test basis, long
distance services to residential customers. In June 1996, we began marketing
and providing to residential customers in Cedar Rapids, Iowa and Iowa City, Iowa
an integrated package of communications services, marketed under the name
PrimeLine(R), that includes local and long distance service, voice mail,
Internet access and travel card services. Since June 1996, we have expanded the
states in which we offer service to business customers to include Iowa,
Illinois, Indiana, Minnesota, Wisconsin, North Dakota, South Dakota, Colorado,
Missouri and Wyoming. We also expanded our PrimeLine(R) service to additional
cities in Iowa and Illinois and began offering the service to customers in North
Dakota, South Dakota, Wisconsin, Wyoming and Colorado. We plan to continue our
efforts to market and provide local, long distance and other communications
services to business customers and market our PrimeLine(R) service to
residential customers.
Our principal operating expenses consist of cost of service; selling,
general and administrative expenses ("SG&A"); and depreciation and amortization.
Cost of service primarily includes local services purchased from regional Bell
operating companies, costs to terminate the long distance calls of our customers
through long distance carriers, costs of printing and distributing telephone
directories and costs
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<PAGE>
associated with maintaining the Iowa Communications Network. The Iowa
Communications Network is a fiber optic communications network that links many
of the State of Iowa's schools, libraries and other public buildings. SG&A
consists of sales and marketing, customer service and administrative expenses,
including the costs associated with operating our communications network.
Depreciation and amortization include depreciation of our telecommunications
network and equipment; amortization of goodwill and other intangibles related to
our acquisitions, amortization expense related to the excess of estimated fair
market value in aggregate of options over the aggregate exercise price of such
options granted to some of our officers, other employees and directors; and
amortization of one-time installation costs associated with transferring
customers' local line service from the regional Bell operating companies to our
local telecommunications service.
As we expand into new markets, both cost of service and SG&A will increase.
We expect to incur cost of service and SG&A expenses before achieving
significant revenues in new markets. Fixed costs related to leasing of central
office facilities needed to provide telephone services must be incurred prior to
generating revenue in new markets, while significant levels of marketing
activity may be necessary in the new markets in order for us to build a customer
base large enough to generate sufficient revenue to offset such fixed costs and
marketing expenses.
In January and February 1996, we granted options to purchase an aggregate
of 965,166 and 688,502 shares of our Class A common stock, respectively, at an
exercise price of $2.67 per share, to some of our directors, officers and other
employees. The estimated fair market value of these options, in the aggregate,
at the date of grant was later determined to exceed the aggregate exercise price
by approximately $9.2 million. Additionally, in September 1997, we granted
options to purchase an aggregate of 1,468,945 shares of our Class A common stock
at an exercise price of $24.50 to some employees of CCI. The fair market value
of these options, in the aggregate, at the date of grant exceeded the aggregate
exercise price by approximately $15.8 million. These amounts are being
amortized on a monthly basis over the four-year vesting period of the options.
We have experienced operating losses since our inception as a result of
efforts to build our customer base, develop and construct our communications
network infrastructure, build our internal staffing, develop our systems and
expand into new markets. We expect to continue to focus on increasing our
customer base and geographic coverage and bringing our customer base onto our
communications network. Accordingly, we expect that our cost of service, SG&A
and capital expenditures will continue to increase significantly, all of which
may have a negative impact on operating results.
In addition, our projected increases in capital expenditures will continue
to generate negative cash flows from construction activities during the next
several years while we install and expand our fiber optic communications network
and develop wireless services. We may also be forced to change our pricing
policies to respond to a changing competitive environment, and we cannot assure
you that we will be able to maintain our operating margin. We cannot assure you
that growth in our revenue or customer base will continue or that we will be
able to achieve or sustain profitability or positive cash flows.
We have generated net operating losses since our inception and,
accordingly, have incurred no income tax expense. We have reduced the net
deferred tax assets generated by these losses by a valuation allowance which
offsets the net deferred tax asset due to the uncertainty of realizing the
benefit of the tax loss carry forwards. We will reduce the valuation allowance
when, based on the weight of available evidence, it is more likely than not that
some portion or all of the deferred tax assets will be realized.
Year Ended 1998 Compared with Year Ended 1997
Total revenue increased from $267.9 million for the year ended December 31,
1997 to $604.1 million for the year ended December 31, 1998, representing an
increase of $336.2 million or 125%. Revenue from the sale of local and long
distance communications services accounted for $157.4 million of this increase,
including $58.1 million contributed by CCI. Local exchange services generated by
ICTC increased by $51.7 million over 1997. Private line and data revenues
accounted for $26.7 million of increased revenues over 1997, which was primarily
attributable to the acquisition of CCI. Network maintenance and equipment
revenue increased $11.9 million over 1997 due primarily to the acquisitions of
Digital Communications of Iowa, Inc., ESI Communications, Inc., CCI and NewCom.
Other
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<PAGE>
communications revenue, which was due almost entirely to the acquisition
of CCI, represented $17.9 million of the increase in revenues. Directory
revenues increased $63.8 million from 1997 to 1998 due to revenues from new
directories acquired in 1998 and the acquisition of CCI. The $6.8 million
increase in telemarketing revenues from 1997 to 1998 was due almost entirely to
the acquisition of CCI.
Cost of service increased from $151.2 million for 1997 to $323.2 million
for 1998, representing an increase of $172.0 million or 114%. This increase in
cost of service was due primarily to the growth in our local and long distance
communications services and to the acquisitions of Digital Communications, ESI
Communications, CCI, CCC and NewCom, which contributed an aggregate of
$109.7 million to the increase. Cost of service as a percentage of revenue
decreased from 56% for 1997 to 53% for 1998, as a result of these acquisitions
and as a result of reductions in the cost of providing local and long distance
services as a percentage of local and long distance communications revenue,
which decreased from 84% in 1997 to 70% in 1998. This decrease was primarily due
to the realization of benefits associated with new wholesale line cost rate
agreements with the regional Bell operating companies and reduced long distance
costs resulting from migration of over 60% of customer long distance traffic to
our fiber optic communications network.
SG&A increased from $148.2 million for the year ended December 31, 1997
to $260.9 million for the year ended December 31, 1998, an increase of
$112.7 million or 76%. The acquisitions of Digital Communications, ESI
Communications, CCI, CCC, NewCom and Inlet contributed an aggregate of
$61.9 million to the increase. Also contributing to this increase were increased
costs of $50.8 million primarily related to expansion of selling, customer
support and administration activities to support our growth.
Depreciation and amortization expenses increased from $33.3 million for the
year ended December 31, 1997 to $89.1 million for the year ended December 31,
1998, representing an increase of $55.8 million or 168%. This increase consisted
of $38.1 million related to the acquisitions of Digital Communications, ESI
Communications, CCI, CCC, NewCom and Inlet, and $17.7 million due primarily to
the growth of our communications network.
Other operating expenses represented the amortization of capitalized costs
associated with CCD directories in progress at the time we acquired CCI.
Interest income increased from $22.7 million for the year ended December
31, 1997, to $26 million in 1998. This increase resulted from increased earnings
on investments made with the remaining proceeds from our debt offerings in March
and July 1997 and the proceeds from our offerings of 8 3/8% senior notes and
9 1/2% senior notes in March and October 1998, respectively.
Gross interest expense increased from $39.0 million for the year ended
December 31, 1997 to $88.9 million in 1998. This increase was primarily a result
of an increase in the accretion of interest on our 10 1/2% senior discount notes
of $8.4 million and an increase of interest of $36 million as the result of the
issuance of our 9 1/4% senior notes, 8 3/8% senior notes and 9 1/2% senior
notes. Interest expense of approximately $8 million and $4.4 million was
capitalized as part of our construction of fiber optic communications network
during 1998 and 1997, respectively. In addition, interest expense of
approximately $2.6 million was capitalized as part of our operating facilities
building construction and our software development in 1998, with no
corresponding amount in 1997.
Net loss increased from $79.9 million for the year ended December 31,
1997 to $124.9 million for the year ended December 31, 1998, an increase of
$45 million. This increase resulted primarily from the following three factors:
. the expansion of our local and long distance services, which requires
significant expenditures, a substantial portion of which is incurred
before the realization of revenues
. the increased depreciation expense related to the construction and
expansion of our communications networks and amortization of
intangibles related to acquisitions
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. net interest expense on indebtedness to fund market expansion, network
development and acquisitions
Year Ended 1997 Compared with Year Ended 1996
Revenue was $267.9 million for the year ended December 31, 1997, an
increase of $186.6 million or 229% from $81.3 million for 1996. This increase
was due to the many acquisitions completed in 1997 and 1996 as well as the
increase in local and long distance customers. Revenue from the sale of local
and long distance communications services accounted for $68.6 million of the
increase, including $23.1 million contributed by CCI from September 25, 1997 to
December 31, 1997. Local exchange services represented $16.1 million for the
period from September 25, 1997 to December 31, 1997, for which there were no
corresponding 1996 revenues. Private line and data revenues accounted for
$6.9 million of increased revenues over 1996 which was primarily attributable to
the acquisition of CCI. Network maintenance and equipment revenue increased
$15.0 million over 1996 due to the acquisitions of Digital Communications, ESI
Communications and CCI. Other communications revenue, which was due entirely to
the acquisition of CCI, represented $9.9 million of 1997 revenues with no
corresponding 1996 amount. Directory revenues increased $65.9 million from 1996
to 1997 and were due to a full year of TelecomUSA Publishing revenues in 1997
and the acquisition of CCI on September 24, 1997. The increase in telemarketing
revenues from 1996 to 1997 of $4.1 million was due almost entirely to the
acquisition of CCI.
Cost of service increased from $52.6 million for the year ended
December 31, 1996 to $151.2 million for the year ended December 31, 1997,
representing an increase of $98.6 million or 187%. This increase in cost of
service was due primarily to the growth in our local and long distance
communications services and to the acquisitions of Ruffalo Cody, TelecomUSA
Publishing, Digital Communications, ESI Communications and CCI, which
contributed an aggregate of $62.2 million to the increase. Cost of service as a
percentage of revenue decreased from 65% for the year ended December 31, 1996 to
58% for the year ended December 31, 1997, primarily as a result of the effect of
these acquisitions. The cost of providing local and long distance services as a
percentage of local and long distance communications revenue increased from 70%
for the year ended December 31, 1996 to 73% for the year ended December 31,
1997, primarily as a result of increased line costs associated with our
accelerated expansion into new markets.
SG&A increased from $46 million for the year ended December 31, 1996 to
$148.2 million for the year ended December 31, 1997, an increase of
$102.2 million or 222%. The acquisitions of Ruffalo Cody, TelecomUSA Publishing,
Digital Communications, ESI Communications and CCI contributed an aggregate of
$54.3 million to the increase. Also contributing to this increase were increased
costs of $43.6 million primarily related to expansion of selling, customer
support and administration activities to support our growth.
Depreciation and amortization expenses increased from $8.5 million for the
year ended December 31, 1996 to $33.3 million for the year ended December 31,
1997, representing an increase of $24.8 million or 292%. The increase was
primarily due to $14.3 million related to the acquisitions of Ruffalo Cody,
TelecomUSA Publishing, Digital Communications, ESI Communications and CCI, and
$3.8 million due primarily to the growth of our network in 1997.
Other operating expenses in 1997 represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
TelecomUSA Publishing and CCI directories in progress at the time of the
acquisitions.
Interest income increased from $6 million for the year ended December 31,
1996 to $22.7 million for the year ended December 31, 1997. This increase
resulted from increased earnings on investments made with a portion of the
proceeds from our offerings of Class A common stock in June and November 1996
and from our private offerings of 10 1/2% senior discount notes and 9 1/4%
senior notes in March 1997 and July 1997, respectively.
Gross interest expense increased from $869,000 for the year ended
December 31, 1996 to $39.0 million for the year ended December 31, 1997. This
increase was primarily a result of accretion of
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interest on the 10 1/2% senior discount notes of $26.8 million and accrual of
interest on the 9 1/4% senior notes of $9.5 million. Interest expense of
approximately $4.4 million and $204,000 was capitalized as part of our
construction of fiber optic network during the years ended December 31, 1997
and 1996, respectively.
Net loss increased from $22.3 million for the year ended December 31,
1996 to $79.9 million for the year ended December 31, 1997, an increase of
$57.6 million. This increase resulted primarily from the following three
factors:
. the construction and expansion of our communications network which
require significant expenditures, a substantial portion of which is
incurred before the realization of revenues
. the increased depreciation expense related to those networks and
amortization of intangibles related to acquisitions
. net interest expense on indebtedness to fund market expansion, network
development and acquisitions
Operating loss before depreciation, amortization and other non-recurring
operating expenses increased from a negative $17.3 million for the year ended
December 31, 1996 to a negative $31.5 million for the year ended December 31,
1997, an increase of $14.2 million. The change reflected the increase in the
operating loss incurred in 1997 due primarily to the expansion of our local,
long distance and other communications services as described above.
Year Ended 1996 Compared with Year Ended 1995
Revenue increased from $29 million for the year ended December 31, 1995 to
$81.3 million for the year ended December 31, 1996, representing an increase of
$52.3 million or 180%. Revenue from the sale of local and long distance
communications services accounted for $19.9 million of this increase. Included
in the year ended December 31, 1996 revenue was $8.6 million of revenue from
Ruffalo Cody, which was acquired on July 15, 1996, and $15.1 million in revenue
from TelecomUSA Publishing, which was acquired on September 20, 1996. Excluding
these acquisitions, 1996 revenue would have been $57.6 million.
Cost of service increased from $19.7 million for the year ended
December 31, 1995 to $52.6 million for the year ended December 31, 1996, an
increase of $32.9 million or 168%. This increase in cost of service was due
primarily to the growth in our local and long distance communications services
and to the acquisitions of Ruffalo Cody and TelecomUSA Publishing, which
contributed $4.5 million and $6.7 million, respectively, to the increase. Cost
of service as a percentage of revenue decreased from 68% to 65%, primarily as a
result of the effect of these acquisitions. The cost of providing local and long
distance services as a percentage of local and long distance communications
revenue increased from 68% for the year ended December 31, 1995 to 70% for the
year ended December 31, 1996, primarily as a result of an increased number of
higher volume, price-sensitive customers and increased local line costs
associated with expansion into new markets.
SG&A increased from $18.1 million for the year ended December 31, 1995 to
$46 million for the year ended December 31, 1996, an increase of $27.9 million
or 155%. The acquisitions of Ruffalo Cody and TelecomUSA Publishing contributed
$3.3 million and $7.3 million, respectively, to the increase. Increased costs
of $17.3 million related to expansion of selling, customer support and
administration activities to support our growth also contributed to this
increase.
Depreciation and amortization expenses increased from $1.8 million for the
year ended December 31, 1995 to $8.5 million for the year ended December 31,
1996, an increase of $6.7 million or 362%. This increase consisted of
$2.1 million related to the acquisitions of Ruffalo Cody and TelecomUSA
Publishing; amortization expense of $2 million related to the excess of
estimated aggregate fair market value of options over the aggregate exercise
price of such options granted to some of our officers, other employees, and
directors; and $2.6 million due primarily to the growth of our network in 1996.
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Other operating expense in 1996 represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
directories in progress at the time we acquired TelecomUSA Publishing.
We had net interest income of $5.4 million for the year ended December 31,
1996 compared to net interest expense of $771,000 for the year ended
December 31, 1995 as a result of earnings on investments made with a portion of
the proceeds of our public offerings of Class A common stock during 1996 and
decreased interest expense on reduced borrowings as a result of our repayment of
all amounts outstanding under a bank credit facility maintained by McLeodUSA
from May 1994 until June 1996 with a portion of the net proceeds from our
initial public offering of Class A common stock. We also had other non-operating
income of $495,000 for the year ended December 31, 1996.
Net loss increased from $11.3 million for the year ended December 31,
1995 to $22.3 million for the year ended December 31, 1996, an increase of
$11 million. This increase resulted primarily from the expansion of the local
and long distance businesses, amortization and other operating expenses related
to the acquisitions of Ruffalo Cody and TelecomUSA Publishing and amortization
expense related to stock options granted to some of our officers, other
employees and directors. The development of our business and the construction
and expansion of our communications network require significant expenditures, a
substantial portion of which is incurred before the realization of revenues.
Operating loss before depreciation, amortization and other non-recurring
operating expenses increased from a negative $8.7 million for the year ended
December 31, 1995 to a negative $17.3 million for the year ended December 31,
1996, an increase of $8.6 million. The change reflected the increase in the
operating loss incurred in 1996 due primarily to the expansion of our local,
long distance and other communications services and the factors described above.
Liquidity and Capital Resources
Our total assets increased from $1.3 billion at December 31, 1997 to $1.9
billion at December 31, 1998, primarily due to the net proceeds of approximately
$583.8 million from our private offerings of 8 3/8% senior notes and 9 1/2%
senior notes in March 1998 and October 1998, respectively. At December 31, 1998,
our current assets of $793.2 million exceeded our current liabilities of $180.0
million, providing working capital of $613.2 million, which represents an
increase of $234.6 million compared to December 31, 1997, primarily attributable
to the net proceeds from our private offerings of 8 3/8% senior notes and 9 1/2%
senior notes. At December 31, 1997, our current assets of $517.9 million
exceeded current liabilities of $139.3 million, providing working capital of
$378.6 million.
Net cash used in operating activities totaled $22.5 million for the year
ended December 31, 1998 and $8.8 million for the year ended December 31, 1997.
During the year ended December 31, 1998, cash for operating activities was used
primarily to fund our net loss of $124.9 million for such period. As a result
of the expansion of our local and long distance communications services, we also
required cash to fund:
. growth in trade receivables of $6.4 million
. growth in inventory of $8.2 million
. prepaid and other expenses of $34.3 million
. deferred line installation costs of $13.6 million
These amounts were partially offset by:
. increases in accounts payable and accrued expenses of $32.2 million
. increases in deferred revenue of $4.6 million
. increases in customer deposits of $4.1 million
. cumulative non-cash expenses of $123.2 million
During the year ended December 31, 1997, cash for operating activities was
used primarily to fund our net loss of $79.9 million for such period. We also
required cash to fund the growth in accounts receivable and deferred line
installation costs of $15.9 million and $9.7 million, respectively, offset by
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increases in accounts payable and accrued expenses of $27.1 million, deferred
revenues of $7.2 million, customer deposits of $3 million and cumulative non-
cash expenses of $60 million.
Net cash used in investing activities totaled $424.0 million during the
year ended December 31, 1998 and $242.8 million during the year ended
December 31, 1997. The expansion of our local and long distance communications
services, development and construction of our fiber optic communications
networks and other capital expenditures resulted in purchases of equipment and
fiber optic cable and other property and equipment totaling $289.9 million and
$151.3 million during the years ended December 31, 1998 and 1997, respectively.
We also used cash of $607.4 million to acquire available-for-sale securities
during the year ended December 31, 1998, offset by proceeds from sales and
maturities of available-for-sale securities of $506.4 million during the period.
During the year ended December 31, 1997, the cash used in investing activities
was partially offset by net proceeds of $120.2 million from the sales and
maturities of available-for-sale securities.
During the year ended December 31, 1998, we used an aggregate of
$27.8 million cash to acquire:
. directories from F.D.S.D. Rapid City Directories, Inc. in March 1998
. directories from Bi-Rite Directories, Inc. in March 1998
. directories from Smart Pages, Inc. and Yellow Pages Publishers, Inc.
in April 1998
. directories from ADCO Publishing Co., Inc. in September 1998
. directories from River Directories, Inc. in November 1998
. directories from Mo-Ark Directories, Inc. in December 1998
. the capital stock of NewCom in April 1998
. the assets of CCC in June 1998
. the capital stock of QST in August 1998
. the assets of Inlet in November 1998
During the year ended December 31, 1997, we used an aggregate of $181.9
million cash to acquire:
. the assets of ESI Communications in June 1997
. directories from Fronteer Financial Holdings, Inc. in February 1997
. directories from Indiana Directories, Inc. in March 1997
. directories from Smart Pages, Inc. and Yellow Pages Publishers, Inc.
in September 1997
. the capital stock of CCI in September 1997
In 1997, the FCC awarded us 26 "D" and "E" block frequency PCS licenses and
in September 1997 we acquired CCI and its "E" block frequency PCS license,
giving us a total of 27 PCS licenses in 25 markets covering areas of Iowa,
Illinois, Minnesota, Nebraska and South Dakota. During 1996 and 1997, we paid
an aggregate of approximately $32.8 million for the 26 PCS licenses awarded to
us by the FCC.
Net cash received from financing activities was $569.6 million during the
year ended December 31, 1998, primarily as a result of our private offerings of
8 3/8% senior notes in March 1998 and 9 1/2% senior notes in October 1998. Net
cash received from financing activities during the year ended December 31, 1997
was $487 million and was primarily obtained from our private offerings of 10
1/2% senior discount notes in March 1997 and 9 1/4% senior notes in July 1997.
1998 Financings. On March 16, 1998, we completed a private offering of $300
million aggregate principal amount of our 8 3/8% senior notes in which we
received net proceeds of approximately $291.9 million. Interest on the 8 3/8%
senior notes accrues at the rate of 8 3/8% per annum and is payable in cash
semi-annually in arrears on March 15 and September 15, starting September 15,
1998. The 8 3/8% senior notes are redeemable at our option, in whole or in
part, at any time on or after March 15, 2003 at 104.188% of their principal
amount at maturity, plus accrued and unpaid interest, declining to 100.000% of
their principal amount at maturity, plus accrued and unpaid interest, on or
after March 15, 2006. In the event of specified equity investments in McLeodUSA
by specified strategic investors on or before March 15, 2001, we may, at our
option, use all or a portion of the net proceeds from such sale to redeem up to
33 1/3% of the
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original principal amount of the 8 3/8% senior notes at a redemption price equal
to 108.375% of their principal amount plus accrued and unpaid interest, if any,
to but excluding the redemption date, provided that at least 66 2/3% of the
original principal amount of the 8 3/8% senior notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event of
a "Change of Control" (as defined in the indenture governing the 8 3/8% senior
notes) of McLeodUSA, each holder of 8 3/8% senior notes will have the right to
require us to repurchase all or any part of such holder's 8 3/8% senior notes at
a purchase price equal to 101% of the principal amount of the 8 3/8% senior
notes tendered by such holder plus accrued and unpaid interest, if any, to any
"Change of Control Payment Date" (as defined in the indenture governing the 8
3/8% senior notes). The 8 3/8% senior notes will mature on March 15, 2008.
On October 30, 1998, we completed a private offering of $300 million
aggregate principal amount of our 9 1/2% senior notes in which we received net
proceeds of approximately $291.9 million. Interest on the 9 1/2% senior notes
accrues at the rate of 9 1/2% per annum and is payable in cash semi-annually in
arrears on November 1 and May 1, starting May 1, 1999. The 9 1/2% senior notes
are redeemable at our option, in whole or in part, at any time on or after
November 1, 2003 at 106.75% of their principal amount at maturity, plus accrued
and unpaid interest, declining to 100.000% of their principal amount at
maturity, plus accrued and unpaid interest, on or after November 1, 2008. In the
event of specified equity investments in McLeodUSA by specified strategic
investors on or before November 1, 2001, we may, at our option, use all or a
portion of the net proceeds from such sale to redeem up to 33 1/3% of the
original principal amount of the 9 1/2% senior notes at a redemption price equal
to 111.5% of their principal amount plus accrued and unpaid interest, if any, to
but excluding the redemption date, provided that at least 66 2/3% of the
original principal amount of the 9 1/2% senior notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event of
a "Change of Control" (as defined in the indenture governing the 9 1/2% senior
notes) of McLeodUSA, each holder of 9 1/2% senior notes will have the right to
require us to repurchase all or any part of such holder's 9 1/2% senior notes at
a purchase price equal to 101% of the principal amount of the 9 1/2% senior
notes tendered by such holder plus accrued and unpaid interest, if any, to any
"Change of Control Payment Date" (as defined in the indenture governing the 9
1/2% senior notes). The 9 1/2% senior notes will mature on November 1, 2008.
1997 Financings. On March 4, 1997, we completed a private offering of $500
million aggregate principal amount at maturity of our 10 1/2% senior discount
notes. The 10 1/2% senior discount notes were issued with an original issue
discount in which we received approximately $288.9 million in net proceeds. The
10 1/2% senior discount notes accrete from March 4, 1997 at a rate of 10 1/2%
per year, compounded semi-annually to an aggregate principal amount of $500
million by March 1, 2002. As of December 31, 1998, the accreted balance of the
10 1/2% senior discount notes was $361.9 million. Interest will not accrue on
the 10 1/2% senior discount notes before March 1, 2002. Thereafter, interest
will accrue at a rate of 10 1/2% per annum and will be payable in cash semi-
annually in arrears on March 1 and September 1 of each year, starting September
1, 2002. The 10 1/2% senior discount notes are redeemable, at our option, in
whole or in part, at any time on or after March 1, 2002, at 105.25% of their
principal amount at maturity, plus accrued and unpaid interest, declining to
100% of their principal amount at maturity, plus accrued and unpaid interest, on
or after March 1, 2005. In the event of specified equity investments in
McLeodUSA by specified strategic investors on or before March 1, 2000, we may,
at our option, use all or a portion of the net proceeds therefrom to redeem up
to a maximum of 33 1/3% of the original principal amount of the 10 1/2% senior
discount notes at a redemption price of 110.5% of their accreted value, provided
that at least 66 2/3% of the original principal amount of the 10 1/2% senior
discount notes would remain outstanding after giving effect to such redemption.
In addition, in the event of a "Change of Control" (as defined in the indenture
governing the 10 1/2% senior discount notes) of McLeodUSA, each holder of 10
1/2% senior discount notes will have the right to require us to repurchase all
or any part of such holder's 10 1/2% senior discount notes at a purchase price
equal to 101% of the accreted value thereof prior to March 1, 2002, or 101% of
the principal amount thereof plus accrued and unpaid interest, if any, on or
after March 1, 2002. The 10 1/2% senior discount notes will mature on March 1,
2007.
On July 21, 1997, we completed a private offering of $225 million aggregate
principal amount of our 9 1/4% senior notes in which we received net proceeds of
approximately $217.6 million. Interest on the 9 1/4% senior notes accrues at
the rate of 9 1/4% per annum and is payable in cash semi-annually in arrears on
July 15 and January 15, starting January 15, 1998. The 9 1/4% senior notes are
redeemable at our option, in whole or in part, at any time on or after July 15,
2002 at 104.625% of their principal amount at
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maturity, plus accrued and unpaid interest, declining to 100.000% of their
principal amount at maturity, plus accrued and unpaid interest, on or after July
15, 2005. In the event of specified equity investments in McLeodUSA by specified
strategic investors on or before July 15, 2000, we may, at our option, use all
or a portion of the net proceeds from such sale to redeem up to 33 1/3% of the
original principal amount of the 9 1/4% senior notes at a redemption price equal
to 109.25% of their principal amount plus accrued and unpaid interest, if any,
to but excluding the redemption date, provided that at least 66 2/3% of the
original principal amount of the 9 1/4% senior notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event of
a "Change of Control" (as defined in the indenture governing the 9 1/4% senior
notes) of McLeodUSA, each holder of 9 1/4% senior notes will have the right to
require us to repurchase all or any part of such holder's 9 1/4% senior notes at
a purchase price equal to 101% of the principal amount of the 9 1/4% senior
notes tendered by such holder plus accrued and unpaid interest, if any, to any
"Change of Control Payment Date" (as defined in the indenture governing the 9
1/4% senior notes). The 9 1/4% senior notes will mature on July 15, 2007.
Recent Events. On February 10, 1999, we acquired Talking Directories for
an aggregate of 2,556,390 shares of our Class A common stock. In a related and
concurrent transaction, on February 10, 1999, we also acquired Info America for
an aggregate of 1,203,007 shares of our Class A common stock. We paid
approximately $27 million of the outstanding obligations of Talking Directories
and Info America at the time of these transactions.
On March 5, 1999, we acquired Dakota Telecommunications for an aggregate of
1,375,000 shares of our Class A common stock and the assumption of $31 million
in debt.
On January 7, 1999, we entered into the Ovation merger agreement with
Ovation and several stockholders of Ovation to acquire Ovation, subject to
several conditions, for an amount of cash and a number of shares of Class A
common stock to be determined immediately prior to consummation of the
transaction. We estimate that we will be required to issue approximately
5.1 million shares of our Class A common stock and to pay approximately
$141 million cash to effect the Ovation merger. We will also assume
approximately $95 million in Ovation debt. Consummation of the Ovation merger is
subject to the satisfaction of several conditions, including receipt of
specified regulatory approvals and other customary conditions. We cannot assure
you that the Ovation merger will be consummated.
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 are redeemable at our option, in whole or in part, at any time on
or after February 15, 2004 at 104.063% of their principal amount at maturity,
plus accrued and unpaid interest, declining to 100.000% of their principal
amount at maturity,plus accrued and unpaid interest, on or after February 15,
2007. In the event of specified equity investments in McLeodUSA by specified
strategic investors on or before February 15, 2002, we may, at our option, use
all or a portion of the net proceeds from such sale to redeem up to 33 1/3% of
the original principal amount of the 8 1/8% senior notes at a redemption price
equal to 108.125% of their principal amount plus accrued and unpaid interest,
if any, to but excluding the redemption date, provided that at least 66 2/3%
of the original principal amount of the 8 1/8% senior notes would remain
outstanding immediately after giving effect to such redemption. In addition,
in the event of a "Change of Control" (as defined in the indenture governing
the 8 1/8% senior notes) of McLeodUSA, each holder of 8 1/8% senior notes will
have the right to require us to repurchase all or any part of such holder's
8 1/8% senior notes at a purchase price equal to 101% of the principal amount
of the 8 1/8% senior notes tendered by such holder plus accrued and unpaid
interest, if any, to any "Change of Control Payment Date" (as defined in the
indenture governing the 8 1/8% senior notes). The 8 1/8% senior notes will
mature on February 15, 2009.
Our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior
notes, 9 1/2% senior notes and 8 1/8% senior notes are senior unsecured
obligations of McLeodUSA ranking pari passu in right of payment with all other
existing and future senior unsecured obligations of McLeodUSA and senior to all
existing and future subordinated debt of McLeodUSA. The 10 1/2% senior discount
notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8%
senior notes are effectively subordinated to all existing and future secured
indebtedness of McLeodUSA and our subsidiaries to the extent of the value of the
assets
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securing such indebtedness. The 10 1/2% senior discount notes, 9 1/4% senior
notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes also are
effectively subordinated to all existing and future third-party indebtedness and
other liabilities of our subsidiaries.
The indentures governing our 10 1/2% senior discount notes, 9 1/4% senior
notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes impose
operating and financial restrictions on us and our subsidiaries. These
restrictions affect, and in many cases significantly limit or prohibit, among
other things, our and our subsidiaries' ability to:
. incur additional indebtedness
. pay dividends or make distributions in respect of our or our
subsidiaries' capital stock
. redeem capital stock
. make other restricted payments
. enter into sale and leaseback transactions
. create liens upon assets
. enter into transactions with affiliates or related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
We cannot assure you that such covenants will not adversely affect our ability
to finance our future operations or capital needs or to engage in other business
activities that may be in our interests.
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. Failure to generate or raise sufficient
funds may require us to delay or abandon some of our expansion plans or
expenditures, which could have a material adverse effect on our business,
results of operations or financial condition.
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. Our estimated aggregate capital
requirements include the projected costs of:
. building our fiber optic communications network, including intra-city
fiber optic communications networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. completing recent and pending acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
The estimated costs and incremental capital needs associated with the
acquisitions of Talking Directories, Info America, Dakota Telecommunications and
Ovation are included in our estimated aggregate capital requirements.
We expect to use the following to address our capital needs:
. approximately $487.8 million in net proceeds from our offering of 8
1/8% senior notes
. approximately $591.7 million of cash and investments on hand at
December 31, 1998
. additional issuances of debt or equity securities
. projected operating cash flow
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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. Accordingly, we may need additional
capital to continue to expand our markets, operations, facilities, network and
services.
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.
We have received a non-binding commitment from The Chase Manhattan Bank to
lead a syndication to provide a senior secured revolving credit facility. We
cannot assure you, however, that we will be successful in obtaining such credit
facility on acceptable terms or at all.
Failure to generate or raise sufficient funds may require us to delay or
abandon some of our expansion plans or expenditures, which could have a material
adverse effect on our business, results of operations or financial condition.
See "Business--Risk Factors--Failure to Raise Necessary Capital Could Restrict
Our Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions."
Market Risk
At December 31, 1998, we recorded the marketable equity securities that we
hold at a fair value of $30.6 million. These securities have exposure to price
risk. A hypothetical ten percent adverse change in quoted market prices would
amount to a decrease in the recorded value of investments of approximately
$3 million. We believe our exposure to market price fluctuations on all other
investments is nominal due to the short-term nature of our investment portfolio.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of our
long-term debt obligations are fixed rate obligations.
Year 2000 Date Conversion
We are currently verifying system readiness for the processing of date-
sensitive information by our computerized information systems. The Year 2000
problem impacts computer programs and hardware timers using two digits (rather
than four) to define the applicable year. Some of our programs and timers that
have time-sensitive functions may recognize a date using "00" as the year 1900
rather than 2000, which could result in miscalculations or system failures.
We are reviewing our IT and non-IT computer systems and programs to
determine which are not capable of recognizing the Year 2000 and to verify
system readiness for the millennium date. The review covers all of our
operations and is centrally managed. The review includes:
1. increasing employee awareness and communication of Year 2000 issues
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2. inventorying hardware, software and data interfaces and confirming
Year 2000 readiness of key vendors
3. identifying mission-critical components for internal systems, vendor
relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. testing and verifying systems
7. remediating any identified problems by correcting or replacing systems
or components
8. implementing the remediation plan
9. developing contingency plans
10. training for contingency plans
We have completed more than 95% of the activities required for the first
three of these steps, more than 75% of the activities required for the fourth
and fifth steps, more than 30% of the activities required for the sixth and
seventh steps and more than 20% of the activities required for the eighth step.
We are in the initial stages of performing the activities required to complete
the remaining steps and have begun to develop contingency plans to handle our
most reasonably likely worst case Year 2000 scenarios. The completion
percentages do not include information for pending or recently completed
acquisitions. The review and related Year 2000 activities have not caused us to
defer or forego, to any material degree, any other critical IT project.
We estimate that our Year 2000 readiness costs will not exceed
$11.5 million. We generally expense these costs as incurred. As of February 28,
1999, we had incurred costs of $2.3 million in connection with our Year 2000
readiness activities.
Our estimate of our Year 2000 readiness costs is a forward-looking
statement within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Costs, results, performance and
effects of Year 2000 activities described in those forward-looking statements
may differ materially from actual costs, results, performance and effects in the
future due to the interrelationship and interdependence of our computer systems
and those of our vendors, material service providers, customers and other third
parties.
We have not yet fully identified our most reasonably likely worst case Year
2000 scenarios. We continue to contact our vendors, suppliers and third parties
with which we have material relationships, regarding their state of readiness.
This activity is focused primarily on mission critical systems and key business
suppliers. U S WEST, Ameritech and Southwestern Bell are our primary suppliers
of local central office switching and local lines. Until we have received and
analyzed substantial responses from them we will have difficulty determining our
worst case scenarios.
We have begun to develop contingency plans to handle worst case scenarios,
to the extent they can be identified fully. We intend to complete our
contingency planning after completing our determination of worst case scenarios.
Completion of these activities depends upon the responses to the inquiries we
have made of our major vendors, material service providers and third parties
with which we have material relationships. We have also begun work on
contingency plans for some systems identified as critical to our operations.
If we, our major vendors, our material service providers or our customers
fail to address Year 2000 issues in a timely manner, such failure could have a
material adverse effect on our business, results of operations and financial
condition. We depend on local exchange carriers, 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, such interference could have a material adverse effect on our
future operations. If other telecommunications carriers are unable to resolve
Year 2000 issues, it is likely that we will be affected to a similar degree as
others in the telecommunications industry.
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Effects of New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for the costs of computer software developed or obtained for internal
use and is required to be adopted no later than our 1999 fiscal year. We plan
to modify our method of capitalization of such costs by adopting this statement
prospectively on January 1, 1999. We are currently evaluating this statement
but do not expect it to have a material impact on our financial condition or
results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"). SFAS 133 establishes accounting and reporting standards requiring
that every derivative instrument (including derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS 133 as of the beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be
applied to (a) derivative instruments and (b) derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
We do not expect the impact of the adoption of SFAS 133 to be material to
our results of operations as we do not currently hold any derivative instruments
or engage in hedging activities.
Inflation
We do not believe that inflation has had a significant impact on our
consolidated operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
At December 31, 1998, we recorded the marketable equity securities that we
hold at a fair value of $30.6 million. These securities have exposure to price
risk. A hypothetical ten percent adverse change in quoted market prices would
amount to a decrease in the recorded value of investments of approximately
$3 million. We believe our exposure to market price fluctuations on all other
investments is nominal due to the short-term nature of our investment portfolio.
We have no material future earnings or cash flow exposures from changes in
interest rates on our long-term debt obligations, as substantially all of our
long-term debt obligations are fixed rate obligations.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements, including our consolidated balance
sheets as of December 31, 1998 and 1997, consolidated statements of operations
for the years ended December 31, 1998, 1997 and 1996, consolidated statements of
stockholders' equity for the years ended December 31, 1998, 1997 and 1996,
consolidated statements of cash flows for the years ended December 31, 1998,
1997 and 1996, and notes to our consolidated financial statements, together with
a report thereon of Arthur Andersen LLP, dated January 27, 1999, are attached
hereto as pages F-2 through F-31.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
On March 27, 1997, we engaged the accounting firm of Arthur Andersen LLP as
our principal independent accountants, to replace McGladrey & Pullen, LLP, our
former independent accountants,
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effective with such engagement. The decision to change independent accountants
was made following a review of competitive proposals submitted by Arthur
Andersen LLP and two other major public accounting firms, and was recommended by
the audit committee of our board of directors and approved by our board of
directors. McGladrey & Pullen, LLP did not resign and did not decline to stand
for re-election.
During the fiscal years ended December 31, 1996 and 1995, and the interim
period between December 31, 1996 and March 27, 1997, there were no disagreements
with McGladrey & Pullen, LLP on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure which
would have caused McGladrey & Pullen, LLP to make reference in their report to
such disagreements if not resolved to their satisfaction.
McGladrey & Pullen, LLP's reports on the financial statements of McLeodUSA
for the fiscal years ended December 31, 1996 and 1995 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
We provided McGladrey & Pullen, LLP with a copy of this disclosure and
requested that McGladrey & Pullen, LLP furnish us with a letter addressed to the
Securities and Exchange Commission stating whether it agrees with the above
statements. (A copy of the McGladrey & Pullen, LLP letter addressed to the SEC
is filed as Exhibit 16.1 to this Form 10-K).
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PART III
Item 10. Directors and Executive Officers of the Registrant.
Our Directors and Executive Officers
The following is a list of our directors and executive officers as of
December 31, 1998. Our board of directors currently consists of nine directors,
divided into three classes serving staggered three-year terms, with one-third
elected at each annual stockholders meeting. Our executive officers generally
are appointed for one-year terms by our board of directors at their first
meeting after our annual stockholders meeting. Our directors and executive
officers serve until their terms expire and their successors are elected and
qualified, or until they resign or are removed or disqualified to serve. The
ages of the persons set forth below are as of December 31, 1998.
<TABLE>
<CAPTION>
Term as
Name Age Position(s) with Company Director Expires
- ------------------------------ --- ------------------------------------------------------------- ----------------
<S> <C> <C> <C>
Clark E. McLeod............... 52 Chairman, Chief Executive Officer and Director 2000
Richard A. Lumpkin............ 63 Vice Chairman and Director 2001
Stephen C. Gray............... 40 President, Chief Operating Officer and Director 1999
Blake O. Fisher, Jr........... 54 Group Vice President, Regional President--Iowa and Minnesota 2000
and Director
J. Lyle Patrick............... 46 Group Vice President--Finance and Accounting and Chief
Financial and Accounting Officer
Arthur L. Christoffersen...... 52 Group Vice President--Publishing Services
Kirk E. Kaalberg.............. 39 Group Vice President--Network Services
Stephen K. Brandenburg........ 46 Group Vice President--Intelligent Technologies and Systems
and Chief Information Officer
David M. Boatner.............. 50 Group Vice President and Regional President--Colorado,
Wyoming, North Dakota and South Dakota
Albert P. Ruffalo............. 52 Group Vice President--Human Resources, Training and Direct
Marketing
Dennis L. Erickson............ 52 Group Vice President and Regional President--Indiana,
Illinois and Wisconsin
Steven J. Shirar.............. 40 Group Vice President and Regional President--Missouri
Michael J. Brown.............. 41 Group Vice President--Customer Support
Randall Rings................. 36 Vice President, General Counsel and Secretary
Thomas M. Collins(1)(2)....... 71 Director 2001
Robert J. Currey.............. 53 Director 1999
Lee Liu(2).................... 65 Director 2000
Paul D. Rhines(2)............. 55 Director 1999
Ronald W. Stepien(1).......... 52 Director 2001
</TABLE>
- -------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Biographical summaries of the experience and principal occupations for the
past five years of each of our directors and executive officers are set out
below.
Clark E. McLeod. Mr. McLeod founded McLeodUSA and has served as Chairman,
Chief Executive Officer and a director since our inception in June 1991. His
previous business venture, Teleconnect Company, an Iowa-based long distance
telecommunications company, was founded in January 1980. Mr. McLeod served as
Chairman and Chief Executive Officer of Teleconnect from January 1980 to
December 1988, and from December 1988 to August 1990, he served as President of
TelecomUSA, Inc., the successor to Teleconnect following its merger with
SouthernNet, Inc. in December 1988. By 1990, TelecomUSA had become America's
fourth largest long distance telecommunications company with nearly
6,000 employees. MCI purchased TelecomUSA in August 1990 for $1.25 billion.
Richard A. Lumpkin. Mr. Lumpkin has served as Vice Chairman and a
director since September 1997. Mr. Lumpkin was elected as an officer and a
director based on requirements under the CCI merger
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agreement. Mr. Lumpkin served as Chairman and Chief Executive Officer of CCI
from 1990 to September 24, 1997, the date we acquired CCI. He continues to serve
as Chairman and Chief Executive Officer of ICTC, a post he has held since 1990.
From its formation in 1984 to 1990, Mr. Lumpkin served as President of CCI. From
1968 to 1990, Mr. Lumpkin held various executive positions at ICTC, including
Vice President of Operations and Treasurer. He is a director of Ameren
Corporation, an electric utility holding company, First Mid-Illinois Bancshares,
Inc., a bank holding company, and its wholly owned subsidiary First Mid-Illinois
Bank & Trust, a bank. Mr. Lumpkin served as a director of International Teledata
Corporation, an information technology company, until January 1999. Mr. Lumpkin
is Chairman of the Board of Illuminet Holdings, Inc., a telecommunications
company. See "Security Ownership of Certain Beneficial Owners and
Management--Investor Agreement and Stockholders' Agreements."
Stephen C. Gray. Mr. Gray has been Chief Operating Officer since
September 1992, President since October 1994 and a director since April 1993.
Mr. Gray is one of Mr. McLeod's nominees on our board of directors. Before
joining us, Mr. Gray served from August 1990 to September 1992 as Vice President
of Business Services at MCI, where he was responsible for MCI's local access
strategy and for marketing and sales support of the Business Markets division.
From February 1988 to August 1990, he served as Senior Vice President of
National Accounts and Carrier Services for TelecomUSA, where his
responsibilities included sales, marketing, key contract negotiations and
strategic acquisitions and combinations. Before joining TelecomUSA, from
September 1986 to February 1988, Mr. Gray held a variety of management positions
with WilTel, Inc. and Clay Desta Communications, Inc., long-distance telephone
companies. See "Security Ownership of Certain Beneficial Owners and Management--
Investor Agreement and Stockholders' Agreements."
Blake O. Fisher, Jr. Mr. Fisher has served as a director since October
1996 and as Group Vice President and Regional President--Iowa and Minnesota
since September 1998. Mr. Fisher is one of Mr. McLeod's nominees on our board
of directors. Mr. Fisher served as Executive Vice President, Corporate
Administration and Chief Financial Officer from September 1996 through September
1998, as Chief Financial and Administrative Officer from October 1997 to
September 1998 and as Treasurer from February 1996 to September 1998.
Mr. Fisher also served as one of Alliant Energy's nominees on our board of
directors from April 1993 to February 1996. He served as Executive Vice
President and Chief Financial Officer of IES Industries Inc., a diversified
electric utility holding company and predecessor to Alliant Energy, from January
1991 to February 1996. Mr. Fisher also served as President of IES Utilities
Inc., an electric utility, from February 1995 to February 1996. Before joining
IES, Mr. Fisher held a variety of management positions with Consumers Power
Company, an electric utility, including Vice President of Finance and Treasurer.
See "Security Ownership of Certain Beneficial Owners and Management--Investor
Agreement and Stockholders' Agreements."
J. Lyle Patrick. Mr. Patrick has served as Group Vice President Finance
and Chief Financial and Accounting Officer since September 1998. From September
1997 to September 1998, Mr. Patrick served as Executive Vice President
Accounting and Public Policy, with responsibility for financial, billing and
other administrative functions, as well as regulatory and legislative efforts.
From June 1988 until September 1997, Mr. Patrick was Vice President and Chief
Financial Officer of CCI. Mr. Patrick is a Certified Public Accountant and was a
partner with Arthur Andersen LLP prior to joining CCI.
Arthur L. Christoffersen. Mr. Christoffersen has served as Group Vice
President--Publishing Services since September 1998. Mr. Christoffersen served
as Group President, Publishing Services from September 1997 to September 1998
and as Executive Vice President, Publishing Services from September 1996, the
date we acquired TelecomUSA Publishing, to September 1997. Mr. Christoffersen
served as Chairman, President and Chief Executive Officer of TelecomUSA
Publishing from November 1990, the date Mr. Christoffersen and other investors
acquired TelecomUSA Publishing from MCI, and has continued to serve in that
capacity following our acquisition of TelecomUSA Publishing in September 1996.
From December 1987 to August 1990, Mr. Christoffersen served as Executive Vice
President and Chief Financial Officer of Teleconnect and its successor,
TelecomUSA. From 1975 to 1987, Mr. Christoffersen held a variety of management
positions, including Executive Vice President, of Life Investors, Inc., a
diversified financial services company.
Kirk E. Kaalberg. Mr. Kaalberg has served since September 1998 as Group
Vice President--Network Services, responsible for the design and development of
our communications network and
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switching platforms and maintenance of the Iowa Communications Network. From
September 1996 to September 1998, Mr. Kaalberg served as Executive Vice
President, Network Services, from March 1994 to September 1996, he served as
Senior Vice President, Network Design and Development, and from January 1992 to
February 1994, he served as Vice President. From August 1990 to January 1992,
Mr. Kaalberg served as a senior manager of MCI, where he managed a 175-person
conference calling, financial and operations group. From August 1987 to August
1990, Mr. Kaalberg was an employee of Teleconnect and its successor, TelecomUSA,
where he was responsible for business planning and management information
systems project prioritization. From 1983 to 1987, he held a variety of product
management positions with Banks of Iowa, Computer Services, Inc., a computer
services company, and Source Data Systems, a software company.
Stephen K. Brandenburg. Mr. Brandenburg has served since September 1998
as Group Vice President--Intelligent Technologies and Systems and since
September 1996 as Chief Information Officer, where he is responsible for the
design and deployment of our internal computing systems and operations. From
September 1996 to September 1998, Mr. Brandenburg served as Executive Vice
President and from June 1995 to September 1996, he served as Senior Vice
President, Intelligent Technologies and Systems. Prior to joining McLeodUSA,
Mr. Brandenburg served from August 1990 to June 1995 as Vice President, Revenue
Management Systems at MCI, where he was responsible for MCI's 1,400 person
business markets traffic/call processing, order/entry, billing and calling card
operations. From 1987 to August 1990, he served as Senior Vice President of
Information Systems at Teleconnect and its successor, TelecomUSA. Prior to
joining Teleconnect, Mr. Brandenburg held a variety of information systems
positions with academic medical centers, including the Mayo Medical Clinic and
the University of Wisconsin.
David M. Boatner. Mr. Boatner has served since September 1998 as Group
Vice President and Regional President--Colorado, Wyoming, North Dakota and South
Dakota. From September 1996 to September 1998, Mr. Boatner served as Executive
Vice President, Business Services and from February 1996 to September 1996, he
served as Senior Vice President, Sales and Marketing. Prior to joining us,
Mr. Boatner served from January 1995 to February 1996 as Regional Vice President
of Sales of WorldCom, a long distance telecommunications company, where he was
responsible for sales in the central, western and southwest regions of the
United States. From May 1989 to January 1995, Mr. Boatner served as Vice
President for Commercial Sales of WilTel, Inc., a long distance
telecommunications company which was acquired by WorldCom in January 1995.
Before joining WilTel, Inc., Mr. Boatner held a variety of positions at AT&T
and its Bell operating subsidiaries.
Albert P. Ruffalo. Mr. Ruffalo has served as Group Vice President--Human
Resources, Training and Direct Marketing since January 1999. He served as Group
Vice President--Direct Marketing from September 1998 to January 1999. He served
as Executive Vice President, Consumer Services from September 1996 to September
1998. From August 1991 to September 1998, Mr. Ruffalo served as President and
Chief Executive Officer of Ruffalo Cody, which we acquired on July 15, 1996.
From September 1990 to July 1991, Mr. Ruffalo served as President of a
subsidiary of MCI. From 1983 to August 1990, Mr. Ruffalo held various executive
positions at Teleconnect and TelecomUSA Data Base Marketing Company, an indirect
wholly owned subsidiary of TelecomUSA, Teleconnect's successor. From 1980 to
1983, Mr. Ruffalo was Marketing Manager of National Oats Corporation, a grain
distribution firm.
Dennis L. Erickson. Mr. Erickson has served as Group Vice President and
Regional President Illinois, Indiana and Wisconsin since September 1998 and as
President of ICTC since February 1998. He served as Executive Vice President of
Integrated Business Systems from September 1997 to September 1998. Before
September 1997, Mr. Erickson held a variety of senior management positions with
CCI, including President of Consolidated Communications Telecom Services from
February 1996 to February 1998; Vice President of Operations from November 1990
to February 1996; and Vice President of Human Resources from July 1990 to
November 1990.
Steven J. Shirar. Mr. Shirar has served as Group Vice President and
Regional President Missouri since September 1998. From September 1997 until
September 1998, Mr. Shirar served as Executive Vice President of
Telecommunications Marketing. From August 1996 until September 1997, Mr. Shirar
was President of Consolidated Systems and Services, a billing services and
software development subsidiary
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of CCI. From September 1994 through August 1996, Mr. Shirar was Chief Operating
Officer of MedAdvantage, a managed health care company. From January 1992 until
August 1994, he was President of Ameritech Industrial Infosource, Inc., an
advertising services and publishing company. From January 1989 through December
1991, Mr. Shirar was responsible for corporate and market strategy development
for Ameritech, focused on the consumer and small business marketplace.
Michael J. Brown. Mr. Brown has served as Group Vice President Customer
Support since September 1998. From February 1998 until September 1998,
Mr. Brown served as Senior Vice President, Customer Support. He served as Senior
Vice President of Sales for Colorado, Minnesota, North Dakota and South Dakota
from August 1997 until February 1998. Before August 1997, Mr. Brown held a
variety of positions at McLeodUSA, including Director of Iowa Sales from January
1994 to September 1994; Vice President of Sales from September 1994 to July
1995; and Vice President, Telecommunications from July 1995 to March 1996. From
March 1996 to February 1998, Mr. Brown also served as Vice President of Sales
for several of our field sales regions. Before joining McLeodUSA, Mr. Brown was
Director for Iowa, Nebraska, and South Dakota in MCI's Business Services
division from 1990 to 1994.
Randall Rings. Mr. Rings has served as Vice President, Secretary and
General Counsel since March 9, 1998. From May 1996 to March 1998, he served as
General Counsel of McLeodUSA Publishing, where he was responsible for its legal,
legislative and regulatory affairs. From 1992 to 1996, Mr. Rings served as an
Associate Attorney at March & McMillan, P.C., with a diverse legal practice
which included business planning, commercial litigation, employment and
environmental law, as well as representation of electric and telephone
cooperatives. From November 1988 to June 1992, he served as Corporate Counsel to
the Association of Illinois Electric Cooperatives, where he acted as its chief
legal officer and advised electric and telephone cooperatives throughout
Illinois on corporate, tax, employment and other legal matters.
Thomas M. Collins. Mr. Collins has served as a director since April 1993.
Mr. Collins is Of Counsel at Shuttleworth & Ingersoll, P.C., a law firm in Cedar
Rapids, Iowa, where he has practiced law since 1952. Mr. Collins was a director
of Teleconnect and its successor, TelecomUSA, from 1985 to August 1990. He is
also a director of APAC TeleServices, Inc., a telemarketing company.
Robert J. Currey. Mr. Currey has served as a director since September
1997. Mr. Currey was elected as a director based on requirements under the CCI
merger agreement. Mr. Currey also served as Group President, Telecommunications
Services between October 1997 and March 6, 1998; he resigned his position as an
executive officer effective March 6, 1998. Mr. Currey is President of 21st
Century Telecom Group, Inc., a cable and Internet services company. Mr. Currey
is also a director of Brenton Banks Inc., a bank holding company. Mr. Currey
served as President of CCI from March 1990 to September 24, 1997, the date we
acquired CCI. From June 1988 to March 1990, Mr. Currey served as Senior Vice
President, Operations and Engineering of Citizens Utility Co., a diversified
utility company. From 1987 to 1988, he served as Executive Vice President of
US SPRINT, an interexchange carrier, and from 1984 to 1987, he served as Senior
Vice President, Operations for United Telecommunications, Inc., a
telecommunications company. Prior to 1984, Mr. Currey served as an Assistant
Vice President with Ameritech and also held a succession of management positions
in operations, personnel, labor relations and marketing.
Lee Liu. Mr. Liu has served as a director since April 1993, during
which time he has been the nominee of IES and its successor, Alliant Energy, to
our board of directors. Mr. Liu has been Chairman of IES Industries and its
successor, Interstate Energy Corporation, since July 1993. Mr. Liu previously
served as Chairman of IES Industries from May 1986 to July 1991. He also served
as Chief Executive Officer of IES Industries from May 1986 to April 1998 and as
President from May 1986 to November 1996. Mr. Liu has worked for IES and its
successor, Alliant Energy, since 1957. Mr. Liu is also a director of Eastman
Chemical Company, a chemical company, and the Principal Financial Group, a
financial services company. See "Security Ownership of Certain Beneficial Owners
and Management--Investor Agreement and Stockholders' Agreements."
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Paul D. Rhines. Mr. Rhines has served as a director since April 1993.
Since 1997, Mr. Rhines has been Executive Vice President and Managing Member of
Marshall Venture Capital, L.C., which is the General Partner of Marshall Capital
Fund, L.P., a venture capital limited partnership. He is a founder and a
general partner of R.W. Allsop & Associates, L.P. and R.W. Allsop & Associates
II L.P., two venture capital limited partnerships established in Cedar Rapids,
Iowa, in 1981 and 1983, respectively. He is also a founder and general partner
of MARK Venture Partners L.P., a limited partnership which is the general
partner of Allsop Venture Partners III, L.P., a venture capital limited
partnership established in Cedar Rapids, Iowa in 1987. He has also served since
1980 as Executive Vice President and a director of RWA, Inc., a venture capital
management firm. Mr. Rhines was a director of Teleconnect and its successor,
TelecomUSA, from 1982 to 1990. He is also a director of American Safety Razor
Company, a consumer product manufacturing company.
Ronald W. Stepien. Mr. Stepien has served as a director since
December 1997, during which time he has been the nominee of MidAmerican to our
board of directors. He previously served as one of MidAmerican's nominees to our
board of directors from July 1995 to February 1996. He has been President of
MidAmerican Energy Co., an electric utility, since November 1998 and Executive
Vice President--Marketing and Delivery for MidAmerican since November 1996.
Mr. Stepien was Senior Vice President--Strategy and Corporate Development for
MidAmerican from June 1995 through November 1996. He previously served as an
officer of Iowa-Illinois Gas and Electric Company from 1990 through 1995. See
"Security Ownership of Certain Beneficial Owners and Management--Investor
Agreement and Stockholders' Agreements."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires our directors, officers and beneficial owners of more
than 10% of our Class A common stock to file with the SEC initial reports of
ownership of our equity securities and to file subsequent reports when there are
changes in such ownership. Officers, directors and beneficial owners of more
than 10% of our Class A common stock are required by SEC regulations to furnish
us with copies of all Section 16(a) reports they file.
Based on our review of these reports and on written representations from the
reporting persons that no other reports were required, we believe that during
the fiscal year ended December 31, 1998 all Section 16(a) filing requirements
applicable to our officers, directors and greater than 10% beneficial owners
were complied with, except that one Form 4 for each of Stephen C. Gray and
Paul D. Rhines was filed late.
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Item 11. Executive Compensation.
Summary Compensation Table
The following table sets forth information concerning the cash and non-cash
compensation paid or accrued during the periods indicated to our Chief Executive
Officer and four other most highly compensated officers whose combined salary
and bonus exceeded $100,000 during the fiscal year ended December 31, 1998 (the
"Named Executive Officers").
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Compensation Securities
------------------- Underlying All Other
Name and Principal Position Year Salary Bonus Options Compensation(1)
- --------------------------------------- ------- ------------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Clark E. McLeod 1998 $228,077 $122,732 100,000 $1,883,200(2)
Chairman and Chief 1997 185,262 79,216 223,000 3,000
Executive Officer 1996 156,269 72,422 135,500 48,200(3)
Stephen C. Gray 1998 228,077 122,732 100,000 3,200
President and Chief 1997 184,728 199,216 253,000 3,000
Operating Officer 1996 156,269 72,422 105,500 3,200
Blake O. Fisher, Jr. 1998 176,193 92,607 35,000 3,200
Group Vice President and Regional 1997 143,484 131,048 168,000 --
President--Iowa and Minnesota 1996 97,654 28,392 238,625 --
Arthur L. Christoffersen 1998 176,538 68,000 63,000 3,200
Group Vice President--Publishing 1997 154,524 -- 197,000 3,000
Services 1996(4) 51,782 106,815 -- --
Richard A. Lumpkin 1998 161,231 194,309 40,000 3,200
Vice Chairman 1997(5) 60,411 28,469 45,000 59,250(6)
1996 -- -- -- --
</TABLE>
______________________
(1) Unless otherwise indicated, all other compensation represents matching
contributions made by McLeodUSA to the McLeodUSA Incorporated 401(k) Plan on
behalf of the Named Executive Officers.
(2) Includes $1,880,000 of premiums paid on split dollar life insurance policies
for the benefit of the McLeod Family 1998 Special Trust. For additional
information, see "Certain Relationships and Related Transactions."
(3) Includes $45,000 paid by McLeodUSA to the FTC to cover the filing fee for a
HSR Act notification filed by Mr. and Mrs. McLeod in connection with their
November 1996 purchase of Class A common stock.
(4) Includes amounts received from September 20, 1996 (the date McLeodUSA
acquired TelecomUSA Publishing Group, Inc.) to December 31, 1996.
(5) Includes amounts received from September 24, 1997 (the date McLeodUSA
acquired CCI) to December 31, 1997.
(6) Represents the payment of accumulated vested vacation at the time McLeodUSA
acquired CCI.
55
<PAGE>
Option Grants
The following table sets forth information with respect to grants of stock
options to each of the Named Executive Officers during the year ended December
31, 1998.
<TABLE>
<CAPTION>
Individual Grants Potential Realized
----------------------------------------------------------------------------- Value at Assumed
Number of Percent of Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Option Term
Options Employees in Exercise ------------------------
Name Granted Fiscal Year Price Grant Date Expiration Date 5% 10%
- ---------------- ---------- ------------- -------- ----------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Clark E. McLeod 100,000(1) 1.6% $ 29.75 December 31, 1998 December 31, 2008 $1,870,962 $4,741,384
Stephen C. Gray 100,000(1) 1.6 29.75 December 31, 1998 December 31, 2008 1,870,962 4,741,384
Blake O. 35,000(1) 0.6 29.75 December 31, 1998 December 31, 2008 654,837 1,659,484
Fisher, Jr.
Arthur L.
Christoffersen 23,000(2) 0.4 41.625 April 3, 1998 April 3, 2008 602,088 1,525,809
40,000(1) 0.6 29.75 December 31, 1998 December 31, 2008 748,385 1,896,554
Richard A. 40,000(1) 0.6 29.75 December 31, 1998 December 31, 2008 748,385 1,896,554
Lumpkin
</TABLE>
_______________________
(1) These options vest according to the following schedule: 25% per year for
four years.
(2) These options vest according to the following schedule: 1/3 at 56 months
with an additional 1/3 at each of 63 and 70 months.
Aggregate Option Exercises and Fiscal Year-End Values
The following table sets forth information for each Named Executive Officer
concerning the exercise of options during fiscal year 1998, the number of
securities underlying unexercised options at the 1998 year-end and the year-end
value of all unexercised in-the-money options held by such individuals.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-the-Money Options
Shares Options at Fiscal Year-End at Fiscal Year-End(2)
Acquired on Value -------------------------- --------------------------
Name Exercise Realized(1) Exercisable Unexercisable Exercisable Unexercisable
- ------------------- ----------- ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Clark E. McLeod 123,750 $4,415,709 172,813 318,937 $ 5,441,031 $3,831,220
Stephen C. Gray 217,202 6,367,453 459,697 374,250 13,354,521 4,835,810
Blake O. Fisher, Jr. 41,250 1,363,181 114,969 261,593 2,822,977 4,190,904
Arthur L. 15,000 245,000 1,909,500
Christoffersen
Richard A. Lumpkin 11,250 73,750 60,000
</TABLE>
________________
(1) Represents the difference between the exercise price and the closing price
of our Class A common stock on The Nasdaq Stock Market on the date of
exercise.
(2) Represents the difference between the exercise price and the closing price
of our Class A common stock on The Nasdaq Stock Market on December 31, 1998.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended December 31, 1998, no member of our board of
directors served as a director or a member of the compensation committee of any
other company of which any executive officer served as a member of our board of
directors.
In 1998, we paid 2060 Partnership, L.P. $1,654,000 for the rental of office
and parking spaces in Cedar Rapids, Iowa. 2001 Development Company, an Iowa
corporation, is the general partner and 80% owner of 2060 Partnership, L.P.
Alliant Energy and McLeodUSA own 54.55% and 3.03%, respectively, of the
outstanding stock of 2001 Development
56
<PAGE>
Company. The directors and officers of 2001 Development Company include Lee Liu
and Thomas M. Collins, directors of McLeodUSA, and Clark E. McLeod, a director
and executive officer of McLeodUSA.
During 1998, we paid $86,000 to Shuttleworth & Ingersoll, P.C., a law firm
in Cedar Rapids, Iowa, for legal services rendered. We plan to retain the firm
in 1999. We provide local and long distance telephone service for Shuttleworth
& Ingersoll. Shuttleworth & Ingersoll paid us $64,000 for these services in
1998. Thomas M. Collins is Of Counsel and a stockholder of Shuttleworth &
Ingersoll.
For a description of other related-party transactions, see "Certain
Relationships and Related Transactions."
Employment, Confidentiality and Non-Competition Agreements
We have entered into employment, confidentiality and non-competition
agreements with most members of our senior management, including the Named
Executive Officers. These agreements typically provide that the applicable
senior management employee:
. may not compete with us during the term of his or her employment and
for a one or two-year period following a termination for cause,
resignation or voluntary termination of employment
. may not disclose any confidential information while employed by us and
thereafter
The agreements have an indefinite term but may be terminated on 30 days' written
notice by either party, provided, however, that the confidentiality and non-
competition obligations survive any such termination. As partial consideration
for the execution of the employment, confidentiality and non-competition
agreements, we have granted to the employees signing such agreements options to
purchase shares of our Class A common stock at exercise prices which are based
on the fair market value of the Class A common stock on the date of grant. Such
options were granted under our 1996 Employee Stock Option Plan.
Change-of-Control Agreements
We have entered into change-of-control agreements with our executive
officers, including the Named Executive Officers, which provide for payments and
benefits in connection with specified terminations of employment after a "change
of control" of McLeodUSA (as such term is defined in the change-of-control
agreements). The change-of-control agreements terminate on December 31, 2006,
unless a change of control has occurred during the six months preceding December
31, 2006, in which case the agreements terminate on December 31, 2007. If an
executive who is a party to a change-of-control agreement terminates employment
within six months after such a change of control or, if within 24 months after
such a change of control, the executive's employment is terminated by McLeodUSA
(other than for "disability," "cause," death or "retirement") or by the
executive following a "material reduction" in responsibilities or compensation
(as such terms are defined in the change-of-control agreements):
. the executive will be entitled to a lump sum payment equal to 12 or
24 times the executive's "average monthly compensation" (as defined in
the change-of-control agreements) during the 12 months immediately
preceding the change of control or the date of termination, whichever
average monthly compensation is higher
. all of the executive's outstanding options to purchase stock of
McLeodUSA will become immediately exercisable in full
. if the executive elects to continue coverage under McLeodUSA's group
health plan, McLeodUSA will continue to pay the employer portion of
the premiums for such coverage for the longer of 24 months or the
period of coverage provided by the Internal Revenue Code of 1986, as
amended (the "Code")
An executive who is entitled to payment(s) under a change-of-control agreement
is subject to a non-compete provision generally restricting the executive from
competing with McLeodUSA for a two-year period after the termination of
employment.
57
<PAGE>
Directors' Compensation
Directors who are also employees of McLeodUSA receive no directors fees.
Non-employee directors receive directors fees of $1,000 for each board of
directors and committee meeting attended in person and $500 for each board of
directors and committee meeting attended by telephone. In addition, directors
are reimbursed for their reasonable out-of-pocket travel expenses. Directors are
also eligible to receive grants of stock options under our Directors Stock
Option Plan (the "Directors Plan").
The Directors Plan was adopted by our board of directors and approved by
our stockholders in 1993. On March 28, 1996, the Directors Plan was amended and
restated to be a "formula" plan providing for an automatic grant of stock
options to eligible non-employee directors. Under the Directors Plan, as
amended, the number of shares reserved for purchase upon exercise of options was
increased to an aggregate of 550,000 shares of our Class A common stock (subject
to adjustment for certain events, such as recapitalizations or stock splits,
effected without consideration) for grants to directors who are not officers or
employees of McLeodUSA (each an "Eligible Director"). Options to purchase
450,000 shares of Class A common stock had been granted under the Directors Plan
and options to purchase 142,314 shares of Class A common stock had been
exercised as of December 31, 1998. Under the Directors Plan, each Eligible
Director who commences service as a director is granted an initial option to
purchase 10,000 shares of Class A common stock. Each such Eligible Director is
also granted an additional option to purchase 5,000 shares of Class A common
stock immediately after each of the subsequent two annual stockholders' meetings
if the Eligible Director continues to be an Eligible Director. The Directors
Plan will terminate automatically on March 28, 2006, unless terminated earlier
by our board of directors.
Other than the compensation described above, none of the directors received
any other compensation from McLeodUSA in 1998 in connection with their service
as directors.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Stock Owned by Management
The following beneficial ownership table sets forth information regarding
beneficial ownership of our Class A common stock as of February 28, 1999 by:
. each of our directors
. each Named Executive Officer
. all executive officers and directors as a group
Under the Exchange Act, a person is deemed to be a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting of
such security or the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of any securities of
which that person has the right to acquire beneficial ownership within 60 days.
More than one person may be
58
<PAGE>
deemed to be a beneficial owner of the same securities. The percentage ownership
of each stockholder is calculated based on the total number of outstanding
shares of our Class A common stock as of February 28, 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 is based upon information supplied by our directors and executive
officers. 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 shown as beneficially owned. Also, except as noted below, the table
includes the following shares that the individuals named below have the right to
acquire within 60 days from February 28, 1999 upon exercise of options:
<TABLE>
<S> <C>
Clark E. McLeod................................................ 235,623
Richard A. Lumpkin............................................. 11,250
Stephen C. Gray................................................ 529,072
Thomas M. Collins.............................................. 77,345
Blake O. Fisher, Jr............................................ 189,562
Paul D. Rhines................................................. 77,345
Ronald W. Stepien.............................................. 18,750
Lee Liu........................................................ 27,345
Robert J. Currey............................................... 37,500
Arthur L. Christoffersen....................................... 19,800
---------
Total..................................................... 1,223,592
=========
Directors and executive officers as a group
(19 persons)................................................ 1,884,642
=========
</TABLE>
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------------
Name of Beneficial Owner Number of Shares Percent
- ------------------------------------------------------------------ ---------------- --------
<S> <C> <C>
Clark E. McLeod(1)(2)............................................. 9,371,329 13.8%
Richard A. Lumpkin(1)(3).......................................... 5,067,778 7.5
Stephen C. Gray(4)................................................ 740,634 1.1
Thomas M. Collins................................................. 269,619 *
Blake O. Fisher, Jr............................................... 222,133 *
Paul D. Rhines.................................................... 194,921 *
Ronald W. Stepien................................................. 42,188 *
Lee Liu........................................................... 39,545 *
Robert J. Currey.................................................. 37,500 *
Arthur L. Christoffersen.......................................... 19,800 *
Directors and executive officers as a group (19 persons).......... 16,870,171 25.0
</TABLE>
___________________
* Less than one percent.
(1) Richard Anthony 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, MidAmerican, Alliant
Energy, Clark E. McLeod and Mary E. McLeod are parties to a stockholders'
agreement and, accordingly, may constitute a group within the meaning of
Section 13(d)(3) of the Exchange Act. As of February 28, 1999, these
stockholders beneficially owned an aggregate of 34,334,329 shares of our
Class A common stock, including 1,300,688 shares that Alliant Energy 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 February 28, 1999,
representing an ownership interest of 49.7%. See "--Investor Agreement and
Stockholders' Agreements."
(2) Includes 4,296,993 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.
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
59
<PAGE>
address is c/o McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C
Street SW, P.O. Box 3177, Cedar Rapids, IA 52406-3177.
(3) 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 of purchase within 60 days from March 8, 1999 pursuant to 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.
(4) 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.
Principal Holders of Voting Securities
The following table sets forth information as of February 28, 1999 with
respect to the ownership of shares of our Class A common stock by each person
believed by management to be the beneficial owner of more than five percent of
our outstanding Class A common stock. The information is based on the most
recent Schedule 13D or 13G filed with the SEC on behalf of such persons or other
information made available to us. Except as otherwise indicated, the reporting
persons have stated that they possess sole voting and sole dispositive power
over the entire number of shares reported.
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------------
Name of Beneficial Owner Number of Shares Percent
- ------------------------ ---------------- --------
<S> <C> <C>
Alliant Energy Investments, Inc.(1)............................ 10,278,288 14.9%
Clark E. McLeod(2)............................................. 9,371,329 13.8
MHC Investment Company(3)...................................... 6,741,116 10.0
Richard A. Lumpkin(2).......................................... 5,067,778 7.5
Mary E. McLeod(4).............................................. 4,546,993 6.7
</TABLE>
__________________
(1) Includes 1,300,688 shares of Class A common stock that Alliant Energy has
the right to acquire upon exercise of options. Alliant Energy Investments,
Inc. is a wholly owned indirect subsidiary of Interstate Energy Corporation.
The address of Alliant Energy is c/o Interstate Energy Corporation, 222 West
Washington Avenue, P.O. Box 192, Madison, WI 53701
(2) See "Stock Owned by Management."
(3) MHC Investment Company is a wholly owned indirect subsidiary of MidAmerican
Energy Holdings Company. The address of MHC 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 Ronald W. Stepien. Includes
18,750 shares of Class A common stock that Ronald W. Stepien has the right
to purchase within 60 days from February 28, 1999 upon exercise of options.
MHC Investment Company has the power to direct the disp osition of such
shares.
(4) Includes 125,000 shares of Class A common stock held by the Mary E. McLeod
Unitary Trust and 125,000 shares of Class A common stock held by the Clark
E. McLeod Unitary Trust for which Mrs. McLeod is a trustee and over which
Mrs. McLeod has shared voting and investment power. Mrs. McLeod's address is
c/o McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street SW,
P.O. Box 3177, Cedar Rapids, IA 52406-3177.
Investor Agreement and Stockholders' Agreements
We have entered into an agreement (as amended, the "Investor Agreement")
with Alliant Energy, MidAmerican, Clark E. and Mary E. McLeod and several other
stockholders. The Investor Agreement provides that each of Alliant Energy,
MidAmerican and Clark and Mary McLeod, for so long as each owns at least 10% of
our outstanding capital stock, will vote such party's shares and take all action
within its power to:
60
<PAGE>
. establish the size of our board of directors at nine directors
. cause to be elected to our board of directors one director designated
by Alliant Energy for so long as Alliant Energy owns at least 10% of
our outstanding capital stock
. cause to be elected to our board of directors one director designated
by MidAmerican for so long as MidAmerican owns at least 10% of our
outstanding capital stock
. cause to be elected to our board of directors three directors who are
executive officers of McLeodUSA designated by Clark E. McLeod for so
long as Clark E. and Mary E. McLeod collectively own at least 10% of
our outstanding capital stock
. cause to be elected to our board of directors four independent
directors nominated by the board
On June 14, 1997, we entered into a stockholders' agreement (as amended,
the "June 1997 Stockholders' Agreement") with Alliant Energy, MidAmerican, Clark
and Mary McLeod and several shareholders of CCI. The June 1997 Stockholders'
Agreement became effective on September 24, 1997. Under the June 1997
Stockholders' Agreement, which amends and restates the Investor Agreement among
the parties thereto, each party agreed, for so long as such party owns at least
10% of our outstanding Class A common stock, for a period of three years after
September 24, 1997, 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 Alliant Energy for so long as Alliant Energy owns at least 10% of
our outstanding Class A common stock
. cause to be elected to our board of directors one director designated
by MidAmerican for so long as MidAmerican owns at least 10% of our
outstanding Class A common stock
. cause to be elected to our board of directors three directors who are
executive officers of McLeodUSA designated by Clark E. McLeod for so
long as Clark E. and Mary E. McLeod collectively own at least 10% of
our Class A common stock
. cause Richard A. Lumpkin to be elected to our board of directors for
so long as the former shareholders of CCI who are a party to the
agreement collectively own at least 10% of our Class A common stock
. cause to be elected to our board of directors four non-employee
directors nominated by our board
The June 1997 Stockholders' Agreement also provides, among other things,
that:
. for a period ending in June 1999, and subject to exceptions, each of
Alliant Energy and MidAmerican will refrain from acquiring, or
agreeing or seeking to acquire, beneficial ownership of any securities
issued by us
. if we grant any party to the agreement the opportunity to register any
of our equity securities under the Securities Act, we will grant all
other parties to the agreement the same opportunity to register their
pro rata portion of our equity securities owned by them
The other operative provisions of the Investor Agreement remain unchanged in the
June 1997 Stockholders' Agreement.
On November 18, 1998, we entered into a stockholders' agreement (the
"November 1998 Stockholders' Agreement") with Alliant Energy, Clark E. and Mary
E. McLeod, and Richard A. Lumpkin, Gail G. Lumpkin and several other parties
affiliated or related to the Lumpkins, but not including MidAmerican, which was
a party to prior agreements.
61
<PAGE>
The November 1998 Stockholders' Agreement provides, among other things,
that:
. until December 31, 2001, the parties to the agreement will not sell or
otherwise dispose of any of our equity securities, or any other
securities convertible into or exercisable for such equity securities,
beneficially owned by them without receiving the prior written consent
of our board of directors, except for transfers specifically permitted
by the November 1998 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 to the agreement may sell or otherwise dispose of 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 or other disposition
of our securities by such party, it will grant similar registration
rights to the other parties to the agreement
. our board of directors will determine on an annual basis starting 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 or other disposition by the parties
to the agreement
. 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 other form which would not permit the inclusion of shares of
Class A common stock owned by the parties to the agreement, we will
give written notice of such offering to the parties and will undertake
to register their shares of Class A common stock 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
The November 1998 Stockholders' Agreement terminates on December 31, 2001.
In addition, if during any Annual Period we have not provided a party to the
agreement a reasonable opportunity to sell or otherwise dispose of 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 November 1998 Stockholders'
Agreement as it applies to such party within 10 business days following the end
of any such Annual Period.
The November 1998 Stockholders' Agreement also contains provisions relating
to the designation and election of directors to our board of directors which
provisions take effect on the terms and under the circumstances specified in the
agreement.
We have entered into a stockholders' agreement (the "Ovation Stockholders'
Agreement") with M/C Investors L.L.C. and Media/Communications Partners III
Limited Partnership (collectively, "M/C"), Alliant Energy, Clark E. and Mary E.
McLeod, Richard A. and Gail G. Lumpkin and several other parties related to the
Lumpkins with respect to the shares of our Class A common stock that M/C will
receive in the Ovation merger.
The Ovation Stockholders' Agreement provides that:
. until December 31, 2001, M/C will not sell or otherwise dispose of any
of our equity securities or any other securities convertible into or
exercisable for such equity securities beneficially owned by M/C as a
result of the Ovation merger without receiving the prior written
consent of our board of directors, except for transfers specifically
permitted by the Ovation Stockholders' Agreement
62
<PAGE>
. our board of directors will determine on a quarterly basis starting
with the quarter ending December 31, 1999 and ending on December 31,
2001, the aggregate number, if any, of shares of Class A common stock,
not to exceed in the aggregate 50,000 shares per quarter, that M/C may
sell or otherwise dispose of during designated trading periods
following the release of our quarterly or annual financial results
. our board of directors will determine on an annual basis for each of
the years ending December 31, 2000 and December 31, 2001, the
aggregate number, if any, of shares of 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 M/C as of the completion of the Ovation merger,
to be registered by us under the Securities Act for sale or other
disposition by M/C
. 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 other form which would not permit the inclusion of shares of
Class A common stock owned by M/C, during the period starting on
January 1, 2000 and ending on December 31, 2001, we will give written
notice of such offering to M/C and will undertake to register a number
of shares of Class A common stock owned by M/C, if any, determined by
our board of directors
. we may subsequently determine not to register any shares owned by M/C
under the Securities Act and may either not file a registration
statement or otherwise withdraw or abandon a registration statement
previously filed
The Ovation Stockholders' Agreement also contains various provisions
intended to insure that M/C is generally treated on a similar basis to the other
parties to the agreement in connection with any sale or other disposition of our
securities permitted by us with respect to any of these other parties or any
registration rights granted by us to any of these other parties under the
November 1998 Stockholders' Agreement for the period starting on January 1, 2000
and ending on December 31, 2001. Similar protective rights are also granted in
the Ovation Stockholders' Agreement to each of these other parties with respect
to any sale or other disposition or registration of our securities owned by M/C
permitted by us under the Ovation Stockholders' Agreement. In addition, during
the year ending December 31, 1999, if we participate in a strategic transaction
with an outside investor who agrees to acquire our securities at a premium to
their then average trading price, after we have been paid or otherwise received
our consideration or proceeds from such transaction as determined by us, the
parties to the Ovation Stockholders' Agreement may be entitled to participate in
such transaction on a pro rata basis as determined by our board of directors.
Under the Ovation Stockholders' Agreement, each party has agreed, for so
long as each such party owns at least 2.5 million shares of our Class A common
stock, in the case of M/C, or 4.0 million shares of our Class A common stock, in
the case of the other parties, to (1) establish the size of our board of
directors at up to 11 directors, (2) cause to be elected to our board of
directors one director designated by M/C, for so long as M/C owns at least 2.5
million shares of our Class A common stock, and (3) cause to be elected to our
board the directors designated by the other parties as set forth in the Ovation
Stockholders' Agreement.
The Ovation Stockholders' Agreement terminates on the earlier to occur
of the termination of the Ovation merger agreement and 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 or other disposition 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 the effective
time of the Ovation merger or (2) after January 1, 2000, the November 1998
Stockholders' Agreement has been terminated by all parties to such agreement,
then M/C may terminate the Ovation Stockholders' Agreement by providing written
notice of termination to all other parties (x) in the case of clause (1) above,
no later than 30 days following the end of such year and (y) in the case of
clause (2) above, at any time after January 1, 2000. Lastly, the Ovation
Stockholders' Agreement will be terminated with respect to all parties other
than McLeodUSA and M/C at such time as the November 1998 Stockholders' Agreement
is terminated.
63
<PAGE>
Item 13. Certain Relationships and Related Transactions.
We provide paging services, customer premise equipment, labor and services
for customer premise equipment, long distance service, 800 service and private
lines to First Mid-Illinois Bancshares. First Mid-Illinois Bancshares paid us
$559,000 for these services in 1998. Richard A. Lumpkin, Margaret Lumpkin Keon
and Mary Lumpkin Sparks own approximately 11.3%, 6.8% and 6.9% of the capital
stock of First Mid-Illinois Bancshares, respectively. Richard A. Lumpkin is
also a director of First Mid-Illinois Bancshares. Mr. Lumpkin is a director,
executive officer and significant stockholder of McLeodUSA and Mrs. Keon and
Mrs. Sparks are significant stockholders of McLeodUSA.
Illuminet Holdings paid us $1,696,000 in 1998 for the rental of building
space and for DS-1 usage and transmission facilities in the form of private
leased lines. We paid Illuminet Holdings $1,326,000 in 1998 for database
verification services and SS7 link services. Richard A. Lumpkin is the Chairman
of the Board of Directors of Illuminet Holdings.
Ameren Corporation and Central Illinois Public Service Company collectively
paid us $1,380,000 in 1998 for private line services and long distance services.
Richard A. Lumpkin is a director of Ameren Corporation and Central Illinois
Public Service Company.
In April 1997, McLeodUSA, Clark E. McLeod, Stephen C. Gray and Blake O.
Fisher, Jr. jointly purchased a jet aircraft for an aggregate of approximately
$2.25 million. Subsequently, the ownership was reallocated and Arthur L.
Christoffersen and Richard A. Lumpkin each purchased an interest. In connection
with the ownership reallocation, we paid approximately $1.35 million for a 60%
ownership percentage and Messrs. McLeod, Gray, Fisher, Christoffersen and
Lumpkin each paid approximately $180,000 for an ownership percentage of 8% each.
During 1998, Messrs. Fisher and Christoffersen sold their ownership back to
McLeodUSA for $180,000 each and Mr. McLeod purchased an additional 4% ownership
from us for $90,000, increasing his ownership percentage from 8% to 12%.
McLeodUSA and Messrs. McLeod, Gray and Lumpkin are parties to a Joint Ownership
Agreement by which they have agreed to share the operational expenses of the
aircraft in proportion to their respective ownership interest in the aircraft
(72% by McLeodUSA, 12% by Mr. McLeod and 8% each by Messrs. Gray and Lumpkin).
Messrs. McLeod and Fisher are directors and executive officers of McLeodUSA and
Mr. Christoffersen is an executive officer of McLeodUSA.
We have entered into two agreements with Alliant Energy by which Alliant
Energy has agreed to grant us access to towers, rights-of-way, conduits and
poles in exchange for capacity on our communications network.
In February 1996, we entered into two agreements with MidAmerican by which
MidAmerican has agreed to grant us access to towers, rights-of-way, conduits and
poles in exchange for capacity on our communications network.
On July 18, 1995 and March 29, 1996, respectively, we loaned $75,000 to
each of Kirk E. Kaalberg and Stephen K. Brandenburg in exchange for unsecured
notes executed by Mr. Kaalberg and Mr. Brandenburg, respectively. Interest
accrues on both loan amounts at the applicable rate established in Internal
Revenue Service regulations. Mr. Brandenburg made an annual interest-only
payment in 1998 and will make annual payments of $25,000 plus accrued interest
in each of the next three years. Mr. Kaalberg made an annual payment of $25,000
plus accrued interest in 1998 and will make similar payments in each of the next
two years. Messrs. Kaalberg and Brandenburg are executive officers of
McLeodUSA.
In December 1998, we entered into a split dollar arrangement for life
insurance policies owned by the McLeod Family 1998 Special Trust on the joint
lives of Clark and Mary McLeod. The McLeod Family 1998 Special Trust agreed to
assign the policies to us as collateral for our payment of the premiums for
these policies. No loans have been taken against these policies. In 1998, the
premium payments paid by us on these policies totaled $1,880,000. The aggregate
face amount of the policies is $113,000,000. The McLeod Family 1998 Special
Trust is sole owner and beneficiary of each policy. We have agreed with Clark
and Mary McLeod that one of the principle reasons for entering into this
arrangement is to avoid any need for their heirs to liquidate their holdings of
our Class A common stock at or soon after the death of one or both of them.
Clark and Mary McLeod have agreed to restrictions on their ability to sell or
64
<PAGE>
otherwise dispose of their shares of Class A common stock. See "-- Investor
Agreement and Stockholders' Agreements." We also paid premiums of $138,257 for
a universal life policy on Clark and Mary McLeod with a face value of
$13,500,000. We are the beneficiary of this policy.
In March 1996, our board of directors adopted a policy requiring that any
material transactions between McLeodUSA and persons or entities affiliated with
officers, directors or principal stockholders of McLeodUSA be on terms no less
favorable to McLeodUSA than reasonably could have been obtained in arms' length
transactions with independent third parties or be approved by a majority of
disinterested directors.
For a description of other related-party transactions, see "Executive
Compensation -- Compensaton Committee Interlocks and Insider Participation."
65
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a)(1) The following consolidated financial statements of McLeodUSA
and report of independent public accountants are included in Item 8 of this Form
10-K.
Report of independent public accountants.
Consolidated balance sheets as of December 31, 1998 and 1997.
Consolidated statements of operations and comprehensive income
for the years ended December 31, 1998, 1997 and 1996.
Consolidated statements of stockholders' equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated statements of cash flows for the years ended
December 31, 1998, 1997 and 1996.
Notes to consolidated financial statements.
(a)(2) The following financial statement schedule is filed as part of
this report and is attached hereto as pages S-1 and S-2.
Report of Independent Public Accountants on the Financial
Statement Schedule
Schedule II -- Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable
accounting regulations of the SEC either have been included in our consolidated
financial statements or the notes thereto, are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(a)(3) The following exhibits are either provided with this Form 10-K
or are incorporated herein by reference:
<TABLE>
<CPATION>
Exhibit
Number Exhibit Description
- --------- -------------------
<S> <C>
2.1 Agreement and Plan of Reorganization dated April 28, 1995 among
Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod, Inc.
(Filed as Exhibit 2.1 to Registration Statement on Form S-1, File
No. 333-3112 ("Initial Form S-1"), and incorporated herein by
reference).
2.2 Agreement and Plan of Reorganization dated as of July 12, 1996 among
Ruffalo, Cody & Associates, Inc., certain shareholders of Ruffalo,
Cody & Associates, Inc. and McLeod, Inc. (Filed as Exhibit 2 to
Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on July 29, 1996 and incorporated herein by reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 1996
among TelecomUSA Publishing Group, Inc. and McLeod, Inc. (Filed as
Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, filed
with the Commission on August 26, 1996 and incorporated herein by
reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997
among McLeod, Inc., Digital Communications of Iowa, Inc., Clark E.
McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current Report on
Form 8-K, File No. 0-20763, filed with the Commission on February
24, 1997 and incorporated herein by reference).
</TABLE>
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<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
2.5 Asset Purchase Agreement dated as of May 30, 1997 by and among
McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI Communications,
Inc., ESI Communications/ SW, Inc., ESI Communications/West, Inc.,
ESI Communications Downtown, Inc., ESI Communications North, Inc.,
and Michael Reichert, Peter Jones, John Pupkes and Jeff Meehan.
(Filed as Exhibit 2.1 to Current Report on Form 8-K, File No.
0-20763 (the "June 1997 Form 8-K"), filed with the Commission on
June 26, 1997 and incorporated herein by reference).
2.6 Agreement and Plan of Reorganization dated as of June 14, 1997 among
McLeodUSA Incorporated, Eastside Acquisition Co. and Consolidated
Communications Inc. (Filed as Exhibit 2.2 to the June 1997 Form 8-K
and incorporated herein by reference).
2.7 Agreement and Plan of Merger dated as of October 27, 1998 among
McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
Telecommunications Group, Inc. (Filed as Exhibit 2.7 to the
Registration Statement on Form S-4, File No. 333-68891 (the
"December 1998 Form S-4"), and incorporated herein by reference).
2.8 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, Bravo Acquisition Corporation, Ovation
Communications, Inc. and certain stockholders of Ovation
Communications, Inc. (Filed as Exhibit 2.1 to current Report on Form
8-K, File No. 0-20763 (the "January 1999 Form 8-K"), filed with the
Commission on January 14, 1999 and incorporated herein by reference).
2.9 Agreement and Plan of Merger, dated as of January 7, 1999, among
McLeodUSA Incorporated, McLeodUSA Publishing Company, Pubco Merging
Co., Talking Directories, Inc. and the stockholders of Talking
Directories, Inc. (Filed as Exhibit 2.2 to the January 1999 Form 8-K
and incorporated herein by reference).
2.10 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, McLeodUSA Publishing Company, Publication
Merge Co., Info America Phone Books, Inc. and certain stockholders
of Info America Phone Books, Inc. (Filed as Exhibit 2.3 to the
January 1999 Form 8-K and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Initial Form S-1 and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4")
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on
Form 10-K, File No. 0-20763, filed with the Commission on March 6,
1998 (the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
67
<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10-1/2%
Senior Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2
to Annual Report on Form 10-K, File No. 0-20763, filed with the
Commission on March 31, 1997 (the "1996 Form 10-K") and incorporated
herein by reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc.,
Salomon Brothers Inc. and Morgan Stanley & Co. Incorporated. (Filed
as Exhibit 4.5 to the 1996 Form 10-K and incorporated herein by
reference).
4.6 Investor Agreement dated as of April 1, 1996 among McLeod, Inc., IES
Investments Inc., Midwest Capital Group Inc., MWR Investments Inc.,
Clark and Mary McLeod, and certain other stockholders. (Filed as
Exhibit 4.8 to Initial Form S-1 and incorporated herein by
reference).
4.7 Amendment No. 1 to Investor Agreement dated as of October 23, 1996
by and among McLeod, Inc., IES Investments Inc., Midwest Capital
Group Inc., MWR Investments Inc., Clark E. McLeod and Mary E.
McLeod. (Filed as Exhibit 4.3 to the November 1996 Form S-1 and
incorporated herein by reference).
4.8 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.9 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9-1/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed
as Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
reference).
4.10 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
4.11 Registration Agreement dated July 21, 1997 among McLeodUSA
Incorporated, Salomon Brothers Inc., Morgan Stanley Dean Witter and
Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11 to the July 1997
Form S-4 and incorporated herein by reference).
4.12 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard A.
Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.13 Amendment No. 1 to Stockholders' Agreement dated as of September 19,
1997 by and among McLeodUSA Incorporated, IES Investments Inc.,
Midwest Capital Group, Inc., MWR Investments Inc., Clark E. McLeod,
Mary E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in Schedule
I thereto. (Filed as Exhibit 4.1 to the Quarterly Report on Form
10-Q, File No. 0-20763, filed with the Commission on November 14,
1997 and incorporated herein by reference).
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<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
4.14 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.15 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 8-3/8% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
Exhibit 4.15 to Registration Statement on Form S-4, File No.
333-52793 (the "May 1998 Form S-4") and incorporated herein by
reference).
4.16 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.15).
4.17 Registration Agreement dated March 16, 1998 among McLeodUSA
Incorporated, Solomon Brothers Inc., Bear, Stearns & Co. Inc.,
Morgan Stanley & Co. Incorporated and Chase Securities Inc. (Filed
as Exhibit 4.17 to the May 1998 Form S-4 and incorporated herein by
reference).
4.18 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA Incorporated; IES Investments Inc.; Clark E. McLeod; Mary
E. McLeod; and Richard A. Lumpkin and each of the former
shareholders of Consolidated Communications Inc. ("CCI") and certain
permitted transferees of the former CCI shareholders. (Filed as
Exhibit 99.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the Commission on November 19, 1998 and incorporated
herein by reference).
4.19 Indenture dated as of October 30, 1998 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 9 1/2% Senior Notes Due 2008 of McLeodUSA
Incorporated (Filed as Exhibit 4.19 to Registration Statement on
Form S-4, File No. 333-69621 (the "December 23, 1998 Form S-4") and
incorporated herein by reference).
4.20 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.19).
4.21 Registration Agreement dated October 30, 1998 among McLeodUSA
Incorporated, Salomon Smith Barney Inc., Bear, Stearns & Co.
Incorporated and Chase Securities Inc. (Filed as Exhibit 4.20 to
December 23, 1998 Form S-4 and incorporated herein by reference).
4.22 Indenture dated as of February 22, 1999 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 8 1/8% Senior Notes Due 2009 of McLeodUSA
Incorporated.
4.23 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.22).
4.24 Registration Agreement dated February 22, 1999 among McLeodUSA
Incorporated, Salomon Smith Barney Inc., Bear, Stearns & Co.
Incorporated and Chase Securities Inc.
10.1 Lease Agreement dated September 5, 1995 between State of Iowa and
MWR Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1 and
incorporated herein by reference).
10.2 Lease Agreement dated September 5, 1995 between State of Iowa and
McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial
Form S-1 and incorporated herein by reference).
69
<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
U S WEST Centrex Plus Service Rate Stability Plan dated October 15,
10.3 1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.26 to Initial Form S-1 and
incorporated herein by reference).
U S WEST Centrex Plus Service Rate Stability Plan dated July 17,
10.4 1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.27 to Initial Form S- 1
and incorporated herein by reference).
Ameritech Centrex Service Confirmation of Service Orders dated
10.5 various dates in 1994, 1995 and 1996 between McLeod Telemanagement,
Inc. and Ameritech Information Industry Services. (Filed as Exhibit
10.28 to Initial Form S-1 and incorporated herein by reference).
Lease Agreement dated as of December 28, 1993 between 2060
10.6 Partnership and McLeod Telemanagement, Inc., as amended by
Amendments First to Ninth dated as of July 3, 1994, March 25, 1994,
June 22, 1994, August 12, 1994, September 12, 1994, September 20,
1994, November 16, 1994, September 20, 1995 and January 6, 1996,
respectively. (Filed as Exhibit 10.29 to Initial Form S-1 and
incorporated herein by reference).
Lease Agreement dated as of May 24, 1995 between 2060 Partnership
10.7 and McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to Initial
Form S-1 and incorporated herein by reference).
Lease Agreement dated October 31, 1995 between I.R.F.B. Joint
10.8 Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31 to
Initial Form S-1 and incorporated herein by reference).
First Amendment to Lease Agreement dated as of November 20, 1995
10.9 between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.32 to Initial Form S-1 and incorporated herein
by reference).
Master Right-of-Way Agreement dated July 27, 1994 between McLeod
10.10 Network Services, Inc. and IES Industries Inc. (Filed as Exhibit
10.34 to Initial Form S-1 and incorporated herein by reference).
Master Right-of-Way and Tower Use Agreement dated February 13, 1996
10.11 between IES Industries Inc. and McLeod, Inc. (Filed as Exhibit 10.35
to Initial Form S-1 and incorporated herein by reference).
Master Pole, Duct and Tower Use Agreement dated February 20, 1996
10.12 between MidAmerican Energy Company and McLeod, Inc. (Iowa and South
Dakota). (Filed as Exhibit 10.36 to Initial Form S-1 and
incorporated herein by reference).
Master Pole, Duct and Tower Use Agreement dated February 20, 1996
10.13 between MidAmerican Energy Company and McLeod, Inc. (Illinois).
(Filed as Exhibit 10.37 to Initial Form S-1 and incorporated herein
by reference).
Settlement Agreement dated March 18, 1996 between U S WEST
10.14 Communications, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.38 to Initial Form S-1 and incorporated herein by
reference).
McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan.
10.15 (Filed as Exhibit 10.40 to Initial Form S-1 and incorporated herein
by reference).
McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit
10.16 10.41 to Initial Form S-1 and incorporated herein by reference).
70
<PAGE>
<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
10.17 McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit
10.42 to Initial Form S-1 and incorporated herein by reference).
10.18 McLeod Telecommunications, Inc. Director Stock Option Plan. (Filed
as Exhibit 10.43 to Initial Form S-1 and incorporated herein by
reference).
10.19 Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1 and
incorporated herein by reference).
10.20 Promissory Note dated March 29, 1996 between Stephen K. Brandenburg
and McLeod, Inc. (Filed as Exhibit 10.45 to Initial Form S-1 and
incorporated herein by reference).
+10.21 Telecommunications Services Agreement dated March 14, 1994 between
WilTel, Inc. and McLeod Telemanagement, Inc., as amended. (Filed as
Exhibit 10.47 to Initial Form S-1 and incorporated herein by
reference).
10.22 First Amendment to Agreement Regarding Support Agreement dated May
14, 1996 among McLeod, Inc., IES Diversified Inc. and IES
Investments Inc. (Filed as Exhibit 10.50 to Initial Form S-1 and
incorporated herein by reference).
10.23 First Amendment to Agreement Regarding Guarantee dated May 14, 1996
among McLeod, Inc., IES Diversified Inc. and IES Investments Inc.
(Filed as Exhibit 10.51 to Initial Form S-1 and incorporated herein
by reference).
10.24 Amended and Restated Directors Stock Option Plan of McLeod, Inc.
(Filed as Exhibit 10.52 to Initial Form S-1 and incorporated herein
by reference).
10.25 Forms of Employment, Confidentiality and Non-Competition Agreement
between McLeod, Inc. and certain employees of McLeod, Inc. (Filed as
Exhibit 10.53 to Initial Form S-1 and incorporated herein by
reference).
10.26 Form of Change-of-Control Agreement between McLeod, Inc. and certain
employees of McLeod, Inc. (Filed as Exhibit 10.54 to Initial Form
S-1 and incorporated herein by reference).
10.27 McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed as
Exhibit 10.55 to the November 1996 Form S-1 and incorporated herein
by reference).
10.28 McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as
Exhibit 10.56 to the 1996 Form 10-K and incorporated herein by
reference).
10.29 Form of Indemnity Agreement between McLeod, Inc. and certain
officers and directors of McLeod, Inc. (Filed as Exhibit 10.57 to
Initial Form S-1 and incorporated herein by reference).
10.30 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the November
1996 Form S-1 and incorporated herein by reference).
10.31 Amended and Restated Credit Agreement dated as of May 5, 1996 among
TelecomUSA Publishing Group, Inc., TelecomUSA Publishing Company and
TelecomUSA Neighborhood Directories, Inc. and Norwest Bank Iowa,
National Association. (Filed as Exhibit 10.64 to the November 1996
Form S-1 and incorporated herein by reference).
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<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
10.32 First Amendment to Amended and Restated Credit Agreement dated as of
January 31, 1996 by and between TelecomUSA Publishing Group, Inc.,
TelecomUSA Publishing Company and TelecomUSA Neighborhood
Directories, Inc. and Norwest Bank Iowa, National Association.
(Filed as Exhibit 10.65 to the November 1996 Form S-1 and
incorporated herein by reference).
10.33 Lease Agreement dated as of July 18, 1995 between 2060 Partnership,
L.P. and TelecomUSA Publishing Company. (Filed as Exhibit 10.68 to
the November 1996 Form S-1 and incorporated herein by reference).
10.34 Lease Agreement dated April 26, 1995 by and between A.M. Henderson
and TelecomUSA Publishing Company. (Filed as Exhibit 10.69 to the
November 1996 Form S-1 and incorporated herein by reference).
10.35 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and TelecomUSA Publishing Company.
(Filed as Exhibit 10.70 to the November 1996 Form S-1 and
incorporated herein by reference).
10.36 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and TelecomUSA Publishing Company. (Filed as
Exhibit 10.71 to the November 1996 Form S-1 and incorporated herein
by reference).
10.37 Form of McLeod, Inc. Directors Stock Option Plan Option Agreement.
(Filed as Exhibit 10.72 to the November 1996 Form S-1 and
incorporated herein by reference).
10.38 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive
Stock Option Agreement. (Filed as Exhibit 10.73 to the November 1996
Form S-1 and incorporated herein by reference).
10.39 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-Incentive
Stock Option Agreement. (Filed as Exhibit 10.74 to the November 1996
Form S-1 and incorporated herein by reference).
10.40 Sale and Purchase Agreement dated January 27, 1997 among McLeodUSA
Publishing Company, Fronteer Financial Holdings, Ltd., Classified
Directories, Inc., Larry A. Scott, James Greff, Randall L. Gowin and
Edwin Dressler and certain directors, officers and shareholders of
Fronteer Financial Holdings, Ltd. (Filed as Exhibit 10.90 to the
1996 Form 10-K and incorporated herein by reference).
10.41 Sale and Purchase Agreement dated February 27, 1997 among McLeodUSA
Publishing Company, Indiana Directories, Inc., John Morgan, Hank
Meijer, Jack Hendricks, Brad Nelson and Talking Directories, Inc.
(Filed as Exhibit 10.91 to the 1996 Form 10-K and incorporated
herein by reference).
10.42 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories, Inc.
(Filed as Exhibit 10.92 to the 1996 Form 10-K and incorporated
herein by reference).
10.43 Ameritech Centrex Service Confirmation of Service Orders dated
August 21, 1996 between McLeod Telemanagement, Inc. and Ameritech
Information Industry Services. (Filed as Exhibit 10.93 to the 1996
Form 10-K and incorporated herein by reference).
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<PAGE>
Exhibit
Number Exhibit Description
- --------- -------------------
+10.44 Amended and Restated Program Enrollment Terms dated November 1, 1996
between WorldCom Network Services, Inc. d/b/a WilTel and McLeod
Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual Report on
Form 10-K/A, File No. 0-20763, filed with the Commission on April 8,
1997 and incorporated herein by reference).
10.45 Letter Agreement dated April 15, 1997 between U S WEST
Communications and McLeodUSA Network Services, Inc. (Filed as
Exhibit 10.1 to Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on May 14, 1997 and incorporated herein by
reference).
10.46 Network Agreement dated April 7, 1997, between Wisconsin Power and
Light Company and McLeodUSA Telecommunications Services, Inc. (Filed
as Exhibit 10.96 to the July 1997 Form S-4 and incorporated herein
by reference).
10.47 Agreement dated July 7, 1997 between McLeodUSA Telecommunications
Services, Inc. and U S WEST Communications, Inc. (Filed as Exhibit
10.97 to the July 1997 Form S-4 and incorporated herein by
reference).
10.48 Agreement dated August 14, 1997 between McLeodUSA Incorporated and
Taylor Ball, Inc. (Filed as Exhibit 10.98 to Registration Statement
on Form S-4, File No. 333-34227 (the "November 1997 Form S-4") and
incorporated herein by reference).
10.49 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of October 28, 1996 between
Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.99 to the
November 1997 Form S-4 and incorporated herein by reference).
10.50 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of July 17, 1997 between
Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.100 to the
November 1997 Form S-4 and incorporated herein by reference).
10.51 Supply Agreement dated February 26, 1990 and Amendment Number 4 to
Supply Agreement dated January 4, 1999 between Alcatel USA Marketing,
Inc. and McLeodUSA Incorporated.
11.1 Statement regarding Computation of Per Share Earnings.
16.1 Letter regarding Change in Certifying Accountant (Filed as Exhibit
16.1 to the 1997 Form 10-K and incorporated herein by reference).
21.1 Subsidiaries of McLeodUSA Incorporated.
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
________________________
+ Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
(b) Reports on Form 8-K.
On October 29, 1998, we filed a Current Report on Form 8-K to report (1)
our announcement of our intention to offer 9 1/2% senior notes, (2) our
agreement to acquire Dakota Telecommunications and (3) our executive
realignment.
73
<PAGE>
On October 29, 1998, we filed a Current Report on Form 8-K to report our
financial results for the third quarter of 1998.
On November 19, 1998, we filed a Current Report on Form 8-K to report that
we had entered into a Stockholders' Agreement with Alliant Energy Investments
Inc., Clark E. McLeod, Mary E. McLeod, Richard A. Lumpkin, Gail G. Lumpkin and
certain other parties affiliated or related thereto.
(c) Exhibits.
We hereby file as part of this Form 10-K the exhibits listed in the Index
to Exhibits.
(d) Financial Statement Schedule
The following financial statement schedule is filed herewith:
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is provided in our
consolidated financial statements or notes thereto.
74
<PAGE>
GLOSSARY
Access--Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
Access to Rights-of-Way--Access to poles, ducts, conduits and other rights-
of-way.
CAP (competitive access provider)--A company that provides its customers
with an alternative to the local exchange company for local transport of private
line and special access telecommunications services.
Central offices--The switching centers or central switching facilities of
the local exchange companies.
Collocation--The ability of a CAP such as McLeodUSA to connect its network
to the LECs central offices. Physical collocation occurs when a CAP places its
network connection equipment inside the local exchange company's central
offices. Virtual collocation is an alternative to physical collocation by which
the local exchange company permits a CAP to connect its network to the local
exchange company's central offices on comparable terms, even though the CAP's
network connection equipment is not physically located inside the central
offices.
Dedicated--Telecommunications service or capacity reserved for use by
particular customers.
Dialing Parity--The ability of a competing local or toll service provider
to provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ a
sequence of these pulses to represent information as opposed to the continuously
variable analog signal. The precise digital numbers minimize distortion (such as
graininess or snow in the case of video transmission, or static or other
background distortion in the case of audio transmission).
FCC--Federal Communications Commission.
Interconnection--Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premises to facilitate such interconnection.
Initial Interconnection Decisions--Rulings by the FCC announced in
September 1992 and August 1993, which require the regional Bell operating
companies and most other large local exchange carriers to provide
interconnection in local exchange company central offices to any CAP, long
distance carrier or end user seeking such interconnection for the provision of
interstate special access and switched access transport services.
Interconnection Decision--The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act of
1996.
InterLATA--Telecommunications services originating in a LATA and
terminating outside of that LATA.
IntraLATA--Telecommunications services originating and terminating in the
same LATA.
LATA (local access and transport area)--A geographic area composed of
contiguous local exchanges, usually but not always within a single state. The
State of Iowa contains all or part of five LATAs; the State of Illinois contains
all or part of 17 LATAs. There are approximately 200 LATAs in the United States.
75
<PAGE>
Local exchange--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LEC (local exchange carrier)--A company providing local telephone services.
Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
POPs (points of presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
Private line--A dedicated telecommunications connection between end user
locations.
Public switched network--That portion of a local exchange company's network
available to all users generally on a shared basis (i.e., not dedicated to a
particular user). Traffic along the public switched network is generally
switched at the local exchange company's central offices.
Public utility commission--A state regulatory body, established in most
states, which regulates utilities, including telephone companies providing
intrastate services.
Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network, as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
Resale--Resale by a provider of telecommunications services (such as a
local exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
Route mile--The number of miles of the telecommunications path in which
fiber optic cables are installed.
Self-healing ring--A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub facility
with one or more network nodes (such as customer premises). Traffic is routed
between the hub and each of the nodes simultaneously in both a clockwise and a
counterclockwise direction. In the event of a cable cut or component failure
along one of these paths, traffic will continue to flow along the alternate path
so no traffic is lost. In the event of a catastrophic node failure, other nodes
will be unaffected because traffic will continue to flow along whichever path
(primary or alternate) does not pass through the affected node. The switch from
the primary to the alternate path will be imperceptible to most users.
Special access services--The lease of private, dedicated telecommunications
lines or "circuits" along the network of a local exchange company or a CAP,
which lines or circuits run to or from the long distance carrier POPs. Examples
of special access services are telecommunications lines running between POPs of
a single long distance carrier, from one long distance carrier POP to the POP of
another long distance carrier or from an end user to a long distance carrier
POP.
Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
Switched access transport services--Transportation of switched traffic
along dedicated lines between the local exchange company central offices and
long distance carrier POPs.
76
<PAGE>
Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
Unbundled Access--Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment, features,
functions and capabilities, at any technically feasible point within such
network.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
McLEODUSA INCORPORATED
By /s/ Clark E. McLeod
-------------------
Clark E. McLeod
Chairman and Chief Executive Officer
March 24, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Clark E. McLeod Chairman, Chief Executive Officer and Director March 24, 1999
- ------------------------------- (Principal Executive Officer)
Clark E. McLeod
/s/ Richard A. Lumpkin Vice Chairman and Director March 24, 1999
- -------------------------------
Richard A. Lumpkin
/s/ Stephen C. Gray President, Chief Operating Officer and Director March 24, 1999
- -------------------------------
Stephen C. Gray
/s/ Blake O. Fisher, Jr. Group Vice President, Regional President--Iowa March 24, 1999
- ------------------------------- and Minnesota, and Director
Blake O. Fisher, Jr.
/s/ J. Lyle Patrick Group Vice President--Finance and Accounting March 24, 1999
- ------------------------------- and Chief Financial and Accounting Officer
J. Lyle Patrick (Principal Financial Officer and Principal
Accounting Officer)
/s/ Thomas M. Collins Director March 24, 1999
- -------------------------------
Thomas M. Collins
/s/ Robert J. Currey Director March 24, 1999
- -------------------------------
Robert J. Currey
/s/ Lee Liu Director March 24, 1999
- -------------------------------
Lee Liu
/s/ Paul D. Rhines Director March 24, 1999
- -------------------------------
Paul D. Rhines
Director March __, 1999
- -------------------------------
Ronald W. Stepien
</TABLE>
78
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
Report of Independent Public Accountants................................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997............................ F-3
Consolidated Statements of Operations and Comprehensive Income for the years ended
December 31, 1998, 1997 and 1996........................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996........................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996................................................................................ F-6
Notes to Consolidated Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
McLeodUSA Incorporated:
We have audited the accompanying consolidated balance sheets of McLeodUSA
Incorporated (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations and
comprehensive income, stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of McLeodUSA Incorporated's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of McLeodUSA
Incorporated and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999 (except with respect to the
matters discussed in Note 16, as to
which the date is March 5, 1999)
F-2
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares)
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents........................................................... $ 455,067 $ 331,941
Investment in available-for-sale securities......................................... 136,585 34,696
Trade receivables, net.............................................................. 116,369 108,472
Inventory........................................................................... 12,824 3,992
Deferred expenses................................................................... 26,693 27,641
Prepaid expenses and other.......................................................... 45,654 11,127
---------- ----------
Total current assets............................................................ 793,192 517,869
---------- ----------
Property and Equipment
Land and building................................................................... 60,325 35,420
Telecommunications networks......................................................... 307,310 198,046
Furniture, fixtures and equipment................................................... 138,349 70,579
Networks in progress................................................................ 185,505 81,432
Building in progress................................................................ 12,567 10,002
---------- ----------
704,056 395,479
Less accumulated depreciation....................................................... 74,310 21,675
---------- ----------
629,746 373,804
---------- ----------
Investments, Intangibles and Other Assets
Other investments................................................................... 35,870 30,189
Goodwill, net....................................................................... 289,639 273,359
Other intangibles, net.............................................................. 112,379 97,935
Other............................................................................... 64,371 52,496
---------- ----------
502,259 453,979
---------- ----------
$1,925,197 $1,345,652
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt................................................ $ 8,236 $ 6,004
Contracts and notes payable......................................................... 4,508 6,556
Accounts payable.................................................................... 62,000 45,354
Accrued payroll and payroll related expenses........................................ 13,579 21,454
Other accrued liabilities........................................................... 63,849 36,793
Deferred revenue, current portion................................................... 10,995 10,381
Customer deposits................................................................... 16,789 12,710
---------- ----------
Total current liabilities....................................................... 179,956 139,252
---------- ----------
Long-Term Debt, less current maturities................................................. 1,245,170 613,384
---------- ----------
Deferred Revenue, less current portion.................................................. 16,798 12,664
---------- ----------
Other Long-term liabilities............................................................. 20,467 20,973
---------- ----------
Stockholders' Equity
Capital stock:
Common, Class A, $.01 par value; authorized 250,000,000 shares; issued and
outstanding 1998 63,679,175 shares and 1997 61,799,412 shares................. 637 618
Common, Class B, convertible, $.01 par value; authorized 22,000,000 shares;
issued and outstanding 1998 none; 1997 none .................................. -- --
Additional paid-in capital.......................................................... 716,475 688,964
Accumulated deficit................................................................. (252,647) (127,735)
Accumulated other comprehensive income ............................................. (1,659) (2,468)
---------- ----------
462,806 559,379
---------- ----------
$1,925,197 $1,345,652
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands, except per share data)
<TABLE>
<CAPTION> Year Ended December 31,
----------------------------
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Revenue:
Telecommunications:
Local and long distance ............................................ $ 267,435 $ 110,023 $ 41,399
Local exchange services............................................. 67,785 16,117 --
Private line and data............................................... 43,892 17,174 10,272
Network maintenance and equipment................................... 32,885 20,965 5,936
Other telecommunications............................................ 27,794 9,907 --
----------- ------------ -----------
TOTAL TELECOMMUNICATIONS REVENUE............................... 439,791 174,186 57,607
Directory............................................................. 144,876 81,055 15,152
Telemarketing......................................................... 19,479 12,645 8,564
----------- ------------ -----------
TOTAL REVENUE.................................................. 604,146 267,886 81,323
Operating expenses:
Cost of service....................................................... 323,208 151,190 52,624
Selling, general and administrative................................... 260,931 148,158 46,044
Depreciation and amortization......................................... 89,107 33,275 8,485
Other................................................................. 5,575 4,632 2,380
----------- ------------ -----------
TOTAL OPERATING EXPENSES....................................... 678,821 337,255 109,533
----------- ------------ -----------
OPERATING LOSS................................................. (74,675) (69,369) (28,210)
----------- ------------ -----------
Nonoperating income (expense):
Interest income....................................................... 26,000 22,660 6,034
Interest (expense).................................................... (78,234) (34,627) (665)
Other income.......................................................... 1,997 1,426 495
----------- ----------- -----------
TOTAL NONOPERATING INCOME (EXPENSE)............................ (50,237) (10,541) 5,864
----------- ------------ -----------
LOSS BEFORE INCOME TAXES....................................... (124,912) (79,910) (22,346)
Income taxes............................................................. -- -- --
---------- ------------ -----------
NET LOSS....................................................... $ (124,912) $ (79,910) $ (22,346)
=========== ============ ===========
Loss per common share.................................................... $ (1.99) $ (1.45) $ (0.55)
======== ======= =======
Weighted average common shares outstanding............................... 62,807 54,974 40,506
=========== ============ ===========
Other comprehensive income (loss):
Unrealized gains on securities:
Unrealized holding gains (losses) arising during the
period .......................................................... 3,020 (2,468) --
Less: reclassification adjustment for gains included in
net income...................................................... (2,211) -- --
----------- ------------ -----------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) ...................... 809 (2,468) --
----------- ------------ -----------
COMPREHENSIVE LOSS ..................................... $ (124,103) $ (82,378) $ (22,346)
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
(In thousands, except shares)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-In Accumulated Comprehensive
------------
Class A Class B Capital Deficit Income Total
------- ------- -------- --------- -------------- ---------
<S>...................................................... <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.............................. . $ 164 $ 156 $ 40,117 $ (25,479) $ -- $ 14,958
Net loss............................................... -- -- -- (22,346) -- (22,346)
Issuance of 19,424,316 shares of Class A
common stock......................................... 194 -- 396,020 -- -- 396,214
Issuance of 361,420 shares of Class A common
stock in connection with the acquisition of
Ruffalo, Cody & Associates, Inc. .................... 4 -- 8,941 -- -- 8,945
Options to purchase 158,009 shares of Class A
common stock granted in connection with the
acquisition of Ruffalo, Cody & Associates, Inc.,
less cash to be received upon exercise of options.... -- -- 3,301 -- -- 3,301
Amortization of fair value of stock options issued
to nonemployees...................................... -- -- 341 -- -- 341
Amortization of compensation expense related to
stock options........................................ -- -- 2,016 -- -- 2,016
------ ----- -------- ---------- ---------- ---------
Balance, December 31, 1996............................... 362 156 450,736 (47,825) -- 403,429
Net loss............................................... -- -- -- (79,910) -- (79,910)
Issuance of 1,137,883 shares of Class A
common stock......................................... 11 -- 881 -- -- 892
Release of 56,177 shares of Class A common
stock from escrow.................................... 1 -- 1,346 -- -- 1,347
Issuance of 84,430 shares of Class A common
stock in connection with the acquisition of
Digital Communications of Iowa, Inc. ................ 1 -- 2,249 -- -- 2,250
Issuance of 8,488,596 shares of Class A
common stock in connection with the
acquisition of CCI. ................................. 85 -- 223,590 -- -- 223,675
Issuance of 55,500 shares of Class A common stock
in connection with the acquisition of certain
assets of OneTEL Corp. .............................. 1 -- 1,962 -- -- 1,963
Issuance of 140,000 shares of Class A common stock
in connection with the acquisition of ownership
interests of Colorado Directory Company LLC ......... 1 -- 4,479 -- -- 4,480
Issuance of 38,080 shares of Class A common stock
to participants in the Employee Stock
Purchase Plan........................................ -- -- 728 -- -- 728
Conversion of 15,625,929 shares of Class B
common stock to 15,625,929 shares of Class
A common stock....................................... 156 (156) -- -- -- --
Amortization of compensation expense
related to stock options.............................. -- -- 2,993 -- -- 2,993
Other comprehensive income............................. -- -- -- -- (2,468) (2,468)
------ ----- -------- ---------- ---------- ---------
Balance, December 31, 1997............................... 618 -- 688,964 (127,735) (2,468) 559,379
Net loss............................................... -- -- -- (124,912) -- (124,912)
Issuance of 1,353,785 shares of Class A
common stock......................................... 13 -- 3,755 -- -- 3,768
Issuance of 70,508 shares of Class A common
stock in connection with the acquisition
of NewCom Technologies, Inc. and NewCom OSP
Services, Inc. ...................................... 1 -- 3,216 -- -- 3,217
Issuance of 151,019 shares of Class A common stock in
connection with the acquisition of certain assets
of Communications Cable-Laying Company, Inc. ........ 1 -- 5,964 -- -- 5,965
Issuance of 70,672 shares of Class A common
stock in connection with the acquisition of
of Inlet, Inc. ...................................... 1 -- 2,387 -- -- 2,388
Issuance of 82,602 shares of Class A common
stock to participants in the 401(k)
profit-sharing plans................................. 1 -- 2,611 -- -- 2,612
Issuance of 132,893 shares of Class A
common stock to participants in the Employee Stock
Purchase Plan........................................ 2 -- 3,707 -- -- 3,709
Amortization of compensation expense
related to stock options............................. -- -- 5,871 -- -- 5,871
Other comprehensive income............................. -- -- -- -- 809 809
------ ----- -------- ---------- ---------- ---------
Balance, December 31, 1998............................... $ 637 $ -- $716,475 $ (252,647) $ (1,659) $ 462,806
====== ===== ======== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss........................................................................ $(124,912) $(79,910) $(22,346)
Adjustments to reconcile net loss to net cash (used in) operating activities:
Depreciation.................................................................. 53,343 17,622 3,944
Amortization.................................................................. 34,693 15,653 4,882
Accretion of interest on senior discount notes................................ 35,145 26,754 --
Changes in assets and liabilities, net of effects of acquisitions:
(Increase) in trade receivables............................................. (6,409) (15,937) (9,317)
(Increase) in inventory..................................................... (8,242) (773) (2)
Decrease in deferred expenses............................................... 948 1,218 1,966
(Increase) in prepaid expenses and other....................................
(34,288) (1,041) (3,703)
(Increase) in deferred line installation costs.............................. (13,630) (9,669) (1,289)
Increase in accounts payable and accrued expenses........................... 32,178 27,117 3,192
Increase in deferred revenue................................................ 4,597 7,186 9,505
Increase in customer deposits............................................... 4,077 3,024 1,366
----- ----- -----
NET CASH (used in) operating activities................................... (22,500) (8,756) (11,802)
------- ------ -------
Cash Flows from Investing Activities
Purchase of property and equipment.............................................. (289,923) (151,280) (70,290)
Available-for-sale securities:
Purchases..................................................................... (607,440) (115,985) (207,681)
Sales......................................................................... 264,383 102,368 17,577
Maturities.................................................................... 241,977 133,817 62,389
Business acquisitions........................................................... (27,812) (181,892) (80,081)
Deposits on PCS licenses........................................................ -- (27,975) (4,889)
Other...........................................................................
(5,175) (1,863) (133)
------ ------ ----
Net cash (used in) investing activities................................... (423,990) (242,810) (283,108)
------- -------- --------
Cash Flows from Financing Activities
Proceeds from line of credit agreements......................................... -- -- 55,925
Payments on line of credit agreements........................................... -- -- (59,825)
Payments on contracts and notes payable......................................... (11,082) (18,967) --
Proceeds from long-term debt.................................................... 583,923 506,626 2,060
Payments on long-term debt...................................................... (10,895) (2,252) (2,065)
Net proceeds from issuance of common stock...................................... 7,670 1,620 396,214
Other........................................................................... -- -- (919)
------ ------- -------
Net cash provided by financing activities................................. 569,616 487,027 391,390
------- ------- -------
Net increase in cash and cash equivalents................................. 123,126 235,461 96,480
Cash and cash equivalents:
Beginning....................................................................... 331,941 96,480 --
-------- -------- --
Ending.......................................................................... $ 455,067 $331,941 $ 96,480
======== ======== ========
Supplemental Disclosure of Cash Flow Information
Cash payment for interest, net of interest capitalized 1998 $10,616; 1997 $4,440;
1996 $204.................................................................... $ 26,992 $ 1,764 $ 300
========= ======== =======
Supplemental Schedule of Noncash Investing and Financing Activities
Release of 56,177 shares of Class A common stock from escrow ................... $ 1,347
========
Capital leases incurred for the acquisition of property and equipment .......... $ 5,914 $ 3,367
======= ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business: McLeodUSA Incorporated and subsidiaries (the "Company")
is a diversified telecommunications company, incorporated in Delaware, that
provides a broad range of products and services to business customers in Iowa,
Illinois, North Dakota, South Dakota, Minnesota, Indiana, Colorado and Wyoming
and residential customers in Iowa, Illinois, North Dakota, South Dakota,
Wisconsin and Colorado. The Company's services primarily include local and long-
distance telecommunications services, telecommunications network maintenance
services and telephone equipment sales, service and installation, private line
and data services, the sale of advertising space in telephone directories, the
operation of an independent local exchange company, and telemarketing services.
The Company's business is highly competitive and is subject to various federal,
state and local regulations. In 1997, the Company's stockholders approved a
change in its name to McLeodUSA Incorporated from McLeod, Inc.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
A summary of the Company's significant accounting policies is as follows:
Principles of consolidation: The accompanying financial statements include
those of the Company and its subsidiaries, substantially all of which are wholly
owned. All significant intercompany items and transactions have been eliminated
in consolidation.
Regulatory accounting: Illinois Consolidated Telephone Company ("ICTC"), an
independent local exchange carrier and a wholly owned subsidiary of the Company,
prepares its financial statements in accordance with the provisions of Statement
of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain
Types of Regulation" ("SFAS No. 71"). The provisions of SFAS No. 71 require,
among other things, that regulated enterprises reflect rate actions of
regulators in their financial statements, when appropriate. These rate actions
can provide reasonable assurance of the existence of an asset, reduce or
eliminate the value of an asset, or impose a liability on a regulated
enterprise. SFAS No. 71 also specifies that the actions of a regulator can
eliminate only liabilities imposed by the regulator.
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less and all certificates of deposit, regardless of maturity,
to be cash equivalents.
Investments: Management determines the appropriate classification of the
securities at the time they are acquired and evaluates the appropriateness of
such classifications at each balance sheet date. The Company has classified its
securities as available-for-sale. Available-for-sale securities are stated at
fair value, and unrealized holding gains and losses are reported as a component
of stockholders' equity. Realized gains and losses are determined on the basis
of the specific securities sold.
Trade receivables: In accordance with the industry practice for the
publication of telephone directories, trade receivables include certain unbilled
revenue from installment contracts. It is anticipated that a substantial portion
of all such amounts at December 31, 1997 and 1998 will be collected within one
year (see Note 2).
F-7
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventory: Inventory is carried principally at the lower of average cost or
market and consists primarily of new and reusable parts to maintain fiber optic
networks and parts and equipment used in the maintenance and installation of
telephone systems. All inventory is classified as raw materials.
Property and equipment: Property and equipment is stated at cost. Construction
costs, including interest, are capitalized during the installation of fiber
optic telecommunications networks. Interest expense was also capitalized as part
of the construction of the Company's headquarters buildings and the development
of the Company's software.
ICTC's property and equipment for its regulated operations is summarized as
follows at December 31, 1998 (In thousands):
<TABLE>
<S> <C>
Telephone plant:
In service............................................................................... $101,126
Under construction....................................................................... 902
--------
102,028
Less accumulated depreciation............................................................ (10,576)
--------
$ 91,452
========
</TABLE>
When regulated property and equipment are retired, the original cost, net of
salvage, is charged against accumulated depreciation. The cost of maintenance
and repairs of property and equipment including the cost of replacing minor
items not constituting substantial betterments is charged to operating expense.
The provision for depreciation of regulated property and equipment is based
upon remaining life rates for property placed in service through 1980 and equal
life rates for property additions placed in service after 1980. The regulated
provision is equivalent to an annual composite rate of 5.58% for 1998.
The provision for depreciation of nonregulated property and equipment is
recorded using the straight-line method based on the following estimated useful
lives:
<TABLE>
<CAPTION>
Years
---------
<S> <C>
Buildings.................................................................................... 20-39
Telecommunications networks.................................................................. 5-15
Furniture, fixtures and equipment............................................................ 2-10
</TABLE>
The Company's telecommunications networks are subject to technological risks
and rapid market changes due to new products and services and changing customer
demand. These changes may result in changes in the estimated economic lives of
these assets.
Other investments: Other investments primarily includes $26,195,000 for a
minority interest in a limited partnership which provides cellular services to
customers in east central Illinois. The Company follows the equity method of
accounting for this investment, which recognizes the Company's proportionate
share of the income and losses accruing to it under the terms of its partnership
agreement.
Goodwill: Goodwill resulting from the Company's acquisitions is being
amortized over a range of 15 to 30 years using the straight-line method and the
acquisitions are periodically reviewed for impairment
F-8
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
based upon an assessment of future operations to ensure that it is appropriately
valued. Accumulated amortization on goodwill totaled $16,356,000 and $5,834,000
at December 31, 1998 and 1997, respectively.
Other intangibles: Other intangibles consist of customer lists and noncompete
agreements related to the Company's acquisitions, deferred line installation
costs incurred in the establishment of local access lines for customers and
franchise rights to provide cable services to customers in three Illinois
counties and in a Michigan city. The customer lists and noncompete agreements
are being amortized using the straight-line method over periods ranging from 3
to 15 years. The deferred line installation costs are being amortized using the
straight-line method over 36 to 60 months, which approximates the average lives
of residential and business customer contracts. The franchise rights are being
amortized using the straight-line method over periods ranging from 10 to 15
years. Accumulated amortization on the other intangibles totaled $25,066,000 and
$9,158,000 at December 31, 1998 and 1997, respectively.
Income tax matters: The Company recognizes deferred tax assets and liabilities
for the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred tax assets
and liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Net
deferred tax assets are reduced by a valuation allowance when appropriate (see
Note 6). Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Deferred revenue: Amounts received in advance under long-term leases of fiber
optic telecommunications networks are recognized as revenue on a straight-line
basis over the life of the leases.
Revenue recognition: Revenues for local and long-distance services are
recognized when subscribers use telecommunications services. The revenue from
long-term leases of fiber optic telecommunications networks is recognized over
the term of the lease. Base annual revenue for telecommunications network
maintenance is recognized on a straight-line basis over the term of the
contract. Additional services provided under these contracts are recognized as
the services are performed.
ICTC's toll revenue is provided through a combination of billed carrier access
charges, traditional end-user billed toll revenues, interstate tariffed
subscriber line charges and ICTC's share of revenues and expenses from the non-
traffic sensitive pool administered by the National Exchange Carrier
Association.
As allowed by the FCC, ICTC's presubscribed rate of return on interstate
access revenues for 1998 was 11.25%. The FCC further restricted overall
interstate revenues to a maximum 11.50% rate of return on related investments,
or to a maximum of 11.65% rate of return on related investments per any
individual rate element.
Fees from telemarketing contracts are recognized as revenue in the period the
services are performed.
Revenues from directories are recorded upon publication.
F-9
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Customer deposits consist of cash received from customers at the time a sales
contract is signed. They are recorded as revenue when the related directory is
published or when the related service is performed.
Cost of service and deferred expenses: Cost of service includes local and
long-distance services purchased from certain Regional Bell Operating Companies
and interexchange carriers, the cost of providing local exchange services to
customers in ICTC's service area and the cost of operating the Company's fiber
optic telecommunications networks. Cost of service also includes production
costs associated with the publication of directories and direct costs associated
with telemarketing services and the sale and installation of telephone systems.
Deferred expenses consist of production and selling costs on unpublished
directory advertising orders. They are expensed when the related directory is
published and the related revenue of the directory is recognized.
Key business suppliers: U S WEST, Ameritech and Southwestern Bell Company are
the Company's primary suppliers of local central office switching and local
lines.
Stock options issued to employees: In fiscal year 1996, the Company adopted
the provisions of SFAS No. 123, Accounting for Stock-Based Compensation, which
establishes a fair value based method for the financial reporting of its stock-
based employee compensation plans. The Company measures compensation using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Under this method,
compensation is measured as the difference between the market value of the stock
on the grant date, less the amount required to be paid for the stock. The
difference, if any, is charged to expense over the vesting period of the
options.
The estimated market value used for the stock options granted was determined
on a periodic basis by the Company's Board of Directors prior to the Company's
initial public offering on June 10, 1996. Subsequent to the Company's initial
public offering, the market value used for stock options granted is based upon
the closing price of the Class A common stock on the day before the grant date.
Stock options issued to nonemployees: The Company uses the Black-Scholes model
to determine the fair value of the stock options issued to nonemployees at the
date of grant. This amount is amortized to expense over the vesting period of
the options.
Loss per common share: Loss per common share has been computed using the
weighted average number of shares of common stock outstanding after giving
effect to the recapitalization in 1996. All stock options granted are anti-
dilutive, and therefore excluded from the computation of earnings per share. In
the future, these stock options may become dilutive.
Fair value of financial instruments: The carrying amount of cash and cash
equivalents approximates fair value due to the short maturity of the
instruments. For other investments for which there are no quoted market prices,
a reasonable estimate of fair value could not be made without incurring
excessive cost. The $29.9 million carrying amount of unquoted investments at
December 31, 1998, represents the original cost of the investments, which
management believes is not impaired. The fair value of the Company's long-term
debt is estimated to be $1.3 billion based on the quoted market rates for the
same or similar issues or the current rates offered to the Company for debt with
similar maturities.
F-10
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reclassifications: Certain items in the 1997 consolidated financial
statements have been reclassified to be consistent with the classification in
the 1998 consolidated financial statements.
NOTE 2. TRADE RECEIVABLES
The composition of trade receivables, net is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Billed....................................................................... $110,587 $ 86,309
Unbilled..................................................................... 21,350 34,114
-------- --------
131,937 120,423
(15,568) (11,951)
Less allowance for doubtful accounts and discounts............................. -------- --------
$116,369 $108,472
======== ========
</TABLE>
NOTE 3. INVESTMENTS
At December 31, 1998, the Company held $187,136,000, $30,298,000 and
$30,614,000 in corporate debt securities, United States Government and
governmental agency securities and marketable equity securities, respectively.
At December 31, 1997, the Company held $4,493,000, $94,341,000 and $27,491,000
in repurchase agreements, corporate debt securities and marketable equity
securities, respectively. The Company has classified these securities as
available-for-sale, and at December 31, 1998 and 1997, the debt securities'
amortized cost approximates fair value. The marketable equity securities have
been recorded at their fair market value at December 31, 1998. The available-
for-sale securities have been classified as cash and cash equivalents, and
investment in available-for-sale securities-current, with $111,463,000 and
$136,585,000, respectively, being recorded in each classification at December
31, 1998. At December 31, 1997, $91,629,000 and $34,696,000, respectively, were
recorded in each classification.
The contractual maturities of the available-for-sale securities of
$248,048,000 and $126,325,000 in 1998 and 1997, respectively, are due within one
year.
Expected maturities will differ from contractual maturities because the
issuers of certain debt securities have the right to call or prepay their
obligations without any penalties. The amount classified as current assets on
the accompanying balance sheets represent the expected maturities of the debt
securities during the next year.
F-11
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PLEDGED ASSETS AND DEBT
Debt offerings: On March 4, 1997, the Company completed a private offering of
10 1/2% Senior Discount Notes (the "Senior Discount Notes") due March 1, 2007 at
an original issue discount in which the Company received approximately $288.9
million in net proceeds. The Company filed a registration statement with the
Securities and Exchange Commission ("SEC") for the registration of $500 million
principal amount at maturity of 10 1/2% Senior Discount Notes due March 1, 2007
(the "Senior Discount Exchange Notes") to be offered in exchange for the Senior
Discount Notes (the "Senior Discount Exchange Offer"). The registration
statement was declared effective by the SEC on July 28, 1997 and the Senior
Discount Exchange Offer was commenced. The Senior Discount Exchange Offer
expired on August 24, 1997, at which time all of the Senior Discount Notes were
exchanged for the Senior Discount Exchange Notes. The form and terms of the
Senior Discount Exchange Notes are identical in all material respects to the
form and terms of the Senior Discount Notes except that (i) the Senior Discount
Exchange Notes have been registered under the Securities Act of 1933 (the
"Securities Act") and (ii) holders of the Senior Discount Exchange Notes are not
entitled to certain rights under a registration agreement relating to the Senior
Discount Notes. The Senior Discount Exchange Notes rank pari passu in right of
payment with all existing and future senior unsecured indebtedness of the
Company and rank senior in right of payment to all existing and future
subordinated indebtedness of the Company. The Senior Discount Exchange Notes
accrete interest at a rate of 10 1/2% per year, compounded semi-annually, to an
aggregate principal amount of $500 million by March 1, 2002. Interest will not
accrue on the Senior Discount Exchange Notes for five years, after which time
the Senior Discount Exchange Notes will accrue interest at 10 1/2%, payable
semi-annually. The indenture related to the Senior Discount Exchange Notes
contains certain covenants which, among other things, restrict the ability of
the Company to incur additional indebtedness, pay dividends or make
distributions of the Company's or its subsidiaries' stock, enter into sale and
leaseback transactions, create liens, enter into transactions with affiliates or
related persons, or consolidate, merge or sell all of its assets.
On July 21, 1997, the Company completed a private offering of $225 million
aggregate principal amount of 9 1/4% Senior Notes due July 15, 2007 (the "Senior
Notes"). The Company received net proceeds of approximately $217.6 million from
the Senior Note offering. Interest on the Senior Notes is payable in cash semi-
annually in arrears on July 15 and January 15 of each year at a rate of 9 1/4%
per annum, commencing January 15, 1998. The Senior Notes rank pari passu in
right of payment with all existing and future senior unsecured indebtedness of
the Company and rank senior in right of payment to all existing and future
subordinated indebtedness of the Company. As of December 31, 1997, the Senior
Notes had not been registered under the Securities Act and therefore cannot be
offered for resale, resold or otherwise transferred unless so registered or
unless an applicable exemption from the registration requirements of the
Securities Act is available. The Company has filed a registration statement with
the SEC for the registration of $225 million aggregate principal amount of 9
1/4% Senior Notes due July 15, 2007 (the "Exchange Notes") to be offered in
exchange for the Senior Notes (the "Exchange Offer"). The registration statement
was declared effective by the SEC on December 1, 1997, and the Exchange Offer
was commenced on December 2, 1997. The Exchange Offer expired on January 9,
1998, at which time all of the Senior Notes were exchanged for the Exchange
Notes. The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Senior Notes except that (i) the Exchange
Notes have been registered under the Securities Act and (ii) holders of the
Exchange Notes will not be entitled to certain rights under a registration
agreement relating to the Senior Notes. The indentures relating to the Senior
Notes and the Exchange Notes contain certain covenants which are materially the
same as the covenants relating to the Senior Discount Exchange Notes.
On March 16, 1998, the Company completed a private offering of its 8 3/8%
Senior Notes due March 5, 2008 (the "March 1998 Privately Placed Senior Notes"),
for which the Company received net proceeds
F-12
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PLEDGED ASSETS AND DEBT (CONTINUED)
of approximately $291.9 million. The Company filed a registration statement with
the SEC for the registration of $300 million principal amount of 8 3/8% Senior
Notes due March 15, 2008 (the "March Exchange Notes" together with the March
1998 Privately Placed Senior Notes, the "March 1998 Senior Notes") to be offered
in exchange for the March 1998 Privately Placed Senior Notes (the "March
Exchange Offer"). The registration statement was declared effective by the SEC
on May 15, 1998 and the March Exchange Offer was commenced. The March Exchange
Offer expired on June 25, 1998, at which time all of the March 1998 Privately
Placed Senior Notes were exchanged for the March Exchange Notes. The form and
terms of the March Exchange Notes are identical in all material respects to the
form and terms of the March 1998 Privately Placed Senior Notes except that (i)
the March Exchange Notes have been registered under the Securities Act of 1933
(the "Securities Act") and (ii) holders of the March Exchange Notes are not
entitled to certain rights under a registration agreement related to the March
1998 Privately Placed Senior Notes. Interest on the March 1998 Senior Notes will
be payable in cash semi-annually in arrears on March 15 and September 15 of each
year at a rate of 8 3/8% per annum, commencing September 15, 1998. The March
1998 Senior Notes rank pari passu in right of payment with all existing and
future senior unsecured indebtedness of the Company and rank senior in right of
payment to all existing and future subordinated indebtedness. The March 1998
Senior Notes will mature on March 15, 2008. The March 1998 Senior Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after March 15, 2003 at 104.188% of their principal amount at maturity, plus
accrued and unpaid interest, declining to 100.000% of their principal amount at
maturity, plus accrued and unpaid interest, on or after March 15, 2006. In the
event of certain equity investments in the Company by certain strategic
investors on or before March 15, 2001, the Company may, at its option, use all
or a portion of the net proceeds from such sale to redeem up to 33 1/3% of the
originally issued principal amount of the March 1998 Senior Notes at a
redemption price equal to 108.375% of the principal amount of the March 1998
Senior Notes plus accrued and unpaid interest thereon, if any, to the redemption
date, provided that at least 66 2/3% of the originally issued principal amount
of the March 1998 Senior Notes would remain outstanding immediately after giving
effect to such redemption. In addition, in the event of a Change of Control (as
defined in the indenture dated as of March 16, 1998 between the Company and the
United States Trust Company of New York as trustee, governing the March 1998
Senior Notes (the "March 1998 Senior Note Indenture")) of the Company, each
holder of March 1998 Senior Notes shall have the right to require the Company to
repurchase all or any part of such holder's March 1998 Senior Notes at a
purchase price equal to 101% of the principal amount of the March 1998 Senior
Notes tendered by such holder plus accrued and unpaid interest, if any, to any
Change of Control Payment Date (as defined in the March 1998 Senior Note
Indenture).
The March 1998 Senior Note Indenture imposes operating and financial
restrictions on the Company and its subsidiaries. These restrictions affect,
and in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions in respect of the Company's or such
subsidiaries' capital stock, make other restricted payments, enter into sale and
leaseback transactions, create liens upon assets, enter into transactions with
affiliates ore related persons, sell assets, or consolidate, merge or sell all
or substantially all of their assets.
On October 30, 1998, the Company completed a private offering of its 9 1/2%
Senior Notes due November 1, 2008 (the "October 1998 Privately Placed Senior
Notes"), for which the Company received net proceeds of approximately $291.9
million. The Company filed a registration statement with the SEC for the
registration of $300 million principal amount of 9 1/2% Senior Notes due
November 1, 2008 (the "October Exchange Notes" together with the October 1998
Privately Placed Senior Notes, the
F-13
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PLEDGED ASSETS AND DEBT (CONTINUED)
"October 1998 Senior Notes") to be offered in exchange for the October 1998
Privately Placed Senior Notes (the "October Exchange Offer"). The registration
statement was declared effective by the SEC on January 29, 1999 and the October
Exchange Offer was commenced. The October Exchange Offer expired on March 3,
1999, at which time all of the October 1998 Privately Placed Senior Notes were
exchanged for the October Exchange Notes. The form and terms of the October
Exchange Notes are identical in all material respects to the form and terms of
the October 1998 Privately Placed Senior Notes except that (i) the October
Exchange Notes have been registered under the Securities Act and (ii) holders of
the October Exchange Notes are not entitled to certain rights under a
registration agreement related to the October 1998 Privately Placed Senior
Notes. Interest on the October 1998 Senior Notes will be payable in cash semi-
annually in arrears on May 1 and November 1 of each year at a rate of 9 1/2% per
annum, commencing May 1, 1999. The October 1998 Senior Notes rank pari passu in
right of payment with all existing and future senior unsecured indebtedness of
the Company and rank senior in right of payment to all existing and future
subordinated indebtedness. The October 1998 Senior Notes will mature on November
1, 2008. The October 1998 Senior Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after November 1, 2003 at
106.750% of their principal amount at maturity, plus accrued and unpaid
interest, declining to 100.000% of their principal amount at maturity, plus
accrued and unpaid interest, on November 1, 2008. In the event of certain equity
investments in the Company by certain strategic investors on or before November
1, 2001, the Company may, at its option, use all or a portion of the net
proceeds from such sale to redeem up to 33 1/3% of the originally issued
principal amount of the October 1998 Senior Notes at a redemption price equal to
111.500% of the principal amount of the October 1998 Senior Notes plus accrued
and unpaid interest thereon, if any, to the redemption date, provided that at
least 66 2/3% of the originally issued principal amount of the October 1998
Senior Notes would remain outstanding immediately after giving effect to such
redemption. In addition, in the event of a Change of Control (as defined in the
indenture dated as of October 30, 1998 between the Company and the United States
Trust Company of New York as trustee, governing the October 1998 Senior Notes
(the "October 1998 Senior Note Indenture")) of the Company, each holder of
October 1998 Senior Notes shall have the right to require the Company to
repurchase all or any part of such holder's October 1998 Senior Notes at a
purchase price equal to 101% of the principal amount of the October 1998 Senior
Notes tendered by such holder plus accrued and unpaid interest, if any, to any
Change of Control Payment Date (as defined in the October 1998 Senior Note
Indenture).
The October 1998 Senior Note Indenture imposes operating and financial
restrictions on the Company and its subsidiaries. These restrictions affect, and
in certain cases significantly limit or prohibit, among other things, the
ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions in respect of the Company's or such
subsidiaries' capital stock, make other restricted payments, enter into sale and
leaseback transactions, create liens upon assets, enter into transactions with
affiliates ore related persons, sell assets, or consolidate, merge or sell all
or substantially all of their assets.
F-14
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PLEDGED ASSETS AND DEBT--(CONTINUED)
The Company's debt consisted of the following at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Contracts payable, unsecured, non-interest bearing, due in various installments
with the final payment to be made in 1999............................................... $ 4,400 $ 1,056
Notes payable, banks, bearing interest at 6.1875% due in various installments
through October 1997 (A)................................................................ -- 5,500
Other long-term borrowings, due in various installments
bearing interest at rates ranging from 0% to 8.625%..................................... 108 --
---------- --------
$ 4,508 $ 6,556
========== ========
10 1/2% Senior Discount Notes............................................................. $ 361,902 $326,754
9 1/4% Senior Notes....................................................................... 225,000 225,000
8 3/8% Senior Notes....................................................................... 300,000 --
9 1/2% Senior Notes....................................................................... 300,000 --
CCI unsecured senior notes payable, with semiannual interest payments
at 7.75% payable April 1 and October 1. Annual principal payments
of $1,428,571 are due beginning October 1, 1998 until maturity in
October 2004............................................................................ 8,571 10,000
CCI Series A Senior Unsecured Notes, with semiannual interest payments
at 6.83% payable June 1 and December 1. Annual principal payments of
$909,091 are due beginning December 1, 2001 until maturity in
December 2010........................................................................... 10,000 10,000
CCI Series B Senior Unsecured Notes, with semiannual interest payments
at 6.71% payable June 1 and December 1. Annual principal payments
of $454,546 are due beginning December 1, 2001 until maturity in
December 2010........................................................................... 5,000 5,000
Greene County Partners, Inc. senior notes due in quarterly payments of
$450,000 bearing interest at 6.35% and maturing in April 2001........................... 13,500 15,300
ICTC Series K, 8.620% First Mortgage Bonds due September 2022 (B)......................... 10,000 10,000
ICTC Series L, 7.050% First Mortgage Bonds due October 2013 (B)........................... 10,000 10,000
Contracts payable, to finance company, due in various monthly
payments, including interest at 3.90%, through March 2000,
collateralized by equipment with a depreciated cost of
$4,173,000 at December 31, 1998......................................................... 2,204 2,637
Note payable due in various annual installments, including
interest at 8.25%, through 2006. Collateralized by publishing
rights to purchased directories......................................................... 606 995
Other long-term borrowings, due in various installments
bearing interest at rates ranging from 0% to 8.625%
through March 2004...................................................................... 5,429 2,092
Incentive compensation agreements, due in various
estimated amounts plus interest at 6.0% through
January 2001 (See Note 11).............................................................. 1,194 1,610
---------- --------
1,253,406 619,388
Less current maturities................................................................... 8,236 6,004
---------- --------
$1,245,170 $613,384
========== ========
</TABLE>
________________________
(A) CCI and ICTC have various short-term line of credit agreements with certain
financial institutions totaling $30,000,000 of which no borrowings were
outstanding at December 31, 1998 and $5,500,000 in borrowings were
outstanding at December 31, 1997.
(B) ICTC's first mortgage bonds are collateralized by substantially all real and
personal property of the subsidiary. The bond indenture contains various
provisions restricting, among other things, the payment of dividends and
repurchase of its own stock. Early redemption of the Series K and Series L
Bonds is permitted.
F-15
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. PLEDGED ASSETS AND DEBT--(CONTINUED)
In 1996, the Company used a portion of the proceeds from the Company's
initial public offering (see Note 8) to pay off all existing indebtedness under
three line of credit facilities, which were then canceled. Options to purchase
Class B common stock were granted to a stockholder which had guaranteed
borrowings under two of the facilities. The Company used the Black-Scholes model
to determine the value of the options, which was approximately $3,400,000, at
the date of grant. This value was being amortized over the vesting period of the
options. Upon cancellation of the credit facilities, the options' vesting
schedule and amortization of the fair value of the options were terminated. A
total of 1,300,688 Class B common stock options were outstanding at December 31,
1998 and December 31, 1997.
Principal payments required on the outstanding debt at December 31, 1998 are
as follows (In thousands):
<TABLE>
<S> <C>
1999........................................................... $ 8,236
2000........................................................... 6,643
2001........................................................... 13,414
2002........................................................... 3,256
2003........................................................... 3,203
Later years.................................................... 1,218,654
----------
$1,253,406
==========
</TABLE>
NOTE 5. LEASES AND COMMITMENTS
Leases: The Company leases certain of its office and network facilities
under noncancelable agreements which expire at various times through September
2022. These agreements require various monthly rentals plus the payment of
applicable property taxes, maintenance and insurance. The Company also leases
vehicles and equipment under agreements which expire at various times through
December 2003 and require various monthly rentals.
The total minimum rental commitment at December 31, 1998 under the leases
mentioned above is as follows (In thousands):
<TABLE>
<S> <C>
1999............................................................. $17,786
2000............................................................. 10,908
2001............................................................. 6,090
2002............................................................. 3,877
2003............................................................. 3,026
Thereafter....................................................... 4,398
-------
$46,085
=======
</TABLE>
The total rental expense included in the consolidated statements of operations
for 1998, 1997 and 1996 is approximately $19,824,000, $8,060,000 and $3,640,000,
respectively, which also includes short-term rentals for office facilities.
F-16
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5. LEASES AND COMMITMENTS--(CONTINUED)
Network construction: During 1995, the Company was awarded contracts from
the State of Iowa to build fiber optic telecommunications network segments
throughout the State of Iowa. As of December 31, 1998, the contracts call for
the construction of 235 network segments. Upon completion of each segment, the
Company will receive approximately $115,000 for a seven-year lease for certain
capacity on that segment. The Company will recognize this revenue of
approximately $27,025,000 on a straight-line basis over the term of the lease
based on the relationship of individual segment costs to total projected costs.
For the years ended December 31, 1998, 1997 and 1996, revenue of $2,763,000,
$1,794,000 and $445,000, respectively, had been recognized under these
contracts.
The Company estimates that minimum future construction costs required to
fulfill its obligations under the 1995 contract with the State of Iowa would be
approximately $5,393,000. The Company, however, expects that its actual
construction costs will be higher with respect to such network segments, because
the Company is adding more fiber and route miles than is contractually required
with respect to such construction, in order to optimize the design of its
network. The Company anticipates that the minimum costs to complete this project
will be incurred in 1999.
Buildings: In August 1996, the Company purchased approximately 194 acres of
land on which the Company constructed its headquarters and associated buildings.
Of the land purchased, approximately 75 acres was purchased from a subsidiary of
a stockholder for approximately $692,000. At December 31, 1998, the total
remaining contracted commitments on the building in progress is approximately $8
million.
Alcatel: In January 1999 the Company entered into an agreement with Alcatel
USA Marketing, Inc. to purchase equipment, software and services for a total
commitment of $200,000,000 over a six (6) year period. If McLeodUSA does not
meet the committed purchases on a cumulative annual basis, Alcatel retains the
right to renegotiate the applicable prices. If regulatory conditions
substantially prevent the Company from continuing to implement these plans, the
Company has the option to request renegotiation of unit prices based on revised
quantities of products or to renegotiate unit prices based on the quantities of
products purchased to that time and cease any further purchases of products.
F-17
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. INCOME TAX MATTERS
Net deferred taxes consist of the following components as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(In thousands)
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards................................................ $106,498 $60,335
Accruals and reserves not currently deductible.................................. 24,485 15,910
Deferred revenues............................................................... 8,149 7,093
Intangibles and other assets.................................................... 7,605 3,669
Other........................................................................... 2,144 2,125
-------- -------
148,881 89,132
Less valuation allowance........................................................ 78,556 29,532
-------- -------
70,325 59,600
-------- -------
Deferred tax liabilities:
Property and equipment.......................................................... 39,549 24,620
Other investments............................................................... 11,395 15,333
Differences in revenue recognition.............................................. 10,900 12,140
Deferred line installation cost................................................. 7,952 3,945
Other intangibles............................................................... -- 3,318
Other........................................................................... 529 244
-------- -------
70,325 59,600
-------- -------
$ -- $ --
======== =======
</TABLE>
A valuation allowance has been recognized to offset the related net deferred
tax assets due to the uncertainty of realizing the benefit of the loss
carryforwards. The Company has available net operating loss carryforwards
totaling approximately $262.5 million which expire in various amounts in the
years 2008 to 2018.
The income tax rate differs from the U. S. Federal income tax rate for 1998,
1997 and 1996 due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
"Expected" tax (benefit) rate............................................. (35)% (35)% (35)%
Percent increase (decrease) in income taxes resulting from:
Change in valuation allowance.......................................... 34 15 35
Tax deductions due to exercises of incentive stock options............. (2) (2) (9)
Goodwill amortization for stock purchases.............................. 6 -- --
Net deferred liability balance purchased in CCI
transaction (see Note 11)............................................ -- 21 --
Other.................................................................. (3) 1 9
---- ---- ----
--% --% --%
==== ==== ====
</TABLE>
F-18
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. STOCK-BASED COMPENSATION PLANS
At December 31, 1998, the Company has various stock-based compensation plans
which are described below. Grants under the Company's stock option plans are
accounted for in accordance with Accounting Principles Board (APB) Opinion No.
25 and related Interpretations. The Company granted a total of 1,653,688 stock
options in January and February 1996 at an exercise price of $2.67 per share.
The estimated aggregate fair market value of these options at the date of grant
was later determined to exceed the aggregate exercise price by approximately
$9,190,000. Additionally, in September 1997, the Company granted a total of
1,468,945 stock options at an exercise price of $24.50 per share. The aggregate
fair market value of these options at the date of grant exceeded the aggregate
exercise price by approximately $15,790,000. As a result, the Company is
amortizing these amounts over the four-year vesting period of the options.
Compensation cost of $5,820,000 and $2,993,000 has been charged to income for
the year ended December 31, 1998 and 1997, respectively, using the intrinsic
value based method as prescribed by APB No. 25. Had compensation cost for all of
the stock-based compensation plans been determined based on the grant date fair
values of awards granted during 1998, 1997 and 1996, as prescribed by SFAS No.
123, reported net loss and loss per common share would have been as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
Pro forma net loss............................................... $(151,227) $(93,855) $(24,776)
Pro forma loss per common share.................................. (2.41) (1.71) (0.61)
</TABLE>
1992, 1993 and 1995 Incentive Stock Option Plans: The Company has reserved
2,903,243 shares of Class A common stock for issuance to employees under the
1992, 1993 and 1995 Incentive Stock Option Plans. Options outstanding under
these plans were granted at prices equal to the estimated fair market value on
the dates of grant as determined by the Company's Board of Directors. Under the
1992 and 1993 plans, all options granted become exercisable at a rate of 25% per
year, on a cumulative basis, and expire seven years after the date of grant.
Under the 1995 plan, all options, except for options granted to the Company's
chairman and chief executive officer, become exercisable at a rate of 25% per
year, on a cumulative basis, beginning five years from the date of grant. The
options granted to the Company's chairman and chief executive officer vest at a
rate of 20% per year on a cumulative basis. All options granted under the 1995
plan expire ten years after the date of grant. These plans have been superseded
by the 1996 Employee Stock Option Plan, and no future grants of options will be
made under these plans.
1996 Employee Stock Option Plan: In 1997, the Company's stockholders
approved an amendment to the 1996 Employee Stock Option Plan to increase the
number of Class A common shares available under the plan to 37,500,000 shares
from 4,525,000 shares. At December 31, 1998, after adjusting for option
exercises, the Company has reserved 37,277,305 shares of Class A common stock
for issuance to employees under the plan, which supersedes the 1992, 1993 and
1995 Incentive Stock Option Plans. The exercise price for options granted under
this plan is the fair market value of the Company's Class A common stock on the
day before the grant date (or 110% of the fair market value if the grantee
beneficially owns more than 10% of the outstanding Class A common stock). The
options granted expire ten years after the grant date (or five years after the
grant date if the grantee beneficially owns more than 10% of the outstanding
Class A common stock), and vest over periods determined by the Compensation
Committee; however, no more than $100,000 worth of stock covered by the options
may become exercisable in any calendar year by an individual employee. The 1996
Plan will terminate in March 2006, unless terminated earlier by the Board of
Directors.
F-19
<PAGE>
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. STOCK-BASED COMPENSATION PLANS--(CONTINUED)
Directors' Stock Option Plan: The Company has reserved 397,686 shares of
Class A common stock for issuance under the Directors' Plan to directors who are
not officers or employees of the Company. The Director's Plan was adopted and
approved by the stockholders in 1993 and amended and restated on March 28, 1996
to be a "formula" plan providing for an automatic grant of options to eligible
directors. Each eligible director who commences service on the Board of
Directors after the amendment and restatement of the plan will be granted an
initial option to purchase 10,000 shares of Class A common stock. An additional
option to purchase 5,000 shares of Class A common stock will be granted after
each of the next two annual meetings to each eligible director who remains for
the two-year period. Options granted under the Directors' Plan vest at a rate of
25% per year, on a cumulative basis, and expire seven years after the date of
grant (ten years after the date of grant for options granted under the amended
and restated plan). However, upon a change in control of the Company as defined
in the Directors' Plan, all options will become fully exercisable. The Company
has the right to repurchase any Class A common stock issued pursuant to the
exercise of an option granted under this plan that is offered for sale to an
individual who is not an employee or director of the Company. The Directors'
Plan will terminate in March 2006, unless terminated earlier by the Board of
Directors.
The fair value of each grant under the Company's stock option plans is
estimated at the grant date using the Black-Scholes option-pricing model with
the following weighted-average assumptions for grants in 1998, 1997 and 1996,
respectively: no expected dividends, risk-free interest rates of 4.65%, 5.48%,
and 6.08%; price volatility of 59.39% in 1998, 48.63% in 1997 and 40% in 1996
and expected lives of 4 years for all three years.
Employee Stock Purchase Plan: Under the stock purchase plan, employees may
purchase up to an aggregate of 1,000,000 shares of Class A common stock through
payroll deductions. Employees of the Company who have been employed more than
six months and who are regularly scheduled to work more than 20 hours per week
are eligible to participate in the plan, provided that they own less than five
percent of the total combined voting power of all classes of stock of the
Company. The purchase price for each share will be determined by the
Compensation Committee, but may not be less than 90% of the closing price of the
Class A common stock on the first or last trading day of the payroll deduction
period, whichever is lower. No employee may purchase in any calendar year Class
A common stock having an aggregate fair value in excess of $25,000. Upon
termination of employment, an employee other than a participating employee who
is subject to Section 16(b) under the Securities Exchange Act of 1934, as
amended, will be refunded all moneys in his or her account and the employee's
option to purchase shares will terminate. The plan will terminate in March 2006,
unless terminated earlier by the Board of Directors. The Company has implemented
this plan effective February 1, 1997. Under the plan, the Company sold 132,893
shares of Class A common stock in 1998 and 38,080 shares in 1997. The fair value
of the employees' purchase rights was calculated for disclosure purposes using
the Black-Scholes model with the following assumptions: an expected life of 12
months in 1998 and 11 months in 1997; a risk-free interest rate of 4.65% in 1998
and 5.40% in 1997; expected volatility of 59.39% in 1998 and 48.63% in 1997; and
no expected dividends. The fair value of each purchase right granted in 1998 was
$10.76 and in 1997 was $6.35.
F-20
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Note 7. STOCK-BASED COMPENSATION PLANS--(CONTINUED)
A summary of the status of the Company's stock option plans as of and for the
years ended December 31, 1998, 1997 and 1996 is as follows (In thousands, except
price data):
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
--------------- --------------
<S> <C> <C>
Outstanding at January 1, 1996............................................................ 4,869 $ 1.33
Granted................................................................................ 3,502 13.14
Exercised.............................................................................. (491) 1.30
Forfeited.............................................................................. (336) 7.64
------
Outstanding at December 31, 1996.......................................................... 7,544 6.54
Granted................................................................................ 6,674 26.72
Exercised.............................................................................. (1,138) 1.15
Forfeited.............................................................................. (2,472) 29.74
------
Outstanding at December 31, 1997.......................................................... 10,608 14.40
Granted................................................................................ 6,273 31.28
Exercised.............................................................................. (1,373) 2.72
Forfeited.............................................................................. (3,237) 35.85
------
Outstanding at December 31, 1998.......................................................... 12,271 18.69
======
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
------------------------------------
1998 1997 1996
--------- ------------- ----------
<S> <C> <C> <C>
Exercisable, end of year............................................................ 2,776 2,397 2,324
====== ====== ======
Weighted-average fair value per option of options granted
during the year................................................................... $18.18 $12.24 $ 5.74
====== ====== ======
</TABLE>
Other pertinent information related to the options outstanding at December 31,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------------------------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.27 to $2.27........................ 1,926,362 3.14 $ 1.68 1,373,212 $ 1.49
$2.49 to $2.93........................ 1,275,525 4.20 2.68 569,491 2.67
$4.29 to $9.30........................ 43,073 5.81 7.63 30,917 7.08
$17.75 to $17.75...................... 2,145,639 8.07 17.75 186,408 17.75
$18.63 to $23.50...................... 242,566 7.70 20.14 41,333 20.01
$24.25 to $24.25...................... 2,678,612 9.77 24.25 80 24.25
$24.50 to $24.50...................... 1,639,730 8.66 24.50 399,926 24.50
$24.75 to $29.61...................... 112,511 8.49 29.38 24,093 29.16
$29.75 to $29.75...................... 1,316,560 10.00 29.75 -- --
$31.56 to $46.63...................... 889,956 9.06 35.77 150,066 34.31
---------- ---------
12,270,534 7.61 $18.69 2,775,526 $ 8.49
========== =========
</TABLE>
In addition, options to purchase shares of Class B common stock were granted
to a stockholder which had guaranteed borrowings under certain credit facilities
which were paid off with a portion of the proceeds from the Company's initial
public offering and subsequently canceled. These options have a weighted-average
exercise price of $1.79 and are fully vested at December 31, 1998.
F-21
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Note 8. CAPITAL STOCK INFORMATION AND INVESTOR AGREEMENT
Public offerings: On June 10, 1996, the Company undertook an initial public
offering of Class A common stock which yielded net proceeds of approximately
$258 million. On November 20, 1996, the Company completed an additional public
offering of Class A common stock which yielded net proceeds of approximately
$138 million in additional capital.
Recapitalization: In May 1997, the Company's stockholders approved an
increase in the authorized Class A common stock from 75,000,000 shares of $.01
par value stock to 250,000,000 shares of $.01 par value stock. In March 1996,
the Company's Board of Directors had authorized an increase in the authorized
Class A common stock to 75,000,000 shares of $.01 par value stock from
15,000,000 shares of $.01 par value stock and an increase in the authorized
Class B common stock to 22,000,000 shares of $.01 par value stock from
15,000,000 shares of $.01 par value stock. All Class B common stock has rights
identical to Class A common stock other than their voting rights, which are
equal to .40 vote per share. Each share of Class B common stock is convertible
into one share of Class A common stock at the option of the holder. The restated
Articles of Incorporation also authorizes the Board of Directors to issue up to
2,000,000 shares of $.01 par value preferred stock. The terms of the preferred
stock are determined at the time of issuance. No preferred shares were issued or
outstanding at December 31, 1998. Also in March 1996, the Board of Directors
declared a 3.75 to 1 stock split for both the Class A and Class B common stock
which was effected in the form of a stock dividend. All references to share and
per share amounts give retroactive effect to this stock split and
recapitalization.
Stockholders' Agreement: Certain of the Company's principal stockholders have
entered into a Stockholders' Agreement, which amended and restated a prior
Investor Agreement, and became effective on September 24, 1997. This agreement
provides for the election of directors designated by certain principal
stockholders and prevents certain principal stockholders from disposing of any
equity securities of the Company for a period of one year unless consented to by
the Board of Directors. In addition, certain principal stockholders agreed that
for a period of two years they will not acquire any securities or options issued
by the Company, except as allowed by previous agreements or by the Board of
Directors.
On November 18, 1998, the Company entered into a stockholders' agreement
(the "November 1998 Stockholders' Agreement") with Alliant Energy, Clark E. and
Mary E. McLeod, and Richard A. Lumpkin, Gail G. Lumpkin and several other
parties affiliated or related to Richard A. Lumpkin (collectively, the
"Lumpkins," and together with Alliant Energy and Clark E. and Mary E. McLeod,
the "Principal Stockholders").
The November 1998 Stockholders' Agreement provides, among other things,
that:
. until December 31, 2001, the Principal Stockholders will not sell or
otherwise dispose of any of our equity securities, or any other
securities convertible into or exercisable for such equity securities,
beneficially owned by such Principal Stockholder without receiving the
prior written consent of the Company's board of directors, except for
permitted transfers as provided in the November 1998 Stockholders'
Agreement
. the Company's board of directors will determine on a quarterly basis
commencing with the quarter ending December 31, 1998 and ending on
December 31, 2001, the aggregate number, if any, of shares of Class A
common stock (not to exceed in the aggregate 150,000 shares per quarter)
that the Principal Stockholders may sell or otherwise dispose of during
designated trading periods following the release of the Company's
quarterly or annual financial results
F-22
<PAGE>
. to the extent the Company's board of directors grants registration
rights to a Principal Stockholder in connection with a sale or other
disposition of the Company's securities by such Principal Stockholder,
it will grant similar registration rights to the other parties
. the Company's 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 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 Principal
Stockholders as of December 31, 1998) (the "Registrable Amount"), to be
registered by the Company under the Securities Act, for sale or other
disposition by the Principal Stockholders
. in any underwritten offering of shares of Class A common stock by the
Company, other than an offering registering shares of our Class A common
stock on a registration statement on Form S-4 or Form S-8 or other form
which would not permit the inclusion of shares of Class A common stock of
the Principal Stockholders, the Company will give written notice of such
offering to the Principal Stockholders and will undertake to register the
shares of Class A common stock of such parties up to the Registrable
Amount, if any, as determined by the Company's board of directors
. the Company may subsequently determine not to register any shares of the
Principal Stockholders under the Securities Act and may either not file a
registration statement or otherwise withdraw or abandon a registration
statement previously filed
The November 1998 Stockholders' Agreement terminates on December 31, 2001.
NOTE 9. CHANGE-OF-CONTROL AGREEMENTS
Change-of-Control Agreements: The Company has entered into change-of-control
agreements with certain executive employees, which provide for certain payments
in connection with termination of employment after a change of control (as
defined within the agreements) of the Company. The change-of-control agreements
terminate on December 31, 2006 unless a change of control occurs during the six-
month period prior to December 31, 2006, in which case the agreements terminate
on December 31, 2007. The agreements provide that if an executive terminates his
or her employment within six months after a change of control or if the
executive's employment is terminated within 24 months after a change of control
in accordance with the terms and conditions set forth in the agreements, the
executive will be entitled to certain benefits. The benefits include cash
compensation, immediate vesting of outstanding stock options and coverage under
the Company's group health plan.
NOTE 10. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
CCI, a wholly owned subsidiary of the Company, maintains noncontributory
defined pension and death benefit plans covering substantially all of its
salaried and hourly employees. The pension benefit formula used in the
determination of pension cost is based on the highest five consecutive calendar
years' base earnings within the last ten calendar years immediately preceding
retirement or termination. It is CCI's policy to fund pension costs as they
accrue subject to any applicable Internal Revenue Code limitations.
In 1997, the Company offered salaried plan participants a choice between
transferring their plan assets to the hourly defined benefit plan or
participating in the 1996 Employee Stock Option Plan, as the salaried defined
benefit plan was terminated effective April 1, 1998. This plan change
substantially reduced the expected future benefits under the defined benefits
pension plans and has been reflected in the tables below. As a result of the
termination of the salaried plan, the Company recognized a gain of $2.2 million.
The Company continues to maintain the defined benefit pension plan for
substantially all hourly employees of CCI.
F-23
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--(CONTINUED)
In addition to providing pension benefits, CCI provides an optional retiree
medical program to its salaried and union retirees and spouses under age 65 and
common life insurance coverage for the salaried retirees. All retirees are
required to contribute to the cost of their medical coverage while the salaried
life insurance coverage is provided at no cost to the retiree.
The change in benefit obligations and the change in plan assets for 1998
and 1997, and the components of net periodic benefit costs and the weighted-
average assumption for 1998, 1997 and 1996, are as follows (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS POSTRETIREMENT BENEFITS
-------------------- -------------------------
1998 1997 1998 1997
--------- --------- ------------ -----------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATIONS
- -----------------------------
Benefit obligation at beginning of year $ 52,120 $ 59,495 $ 4,998 $ 9,905
Service cost 788 2,440 114 606
Interest cost 3,904 3,517 337 581
Plan amendments -- -- -- (2,389)
Curtailment gain -- (4,067) -- --
Special termination benefits and other 6,544 -- -- --
Benefits paid (20,319) (2,580) (367) (297)
Actuarial gains 2,013 (6,685) (493) (3,408)
-------- -------- ------- -------
Benefit obligation at end of year $ 45,050 $ 52,120 $ 4,589 $ 4,998
======== ======== ======= =======
CHANGE IN PLAN ASSETS
- ---------------------
Fair value of plan assets at beginning of year $ 65,694 $ 55,257 $ -- $ --
Actual return on plan assets 6,835 7,767 -- --
Employer contributions -- 5,250 367 297
Benefits paid (20,319) (2,580) (367) (297)
-------- -------- ----------- ----------
Fair value of plan assets at end of year $ 52,210 $ 65,694 $ -- $ --
======== ======== =========== ==========
Funded status $ 7,160 $ 13,574 $ (4,589) $ (4,998)
Unrecognized net actuarial gain (13,829) (22,963) (3,742) (3,463)
Unrecognized prior service cost 4,464 3,425 (2,215) (2,389)
Unrecognized transition (asset) or obligation (118) (157) 4,346 4,733
-------- -------- ------- -------
Accrued benefit cost $ (2,323) $ (6,121) $ (6,200) $ (6,117)
======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pension Benefits POSTRETIREMENT BENEFITS
----------------------------- ---------------------------
1998 1997 1996 1998 1997 1996
--------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET
PERIODIC BENEFIT COSTS
- ----------------------
Service cost $ 788 $ 2,440 $ 2,195 $ 114 $ 606 $ 572
Interest cost 3,904 3,517 3,327 337 581 540
Expected return on plan assets (5,043) (3,877) (3,417) -- -- --
Amortization of prior service costs 482 496 496 (174) -- --
Amortization of transitional (asset)
or obligation (39) 12 12 387 387 387
Recognized actuarial (gain) or loss (1,708) (543) (373) (215) (26) (14)
------- ------- ------- ------ ------ ------
Net periodic benefit cost $(1,616) $ 2,045 $ 2,240 $ 449 $1,548 $1,485
======= ======= ======= ====== ====== ======
WEIGHTED-AVERAGE ASSUMPTION
AS OF DECEMBER 31
- -----------------
Discount rate 7% 7% 7% 7% 7% 6%
Expected return on plan assets 8% 8% 8% -- -- --
Rate of compensation increase 5% 5% 5% 5% 5% 5%
</TABLE>
F-24
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10. RETIREMENT PLANS AND POSTRETIREMENT BENEFITS--(CONTINUED)
The postretirement benefit obligation is calculated assuming that health-care
costs increased by 8% in 1998 and 7.5% in 1999, and that the rate of increase
thereafter (the health-care cost trend rate) will decline to 5% in 2004 and
subsequent years. The health-care cost trend rate has a significant effect on
the amounts reported for costs each year as well as on the accumulated
postretirement benefit obligation. For example, a one percentage point increase
each year in the health-care trend rate would have the following effects:
<TABLE>
<CAPTION>
ONE PERCENTAGE ONE PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
<S> <C> <C>
Effect on total of service and
interest cost components in 1998 $ 40,565 $ (35,853)
Effect on year-end 1998
postretirement benefit obligations $370,825 $(333,297)
</TABLE>
The weighted average discount rate used in determining the benefit obligation
was 7% in 1998.
The postretirement medical and life insurance benefit plans have been modified
effective January 1, 1998 to provide benefits only to employees meeting certain
age and years of service requirements as of January 1, 1998.
CCI also has a nonqualified deferred compensation plan, which allows selected
employees to defer a portion of any compensation received. Those deferred
amounts are invested in various funds at December 31, 1998 to provide assets and
accumulated earnings to offset the deferred compensation amounts due to the
participating employees.
In addition, the Company has various 401(k) profit-sharing plans available to
eligible employees. The Company contributed approximately $2,007,000, $1,252,000
and $242,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
An additional discretionary 1998 contribution of $1,500,000 was also made.
NOTE 11. ACQUISITIONS
Ruffalo, Cody & Associates, Inc. (Ruffalo Cody): On July 15, 1996, the
Company acquired Ruffalo Cody for a total purchase price of approximately $17.3
million, which consisted of approximately $5.1 million in cash (including
approximately $243,000 in direct acquisition costs), 361,420 shares of Class A
common stock and 158,009 options to purchase shares of Class A common stock
granted to the holders of Ruffalo Cody options. An additional $50,782 in cash
and 56,177 shares of Class A common stock were delivered to certain stockholders
of Ruffalo Cody upon fulfillment certain conditions relating to ongoing revenues
from an agreement with a major long distance carrier to provide telemarketing
services. The long distance carrier terminated this contract effective December
31, 1996.
TelecomUSA Publishing Group, Inc. (McLeodUSA Media Group): On September 20,
1996, the Company acquired TelecomUSA Publishing Group, Inc. (now known as
McLeodUSA Media Group, Inc.) for a total purchase price of approximately $76.1
million, which consisted of approximately $74.5 million in cash (including
approximately $436,000 in direct acquisition costs) and $1.6 million resulting
from the Company entering into an incentive compensation program with all
holders of nonvested McLeodUSA Media Group options, which provides for payments
to be made to these individuals on January 1 of the year following the year in
which the corresponding options would have vested.
F-25
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. ACQUISITIONS--(CONTINUED)
Total Communications Systems, Inc. (TCSI): On December 9, 1996, the Company
purchased the customer base and certain other assets of TCSI for a cash purchase
price of approximately $534,000.
Digital Communications of Iowa, Inc. (DCI): In January 1997, the Company
issued 84,430 shares of Class A common stock in exchange for all the outstanding
shares of DCI, in a transaction accounted for as a purchase. The total purchase
price was approximately $2.3 million based on the average closing market price
of the Company's Class A common stock at the time of the acquisition.
Fronteer Financial Holdings, Ltd. (Fronteer): In January 1997, McLeodUSA
Media Group exercised its option to acquire six directories from Fronteer for a
total cash purchase price of approximately $3.9 million.
Indiana Directories, Inc. (Indiana Directories): On March 31, 1997,
McLeodUSA Media Group acquired 26 telephone directories published by Indiana
Directories for a total cash purchase price of approximately $10 million.
ESI Communications, Inc. (ESI): On June 10, 1997, the Company acquired
substantially all of the assets of ESI and related entities for a total cash
purchase price of approximately $15.2 million.
Smart Pages, Inc. and Yellow Pages Publishers, Inc. (Smart Pages): On
September 22, 1997, McLeodUSA Media Group acquired two telephone directories
published by Smart Pages for a total cash purchase price of approximately $2
million.
CCI: On September 24, 1997, pursuant to the terms and conditions of an
Agreement and Plan of Reorganization dated June 14, 1997 (the "Merger
Agreement"), the Company issued 8,488,586 shares of Class A common stock and
paid approximately $155 million in cash to the shareholders of CCI in exchange
for all of the outstanding shares of CCI in a transaction accounted for using
the purchase method of accounting. The total purchase price was approximately
$382.1 million based on the average closing price of the Company's Class A
common stock five days before and after the date of the Merger Agreement. The
purchase price includes approximately $3.4 million of direct acquisition costs.
OneTEL Corp. (OneTEL): On October 15, 1997, the Company issued 55,500 shares
of Class A common stock as consideration for certain assets of OneTEL. The total
purchase price was approximately $2 million based on the closing price of the
Company's Class A common stock on the purchase date.
Colorado Directory Company LLC (Colorado Directory): On December 31, 1997, the
Company issued 140,000 shares of Class A common stock as consideration for all
of the outstanding membership and ownership interests of Colorado Directory. The
total purchase price was approximately $4.5 million based on the closing price
of the Company's Class A common stock on the purchase date.
F.D.S.D. Rapid City Directories, Inc. (F.D.S.D.): On March 17, 1998, McLeodUSA
Media Group acquired a telephone directory published by F.D.S.D. for a cash
purchase price of approximately $2.2 million.
Bi-Rite Directories, Inc. (Bi-Rite): On March 20, 1998, McLeodUSA Media Group
acquired a telephone directory published by Bi-Rite for a cash purchase price of
approximately $3.7 million.
Smart Pages, Inc. and Yellow Page Publishers, Inc. (Smart Pages): On April 8,
1998, McLeodUSA Media Group acquired a telephone directory published by Smart
Pages for a cash purchase price of approximately $1.3 million.
F-26
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. ACQUISITIONS--(CONTINUED)
NewCom Technologies, Inc. and NewCom OSP Services, Inc. (collectively,
NewCom): On April 24, 1998, the Company issued 70,508 shares of Class A common
stock and paid approximately $1 million cash for all of the outstanding shares
of NewCom, in a transaction accounted for using the purchase method of
accounting. The total purchase price was approximately $4.2 million based on the
average closing market price of the Class A common stock at the time of the
acquisition.
Communications Cable-Laying Company, Inc. (CCC): On June 29, 1998, the Company
issued 151,019 shares of Class A common stock to acquire certain of the assets
of CCC. The total purchase price was approximately $6 million based on the
average closing market price of the Class A common stock at the time of the
acquisition and including $78,000 of cash acquisition costs.
QST Communications, Inc. (QST): On August 21, 1998, the Company acquired all
the outstanding shares of QST for approximately $20 million cash and an option
to purchase 245,536 shares of the Company's Class A common stock at an exercise
price of the lower of $40.00 or the closing price of the Class A common stock on
the day prior to the closing date of the acquisition ($37.25). This transaction
is accounted for using the purchase method of accounting. The purchase price
includes approximately $151,000 of cash acquisition costs.
ADCO Publishing Co, Inc. (ADCO): On September 15, 1998, McLeodUSA Media Group
acquired two telephone directories published by ADCO for a cash purchase price
of approximately $8.9 million.
Rivers Directories, Inc. (Mozarks): On November 19, 1998, McLeodUSA Media
Group acquired three telephone directories published by Mozarks for a total cash
purchase price of $216,000.
Inlet, Inc. (Inlet): On November 25, 1998, the Company acquired Inlet for a
total purchase price of approximately $2.4 million, which consisted of 70,672
shares of Class A common stock and an option to purchase 10,414 shares of Class
A common stock. The total purchase price was based on the average closing
market price of the Class A common stock on the five days prior to and after the
closing date of the acquisition ($31.76). This transaction is accounted for
using the purchase method of accounting.
Mo-Ark Directories, Inc. (Mo-Ark): On December 3, 1998, McLeodUSA Media Group
acquired two telephone directories published by Mo-Ark for a total cash purchase
price of $606,000.
F-27
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11. ACQUISITIONS--(CONTINUED)
The following table summarizes the purchase price allocations for the
Company's business acquisitions (in thousands):
<TABLE>
<CAPTION>
TRANSACTION YEAR: 1998 1997 1996
- ---------------- -------------- ---------------- -------------
<S> <C> <C> <C>
Cash purchase price $27,583 $178,477 $79,402
Acquisition costs 229 3,415 679
Incentive agreements -- -- 1,610
Contracts payable 9,540 7,022 --
Option agreements -- 500 --
Promissory notes 815 100 --
Stock issued 11,427 232,368 8,945
Options to purchase Class A common stock 143 -- 3,911
Less cash to be received upon option exercised -- -- (610)
------- -------- -------
$49,737 $421,882 $93,937
Working capital acquired, net $ (118) $ 41,797 $ 9,138
Fair value of other assets acquired 13,480 174,401 5,817
Intangibles 38,742 288,038 79,966
Liabilities assumed (2,367) (82,354) (984)
------- -------- -------
$49,737 $421,882 $93,937
</TABLE>
These acquisitions have been accounted for as purchases and the results of
operations are included in the consolidated financial statements since the dates
of acquisition.
The unaudited consolidated results of operations for the years ended December
31, 1998 and 1997 on a pro forma basis as though the above entities had been
acquired as of the beginning of the respective periods are as follows:
<TABLE>
<CAPTION>
1998 1997
------------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenue..................................................... $ 612,703 $ 484,376
Net loss.................................................... (127,006) (86,996)
Loss per common share....................................... (2.02) (1.42)
</TABLE>
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the operating results that would have
occurred had the acquisitions been consummated as of the above dates, nor are
such operating results necessarily indicative of future operating results.
On October 27, 1998, the Company entered into an Agreement and Plan of
Reorganization with Dakota Telecommunications Group, Inc., a Delaware
corporation (DTG), pursuant to which the Company agreed, subject to certain
conditions, to acquire DTG for an aggregate of 1,375,000 shares of Class A
common stock and the assumption of $31 million in debt. The DTG transaction was
consummated on March 5, 1999 (see Note 16).
F-28
<PAGE>
PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12. RELATED PARTY TRANSACTIONS
The Company has entered into agreements with two stockholders that gives
certain rights-of-way to the Company for the construction of its
telecommunications network in exchange for capacity on the network.
The Company provided and purchased services from various companies, the
principals of which are stockholders or directors of McLeodUSA Incorporated or
are affiliates. Revenues from services provided totaled $3,698,000, $1,018,000
and $254,000 and services purchased, primarily rent, legal services and database
verification services, totaled $3,065,000, $2,030,000 and $934,000 for the years
ended December 31, 1998, 1997 and 1996, respectively.
In December 1998, the Company entered into a split dollar arrangement for life
insurance policies owned by the McLeod Family 1998 Special Trust on the joint
lives of Clark and Mary McLeod. The McLeod Family 1998 Special Trust agreed to
assign the policies to the Company as collateral for the premium payments. No
loans have been taken against these policies. In 1998, the premium payments paid
by the Company totaled $1,880,000. The aggregate face amount of the policies is
$113,000,000. The McLeod Family 1998 Special Trust is sole owner and beneficiary
of each policy. The Company has agreed with Clark and Mary McLeod that one of
the principle reasons for entering into this arrangement is to avoid any need
for their heirs to liquidate their holdings of Class A common stock at or soon
after the death of one or both of them. Clark and Mary McLeod have agreed to
restrictions on their ability to sell or otherwise dispose of their shares of
Class A common stock. The Company also paid premiums of $138,257 for a universal
life policy on Clark and Mary McLeod with a face value of $13,500,000. The
Company is the beneficiary of this policy.
During 1997, the Company also acquired two condominium units from a Company
director for a total purchase price of $171,000 and purchased a 15,000 square
foot building, which is used as a support facility for its fiber optic network,
from a stockholder for a cash purchase price of $500,000.
In addition, at December 31, 1998 the Company has two $75,000 notes receivable
from officers. The notes bear interest at the applicable federal interest rate
for mid-term loans. One note requires interest-only payments for one year and
then annual $25,000 payments plus interest until paid in full. The other note
requires annual $25,000 payments plus interest until paid in full.
F-29
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
NOTE 13. QUARTERLY DATA--(UNAUDITED)
The following tables include summarized quarterly financial data for the
years ended December 31:
<TABLE>
<CAPTION>
QUARTERS
--------------------------------------------------
FIRST SECOND THIRD FOURTH (1)
----------- ---------- ---------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1998:
Revenue.............................................. $134,331 $155,695 $148,616 $165,504
Operating loss....................................... (20,813) (17,300) (21,257) (15,305)
Net loss............................................. (30,267) (29,791) (33,042) (31,812)
Loss per common share................................ (0.49) (0.48) (0.52) (0.50)
1997:
Revenue.............................................. $ 35,747 $ 46,523 $ 49,325 $136,291
Operating loss....................................... (15,168) (15,668) (20,074) (18,459)
Net loss............................................. (13,355) (16,496) (23,705) (26,354)
Loss per common share................................ (0.26) (0.31) (0.45) (0.43)
1996:
Revenue.............................................. $ 12,488 $ 13,918 $ 19,091 $ 35,826
Operating loss....................................... (4,076) (4,791) (7,689) (11,654)
Net loss............................................. (4,340) (4,543) (4,535) (8,928)
Loss per common share................................ (0.14) (0.13) (0.10) (0.18)
</TABLE>
- ----------------------
(1) The fourth quarter 1997 results include the operations of CCI, which was
acquired on September 24, 1997.
NOTE 14: INFORMATION BY BUSINESS SEGMENT
The Company operates predominantly in the business of providing local, long
distance and related communications services to end users and the sale of
advertising space in telephone directories. The two business segments have
separate management teams and infrastructures that offer different products and
services. The principal elements of these segments are to provide integrated
communications services, provide outstanding customer service, expand fiber
optic network, expand intra-city fiber network build, and publish and distribute
directories to local area subscribers.
The Company evaluates the performance of its operating segments based on
earnings before interest, taxes, depreciation and amortization, excluding
general corporate expenses ("EBITDA"). The accounting policies of the reportable
segments are the same as those described in Note 1 of Notes to Consolidated
Financial Statements. Intersegment transfers are accounted for on an arm's
length pricing basis.
Identifiable assets (excluding intersegment receivables) are the Company's
assets that are identified in each business segment. Corporate assets primarily
include cash and cash equivalents, investments in available-for-sale securities,
administrative headquarters and goodwill recorded primarily as a result of the
CCI merger in 1997.
In 1998, 1997 and 1996, no single customer or group under common control
represented 10% or more of the Company's sales.
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14: INFORMATION BY BUSINESS SEGMENT--(CONTINUED)
Segment information for the years 1998, 1997 and 1996 was as follows (in
thousands):
<TABLE>
<CAPTION>
TELECOMMUNICATIONS MEDIA CORPORATE TOTAL
----------------------- ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
1998
Revenues $459,270 $144,876 $ -- $ 604,146
================================================================================
EBITDA 13,139 18,829 (11,961) 20,007
Depreciation and amortization (56,136) (9,814) (23,157) (89,107)
Interest Revenue 941 41 25,018 26,000
Interest Expense (5,256) -- (72,978) (78,234)
Taxes and Other (4,014) (42) 478 (3,578)
---------------------------------------------------------------------------------
Net Income (Loss) (51,326) 9,014 (82,600) (124,912)
=================================================================================
Total assets 684,730 199,734 1,040,733 1,925,197
Capital expenditures 251,401 26,395 61,864 339,660
- -------------------------------------------------------------------------------------------------------------------
1997
Revenues $218,245 $ 49,641 $ -- $ 267,886
=================================================================================
EBITDA (29,954) 11,914 (13,422) (31,462)
Depreciation and amortization (18,302) (5,814) (9,159) (33,275)
Interest Revenue 290 21 22,349 22,660
Interest Expense (1,415) (27) (33,185) (34,627)
Taxes and Other 1,366 (2,547) (2,025) (3,206)
---------------------------------------------------------------------------------
Net Income (Loss) (48,015) 3,547 (35,442) (79,910)
=================================================================================
Total assets 351,990 172,424 821,238 1,345,652
Capital expenditures 121,618 34,204 445,315 601,137
- -------------------------------------------------------------------------------------------------------------------
1996
Revenues $ 66,171 $ 15,152 $ -- $ 81,323
=================================================================================
EBITDA (10,490) 1,141 (7,996) (17,345)
Depreciation and amortization (4,327) (1,346) (2,812) (8,485)
Interest Revenue -- 87 5,947 6,034
Interest Expense (1) (133) (531) (665)
Other -- (2,162) 277 (1,885)
---------------------------------------------------------------------------------
Net Income (Loss) (14,818) (2,413) (5,115) (22,346)
=================================================================================
Total assets 110,302 94,270 248,422 452,994
Capital expenditures 66,507 528 106,747 173,782
</TABLE>
F-31
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15: EFFECTS OF NEW ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for the costs of computer software developed or obtained for internal
use and is required to be adopted no later than our 1999 fiscal year. The
Company plans to modify its method of capitalization of such costs by adopting
this statement prospectively on January 1, 1999. The Company is currently
evaluating this statement but does not expect it to have a material impact on
its financial condition or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument (including derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS 133 requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally document,
designate and assess the effectiveness of transactions that receive hedge
accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS 133 as of the beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be
applied to (a) derivative instruments and (b) derivative instruments embedded in
hybrid contracts that were issued, acquired or substantively modified after
December 31, 1997 (and, at the company's election, before January 1, 1998).
The Company does not expect the impact of the adoption of SFAS 133 to be
material to its results of operations as it does not currently hold any
derivative instruments or engage in hedging activities.
NOTE 16: SUBSEQUENT EVENTS
The Ovation Merger Agreement. On January 6, 1999, the Company entered into an
Agreement and Plan of Merger (the "Ovation Merger Agreement") with Ovation
Communications, Inc., a Delaware corporation ("Ovation"), and certain
stockholders of Ovation pursuant to which Ovation will be merged with and into a
newly formed wholly owned subsidiary of the Company (the "Ovation Merger"). As
a result of the Ovation Merger, (i) each share of Ovation's preferred stock will
be converted into the right to receive cash, and (ii) each share of Ovation's
common stock will be converted, at the election of the stockholder, into the
right to receive cash or shares of Class A common stock. The amount of cash
into which each share of Ovation's preferred stock will be converted and the
amount of cash or number of shares of Class A common stock into which each share
of Ovation's common stock will be converted will be determined immediately prior
to consummation of the Ovation Merger in accordance with formulas specified in
the Ovation Merger Agreement. The Company estimates that it will be required to
issue approximately 5.1 million shares of Class A common stock and to pay
approximately $141 million cash to effect the Ovation Merger. The Company will
also assume approximately $95 million in Ovation debt. In addition, under the
terms of the Ovation Merger Agreement, each option to purchase Ovation common
stock issued under Ovation's stock option plan will become or be replaced by an
option to purchase a number of shares of Class A common stock equal to the
number of shares of Ovation common stock that could have been purchased
(assuming full vesting) under the Ovation stock option multiplied by the
exchange ratio used to convert Ovation common stock into Class A common stock.
Consummation of the Ovation Merger is subject to the satisfaction of certain
conditions, including (i) approval of the Ovation Merger Agreement and the
Ovation Merger by the stockholders of Ovation,
F-32
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16: SUBSEQUENT EVENTS--(CONTINUED)
(ii) effectiveness of the registration statement registering the shares of Class
A common stock to be issued in the Ovation Merger, (iii) compliance with the
applicable provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976 and the related waiting periods thereunder, (iv) receipt of specified
regulatory approvals, and (v) certain other customary conditions. Both the
Company and Ovation may terminate the Ovation Merger Agreement if the Ovation
Merger has not been consummated by May 1, 1999. Certain stockholders of Ovation
holding in the aggregate approximately 94% of the voting power attributable to
Ovation's common stock and preferred stock have agreed to vote all of their
shares in favor of the Ovation Merger at a meeting of the stockholders of
Ovation.
In connection with the execution of the Ovation Merger Agreement, the Company
entered into a Revolving Credit Agreement with Ovation pursuant to which the
Company agreed to lend Ovation up to $20 million on a senior subordinated
unsecured basis. In addition, pursuant to a stockholders' agreement, certain
Ovation stockholders agreed through December 31, 2001 to certain restrictions on
their ability to transfer the shares of Class A common stock that they will
receive in the Ovation Merger.
Acquisition of Talking Directories, Inc. and Info America Phone Books, Inc.
On February 10, 1999, the Company acquired Talking Directories, Inc., a Michigan
corporation ("Talking Directories"), in exchange for 2.6 million shares of its
Class A common stock. In a related and concurrent transaction, on February 10,
1999, the Company acquired Info America Phone Books, Inc., a Michigan
corporation ("Info America"), in exchange for 1.2 million shares of Class A
common stock. The Company also paid outstanding obligations of Talking
Directories and Info America of approximately $27 million.
1999 Senior Note Offering. In February 1999, the Company completed a private
offering of $500 million aggregate principal amount of our 8 1/8% Senior Notes
due February 15, 2009 (the "1999 Senior Notes"), yielding net proceeds of
approximately $487.8 million. The 1999 Senior Notes accrue interest at a rate of
8 1/8% per annum payable in cash semi-annually in arrears on February 15 and
August 15 of each year, commencing August 15, 1999.
Acquisition of Dakota Telecommunications Group, Inc. On March 5, 1999, the
Company acquired Dakota Telecommunications Group, Inc. in exchange for 1,375,000
shares of its Class A common stock and the assumption of approximately $31
million in Dakota Telecommunications Group, Inc. debt.
F-33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
McLeodUSA Incorporated:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of McLeodUSA Incorporated included in this Form 10-K,
and have issued our report thereon dated January 27, 1999 (except with respect
to matters described in Note 16 to the financial statements, as to which the
date is March 5, 1999). Our audit was made for the purpose of forming an opinion
on those statements taken as a whole. The supplemental Schedule II--Valuation
and Qualifying Accounts ("Schedule II") is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The Schedule II has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
S-1
<PAGE>
MCLEODUSA INCORPORATED
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
ADDITIONS
-------------------------
BALANCE CHARGED CHARGED BALANCE
AT TO TO AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------------- ------------- --------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Allowance for uncollectible accounts
and discounts....................................... $ 219,000 $ 3,680,000(1) $ -- $ -- $ 3,899,000
Valuation reserve on deferred tax assets............. 8,418,000 7,793,000 -- -- 16,211,000
----------- ----------- -------- ------------ -----------
$ 8,637,000 $11,473,000 $ -- $ -- $20,110,000
=========== =========== ======== ============ ===========
Year Ended December 31, 1997:
Allowance for doubtful accounts
and discounts....................................... $ 3,899,000 $ 8,052,000(2) $ -- $ -- $11,951,000
Valuation reserve on deferred tax assets............. 16,211,000 13,321,000 -- -- 29,532,000
----------- ----------- -------- ------------ -----------
$20,110,000 $21,373,000 $ -- $ -- $41,483,000
=========== =========== ======== ============ ===========
Year Ended December 31, 1998:
Allowance for doubtful accounts
and discounts....................................... $11,951,000 $19,620,000(3) $ -- $16,364,000 $15,207,000
Valuation reserve on deferred tax assets............. 29,532,000 49,024,000 -- -- 78,556,000
----------- ----------- -------- ------------ -----------
$41,483,000 $68,644,000 $ -- $16,364,000 $93,763,000
=========== =========== ======== ============ ===========
</TABLE>
_____________________________
(1) Includes $2,768,000 of allowance for doubtful accounts and discounts related
to acquisitions during the year.
(2) Includes $4,809,000 of allowance for doubtful accounts and discounts related
to acquisitions during the year.
(3) Includes $15,000 of allowance for doubtful accounts and discounts related to
acquisitions during the year.
S-2
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
------ -------------------
2.1 Agreement and Plan of Reorganization dated April 28, 1995 among
Midwest Capital Group Inc., MWR Telecom, Inc. and McLeod, Inc.
(Filed as Exhibit 2.1 to Registration Statement on Form S-1, File
No. 333-3112 ("Initial Form S-1"), and incorporated herein by
reference).
2.2 Agreement and Plan of Reorganization dated as of July 12, 1996
among Ruffalo, Cody & Associates, Inc., certain shareholders of
Ruffalo, Cody & Associates, Inc. and McLeod, Inc. (Filed as
Exhibit 2 to Current Report on Form 8-K, File No. 0-20763, filed
with the Commission on July 29, 1996 and incorporated herein by
reference).
2.3 Agreement and Plan of Reorganization dated as of August 15, 1996
among TelecomUSA Publishing Group, Inc. and McLeod, Inc. (Filed
as Exhibit 2 to Current Report on Form 8-K, File No. 0-20763,
filed with the Commission on August 26, 1996 and incorporated
herein by reference).
2.4 Agreement and Plan of Reorganization dated as of January 27, 1997
among McLeod, Inc., Digital Communications of Iowa, Inc., Clark
E. McLeod and Mary E. McLeod. (Filed as Exhibit 2 to Current
Report on Form 8-K, File No. 0-20763, filed with the Commission
on February 24, 1997 and incorporated herein by reference).
2.5 Asset Purchase Agreement dated as of May 30, 1997 by and among
McLeodUSA Incorporated, ESI/McLeodUSA, Inc., and ESI
Communications, Inc., ESI Communications/ SW, Inc., ESI
Communications/West, Inc., ESI Communications Downtown, Inc., ESI
Communications North, Inc., and Michael Reichert, Peter Jones,
John Pupkes and Jeff Meehan. (Filed as Exhibit 2.1 to Current
Report on Form 8-K, File No. 0-20763 (the "June 1997 Form 8-K"),
filed with the Commission on June 26, 1997 and incorporated
herein by reference).
2.6 Agreement and Plan of Reorganization dated as of June 14, 1997
among McLeodUSA Incorporated, Eastside Acquisition Co. and
Consolidated Communications Inc. (Filed as Exhibit 2.2 to the
June 1997 Form 8-K and incorporated herein by reference).
2.7 Agreement and Plan of Merger dated as of October 27, 1998 among
McLeodUSA Incorporated, West Group Acquisition Co. and Dakota
Telecommunications Group, Inc. (Filed as Exhibit 2.7 to the
Registration Statement on Form S-4, File No. 333-68891 (the
"December 1998 Form S-4"), and incorporated herein by reference).
2.8 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, Bravo Acquisition Corporation, Ovation
Communications, Inc. and certain stockholders of Ovation
Communications, Inc. (Filed as Exhibit 2.1 to current Report on
Form 8-K, File No. 0-20763 (the "January 1999 Form 8-K"), filed
with the Commission on January 14, 1999 and incorporated herein
by reference).
2.9 Agreement and Plan of Merger, dated as of January 7, 1999, among
McLeodUSA Incorporated, McLeodUSA Publishing Company, Pubco
Merging Co., Talking Directories, Inc. and the stockholders of
Talking Directories, Inc. (Filed as Exhibit 2.2 to the January
1999 Form 8-K and incorporated herein by reference).
2.10 Agreement and Plan of Merger, dated as of January 7, 1999 among
McLeodUSA Incorporated, McLeodUSA Publishing Company, Publication
Merge Co., Info America Phone Books, Inc. and certain
stockholders of Info America Phone Books, Inc. (Filed as Exhibit
2.3 to the January 1999 Form 8-K and incorporated herein by
reference).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Initial Form S-1 and incorporated herein
by reference).
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2
to Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to
Registration Statement on Form S-4, File No. 333-27647 (the "July
1997 Form S-4") and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office
of McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report
on Form 10-K, File No. 0-20763, filed with the Commission on
March 6, 1998 (the "1997 Form 10-K") and incorporated herein by
reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed
as Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United
States Trust Company of New York, as Trustee, relating to the 10-
1/2% Senior Discount Notes Due 2007 of McLeod, Inc. (Filed as
Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-20763,
filed with the Commission on March 31, 1997 (the "1996 Form 10-
K") and incorporated herein by reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the
1996 Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1,
2007 of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K
and incorporated herein by reference).
4.5 Registration Agreement dated March 4, 1997 among McLeod, Inc.,
Salomon Brothers Inc. and Morgan Stanley & Co. Incorporated.
(Filed as Exhibit 4.5 to the 1996 Form 10-K and incorporated
herein by reference).
4.6 Investor Agreement dated as of April 1, 1996 among McLeod, Inc.,
IES Investments Inc., Midwest Capital Group Inc., MWR Investments
Inc., Clark and Mary McLeod, and certain other stockholders.
(Filed as Exhibit 4.8 to Initial Form S-1 and incorporated herein
by reference).
4.7 Amendment No. 1 to Investor Agreement dated as of October 23,
1996 by and among McLeod, Inc., IES Investments Inc., Midwest
Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod. (Filed as Exhibit 4.3 to the November 1996
Form S-1 and incorporated herein by reference).
4.8 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.8 to the July 1997
Form S-4 and incorporated herein by reference).
4.9 Indenture dated as of July 21, 1997 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 9-1/4% Senior Notes Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.9 to the July 1997
Form S-4 and incorporated herein by reference).
4.10 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4
and incorporated herein by reference).
2
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
4.11 Registration Agreement dated July 21, 1997 among McLeodUSA
Incorporated, Salomon Brothers Inc., Morgan Stanley Dean Witter
and Bear, Stearns & Co. Inc. (Filed as Exhibit 4.11 to the July
1997 Form S-4 and incorporated herein by reference).
4.12 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc.,
MWR Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard
A. Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.13 Amendment No. 1 to Stockholders' Agreement dated as of September
19, 1997 by and among McLeodUSA Incorporated, IES Investments
Inc., Midwest Capital Group, Inc., MWR Investments Inc., Clark E.
McLeod, Mary E. McLeod and Richard A. Lumpkin on behalf of each
of the shareholders of Consolidated Communications Inc. listed in
Schedule I thereto. (Filed as Exhibit 4.1 to the Quarterly Report
on Form 10-Q, File No. 0-20763, filed with the Commission on
November 14, 1997 and incorporated herein by reference).
4.14 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.15 Indenture dated as of March 16, 1998 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 8-3/8% Senior Notes Due 2008 of
McLeodUSA Incorporated (Filed as Exhibit 4.15 to Registration
Statement on Form S-4, File No. 333-52793 (the "May 1998 Form S-
4") and incorporated herein by reference).
4.16 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit 4.15).
4.17 Registration Agreement dated March 16, 1998 among McLeodUSA
Incorporated, Solomon Brothers Inc., Bear, Stearns & Co. Inc.,
Morgan Stanley & Co. Incorporated and Chase Securities Inc.
(Filed as Exhibit 4.17 to the May 1998 Form S-4 and incorporated
herein by reference).
4.18 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA Incorporated; IES Investments Inc.; Clark E. McLeod;
Mary E. McLeod; and Richard A. Lumpkin and each of the former
shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders.
(Filed as Exhibit 99.1 to the Current Report on Form 8-K, File
No. 0-20763, filed with the Commission on November 19, 1998 and
incorporated herein by reference).
4.19 Indenture dated as of October 30, 1998 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 9 1/2% Senior Notes Due 2008 of
McLeodUSA Incorporated (Filed as Exhibit 4.19 to Registration
Statement on Form S-4, File No. 333-69621 (the "December 23, 1998
Form S-4") and incorporated herein by reference).
4.20 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit 4.19).
4.21 Registration Agreement dated October 30, 1998 among McLeodUSA
Incorporated, Salomon Smith Barney Inc., Bear, Stearns & Co.
Incorporated and Chase Securities Inc. (Filed as Exhibit 4.20 to
December 23, 1998 Form S-4 and incorporated herein by reference).
3
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
4.22 Indenture dated as of February 22, 1999 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 8 1/8% Senior Notes Due 2009 of
McLeodUSA Incorporated.
4.23 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit 4.22).
4.24 Registration Agreement dated February 22, 1999 among McLeodUSA
Incorporated, Salomon Smith Barney Inc., Bear, Stearns & Co.
Incorporated and Chase Securities Inc.
10.1 Lease Agreement dated September 5, 1995 between State of Iowa and
MWR Telecom, Inc. (Filed as Exhibit 10.21 to Initial Form S-1 and
incorporated herein by reference).
10.2 Lease Agreement dated September 5, 1995 between State of Iowa and
McLeod Network Services, Inc. (Filed as Exhibit 10.22 to Initial
Form S-1 and incorporated herein by reference).
10.3 U S WEST Centrex Plus Service Rate Stability Plan dated October
15, 1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.26 to Initial Form S- 1
and incorporated herein by reference).
10.4 U S WEST Centrex Plus Service Rate Stability Plan dated July 17,
1993 between McLeod Telemanagement, Inc. and U S WEST
Communications, Inc. (Filed as Exhibit 10.27 to Initial Form S- 1
and incorporated herein by reference).
10.5 Ameritech Centrex Service Confirmation of Service Orders dated
various dates in 1994, 1995 and 1996 between McLeod
Telemanagement, Inc. and Ameritech Information Industry Services.
(Filed as Exhibit 10.28 to Initial Form S-1 and incorporated
herein by reference).
10.6 Lease Agreement dated as of December 28, 1993 between 2060
Partnership and McLeod Telemanagement, Inc., as amended by
Amendments First to Ninth dated as of July 3, 1994, March 25,
1994, June 22, 1994, August 12, 1994, September 12, 1994,
September 20, 1994, November 16, 1994, September 20, 1995 and
January 6, 1996, respectively. (Filed as Exhibit 10.29 to Initial
Form S- 1 and incorporated herein by reference).
10.7 Lease Agreement dated as of May 24, 1995 between 2060 Partnership
and McLeod Telemanagement, Inc. (Filed as Exhibit 10.30 to
Initial Form S-1 and incorporated herein by reference).
10.8 Lease Agreement dated October 31, 1995 between I.R.F.B. Joint
Venture and McLeod Telemanagement, Inc. (Filed as Exhibit 10.31
to Initial Form S-1 and incorporated herein by reference).
10.9 First Amendment to Lease Agreement dated as of November 20, 1995
between I.R.F.B. Joint Venture and McLeod Telemanagement, Inc.
(Filed as Exhibit 10.32 to Initial Form S-1 and incorporated
herein by reference).
10.10 Master Right-of-Way Agreement dated July 27, 1994 between McLeod
Network Services, Inc. and IES Industries Inc. (Filed as Exhibit
10.34 to Initial Form S-1 and incorporated herein by reference).
10.11 Master Right-of-Way and Tower Use Agreement dated February 13,
1996 between IES Industries Inc. and McLeod, Inc. (Filed as
Exhibit 10.35 to Initial Form S-1 and incorporated herein by
reference).
4
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
10.12 Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Iowa and
South Dakota). (Filed as Exhibit 10.36 to Initial Form S-1 and
incorporated herein by reference).
10.13 Master Pole, Duct and Tower Use Agreement dated February 20, 1996
between MidAmerican Energy Company and McLeod, Inc. (Illinois).
(Filed as Exhibit 10.37 to Initial Form S-1 and incorporated
herein by reference).
10.14 Settlement Agreement dated March 18, 1996 between U S WEST
Communications, Inc. and McLeod Telemanagement, Inc. (Filed as
Exhibit 10.38 to Initial Form S-1 and incorporated herein by
reference).
10.15 McLeod Telecommunications, Inc. 1992 Incentive Stock Option Plan.
(Filed as Exhibit 10.40 to Initial Form S-1 and incorporated
herein by reference).
10.16 McLeod, Inc. 1993 Incentive Stock Option Plan. (Filed as Exhibit
10.41 to Initial Form S-1 and incorporated herein by reference).
10.17 McLeod, Inc. 1995 Incentive Stock Option Plan. (Filed as Exhibit
10.42 to Initial Form S-1 and incorporated herein by reference).
10.18 McLeod Telecommunications, Inc. Director Stock Option Plan.
(Filed as Exhibit 10.43 to Initial Form S-1 and incorporated
herein by reference).
10.19 Promissory Note dated July 18, 1995 between Kirk E. Kaalberg and
McLeod, Inc. (Filed as Exhibit 10.44 to Initial Form S-1 and
incorporated herein by reference).
10.20 Promissory Note dated March 29, 1996 between Stephen K.
Brandenburg and McLeod, Inc. (Filed as Exhibit 10.45 to Initial
Form S-1 and incorporated herein by reference).
+10.21 Telecommunications Services Agreement dated March 14, 1994
between WilTel, Inc. and McLeod Telemanagement, Inc., as amended.
(Filed as Exhibit 10.47 to Initial Form S-1 and incorporated
herein by reference).
10.22 First Amendment to Agreement Regarding Support Agreement dated
May 14, 1996 among McLeod, Inc., IES Diversified Inc. and IES
Investments Inc. (Filed as Exhibit 10.50 to Initial Form S-1 and
incorporated herein by reference).
10.23 First Amendment to Agreement Regarding Guarantee dated May 14,
1996 among McLeod, Inc., IES Diversified Inc. and IES Investments
Inc. (Filed as Exhibit 10.51 to Initial Form S-1 and incorporated
herein by reference).
10.24 Amended and Restated Directors Stock Option Plan of McLeod, Inc.
(Filed as Exhibit 10.52 to Initial Form S-1 and incorporated
herein by reference).
10.25 Forms of Employment, Confidentiality and Non-Competition
Agreement between McLeod, Inc. and certain employees of McLeod,
Inc. (Filed as Exhibit 10.53 to Initial Form S-1 and incorporated
herein by reference).
10.26 Form of Change-of-Control Agreement between McLeod, Inc. and
certain employees of McLeod, Inc. (Filed as Exhibit 10.54 to
Initial Form S-1 and incorporated herein by reference).
10.27 McLeod, Inc. 1996 Employee Stock Option Plan, as amended. (Filed
as Exhibit 10.55 to the November 1996 Form S-1 and incorporated
herein by reference).
5
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
10.28 McLeod, Inc. Employee Stock Purchase Plan, as amended. (Filed as
Exhibit 10.56 to the 1996 Form 10-K and incorporated herein by
reference).
10.29 Form of Indemnity Agreement between McLeod, Inc. and certain
officers and directors of McLeod, Inc. (Filed as Exhibit 10.57 to
Initial Form S-1 and incorporated herein by reference).
10.30 McLeod, Inc. Incentive Plan. (Filed as Exhibit 10.63 to the
November 1996 Form S-1 and incorporated herein by reference).
10.31 Amended and Restated Credit Agreement dated as of May 5, 1996
among TelecomUSA Publishing Group, Inc., TelecomUSA Publishing
Company and TelecomUSA Neighborhood Directories, Inc. and Norwest
Bank Iowa, National Association. (Filed as Exhibit 10.64 to the
November 1996 Form S-1 and incorporated herein by reference).
10.32 First Amendment to Amended and Restated Credit Agreement dated as
of January 31, 1996 by and between TelecomUSA Publishing Group,
Inc., TelecomUSA Publishing Company and TelecomUSA Neighborhood
Directories, Inc. and Norwest Bank Iowa, National Association.
(Filed as Exhibit 10.65 to the November 1996 Form S-1 and
incorporated herein by reference).
10.33 Lease Agreement dated as of July 18, 1995 between 2060
Partnership, L.P. and TelecomUSA Publishing Company. (Filed as
Exhibit 10.68 to the November 1996 Form S-1 and incorporated
herein by reference).
10.34 Lease Agreement dated April 26, 1995 by and between A.M.
Henderson and TelecomUSA Publishing Company. (Filed as Exhibit
10.69 to the November 1996 Form S-1 and incorporated herein by
reference).
10.35 License Agreement dated as of April 19, 1994, between Ameritech
Information Industry Services and TelecomUSA Publishing Company.
(Filed as Exhibit 10.70 to the November 1996 Form S-1 and
incorporated herein by reference).
10.36 License Agreement dated September 13, 1993 between U S WEST
Communications, Inc. and TelecomUSA Publishing Company. (Filed as
Exhibit 10.71 to the November 1996 Form S-1 and incorporated
herein by reference).
10.37 Form of McLeod, Inc. Directors Stock Option Plan Option
Agreement. (Filed as Exhibit 10.72 to the November 1996 Form S-1
and incorporated herein by reference).
10.38 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Incentive
Stock Option Agreement. (Filed as Exhibit 10.73 to the November
1996 Form S-1 and incorporated herein by reference).
10.39 Forms of McLeod, Inc. 1996 Employee Stock Option Plan Non-
Incentive Stock Option Agreement. (Filed as Exhibit 10.74 to the
November 1996 Form S-1 and incorporated herein by reference).
10.40 Sale and Purchase Agreement dated January 27, 1997 among
McLeodUSA Publishing Company, Fronteer Financial Holdings, Ltd.,
Classified Directories, Inc., Larry A. Scott, James Greff,
Randall L. Gowin and Edwin Dressler and certain directors,
officers and shareholders of Fronteer Financial Holdings, Ltd.
(Filed as Exhibit 10.90 to the 1996 Form 10-K and incorporated
herein by reference).
6
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
10.41 Sale and Purchase Agreement dated February 27, 1997 among
McLeodUSA Publishing Company, Indiana Directories, Inc., John
Morgan, Hank Meijer, Jack Hendricks, Brad Nelson and Talking
Directories, Inc. (Filed as Exhibit 10.91 to the 1996 Form 10-K
and incorporated herein by reference).
10.42 Amendment to Sale and Purchase Agreement dated February 28, 1997
between McLeodUSA Publishing Company and Indiana Directories,
Inc. (Filed as Exhibit 10.92 to the 1996 Form 10-K and
incorporated herein by reference).
10.43 Ameritech Centrex Service Confirmation of Service Orders dated
August 21, 1996 between McLeod Telemanagement, Inc. and Ameritech
Information Industry Services. (Filed as Exhibit 10.93 to the
1996 Form 10-K and incorporated herein by reference).
+10.44 Amended and Restated Program Enrollment Terms dated November 1,
1996 between WorldCom Network Services, Inc. d/b/a WilTel and
McLeod Telemanagement, Inc. (Filed as Exhibit 10.94 to Annual
Report on Form 10-K/A, File No. 0-20763, filed with the
Commission on April 8, 1997 and incorporated herein by
reference).
10.45 Letter Agreement dated April 15, 1997 between U S WEST
Communications and McLeodUSA Network Services, Inc. (Filed as
Exhibit 10.1 to Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on May 14, 1997 and incorporated herein
by reference).
10.46 Network Agreement dated April 7, 1997, between Wisconsin Power
and Light Company and McLeodUSA Telecommunications Services, Inc.
(Filed as Exhibit 10.96 to the July 1997 Form S-4 and
incorporated herein by reference).
10.47 Agreement dated July 7, 1997 between McLeodUSA Telecommunications
Services, Inc. and U S WEST Communications, Inc. (Filed as
Exhibit 10.97 to the July 1997 Form S-4 and incorporated herein
by reference).
10.48 Agreement dated August 14, 1997 between McLeodUSA Incorporated
and Taylor Ball, Inc. (Filed as Exhibit 10.98 to Registration
Statement on Form S-4, File No. 333-34227 (the "November 1997
Form S-4") and incorporated herein by reference).
10.49 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of October 28, 1996
between Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.99 to
the November 1997 Form S-4 and incorporated herein by reference).
10.50 Interconnection Agreement Under Sections 251 and 252 of the
Telecommunications Act of 1996 dated as of July 17, 1997 between
Ameritech Information Industry Services and Consolidated
Communications Telecom Services Inc. (Filed as Exhibit 10.100 to
the November 1997 Form S-4 and incorporated herein by reference).
10.51 Supply Agreement dated February 26, 1990 and Amendment Number 4
to Supply Agreement dated January 4, 1999 between Alcatel USA
Marketing, Inc. and McLeodUSA Incorporated.
11.1 Statement regarding Computation of Per Share Earnings.
16.1 Letter regarding Change in Certifying Accountant (Filed as
Exhibit 16.1 to the 1997 Form 10-K and incorporated herein by
reference).
21.1 Subsidiaries of McLeodUSA Incorporated.
7
<PAGE>
Exhibit
Number Exhibit Description
------ -------------------
23.1 Consent of Arthur Andersen LLP.
27.1 Financial Data Schedule.
______________________
+ Confidential treatment has been granted. The copy filed as an exhibit omits
the information subject to the confidential treatment request.
8
<PAGE>
EXHIBIT 4.22
================================================================================
McLeodUSA Incorporated
$500,000,000
8 1/8% SENIOR NOTES DUE 2009
________________
INDENTURE
Dated as of February 22, 1999
________________
United States Trust Company of New York,
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE
Reconciliation and tie between the Trust Indenture Act of 1939, as amended, and
the Indenture, dated as of February 22, 1999
<TABLE>
<CAPTION>
Trust
Indenture
Act Indenture
Section Section
- --------- ---------
<S> <C>
(S)310(a)(1).............................................. 7.10
(a)(2).............................................. 7.10
(a)(3).............................................. N.A.
(a)(4).............................................. N.A.
(a)(5).............................................. 7.10
(b)................................................. 7.08; 7.10
(c)................................................. N.A.
(S)311(a)................................................. 7.11
(b)................................................. 7.11
(c)................................................. N.A.
(S)312(a)................................................. 7.06(a); 7.06(b)
(b)................................................. 7.06(c)
(c)................................................. 7.06(d)
(S)313(a)................................................. 7.06(e)
(b)................................................. N.A.
(c)................................................. 7.06(e); 7.06(f)
(d)................................................. 7.06
(S)314(a)................................................. 4.18; 4.19
(b)................................................. N.A.
(c)(1).............................................. 10.03
(c)(2).............................................. 10.03
(c)(3).............................................. N.A.
(d)................................................. N.A.
(e)................................................. 10.04
(f)................................................. 4.19
(S)315(a)................................................. 7.01(b)
(b)................................................. 7.05(a)
(c)................................................. 7.01(a)
(d)................................................. 7.01(c)
(e)................................................. 6.10
(S)316(a)................................................. 2.10
(a)(1)(A)........................................... 6.05
(a)(1)(B)........................................... 6.04
(a)(2).............................................. N.A.
(b)................................................. 6.07
(c)................................................. 9.05
(S)317(a)(1).............................................. N.A.
(a)(2).............................................. 6.08
(b)................................................. 2.07
(S)318(a)................................................. 10.01
</TABLE>
Note: This reconciliation and tie shall not, for any purpose, be deemed
to be part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I. DEFINITIONS AND OTHER
PROVISIONS OF GENERAL APPLICATION
SECTION 1.01. Definitions.............................................. 1
SECTION 1.02. Incorporation by Reference of Trust Indenture Act........ 23
SECTION 1.03. Rules of Construction.................................... 23
SECTION 1.04. Form of Documents Delivered to Trustee................... 24
SECTION 1.05. Acts of Holders.......................................... 24
SECTION 1.06. Satisfaction and Discharge............................... 25
ARTICLE II. THE NOTES
SECTION 2.01. Form and Dating.......................................... 26
SECTION 2.02. Form of Face of Note..................................... 27
SECTION 2.03. Form of Reverse of Note.................................. 31
SECTION 2.04. Form of Trustee's Certificate of Authentication.......... 38
SECTION 2.06. Note Registrar and Paying Agent.......................... 39
SECTION 2.07. Paying Agent to Hold Money in Trust................ ..... 40
SECTION 2.08. Registration, Registration of Transfer and Exchange...... 40
SECTION 2.09. Replacement Notes........................................ 46
SECTION 2.10. Outstanding Notes........................................ 47
SECTION 2.11. Temporary Notes.......................................... 48
SECTION 2.12. Cancellation............................................. 48
SECTION 2.13. Payment of Interest; Interest Rights Preserved........... 48
SECTION 2.14. Authorized Denominations................................. 49
SECTION 2.15. Computation of Interest.................................. 49
SECTION 2.16. Persons Deemed Owners.................................... 49
SECTION 2.17. CUSIP Numbers............................................ 50
SECTION 2.18. Holder Lists............................................. 50
ARTICLE III. REDEMPTION
SECTION 3.01. Notice to Trustee........................................ 50
SECTION 3.02. Selection of Notes to be Redeemed........................ 50
SECTION 3.03. Notice of Redemption..................................... 51
SECTION 3.04. Effect of Notice of Redemption........................... 52
SECTION 3.05. Deposit of Redemption Price.............................. 52
SECTION 3.06. Notes Redeemed in Part................................... 52
</TABLE>
i
<PAGE>
<TABLE>
ARTICLE IV. COVENANTS
<S> <C>
SECTION 4.01. Payment of Notes.................................................................. 52
SECTION 4.02. Maintenance of Office or Agency................................................... 53
SECTION 4.03. Money for the Note Payments to be Held in Trust................................... 53
SECTION 4.04. Corporate Existence............................................................... 54
SECTION 4.05. Maintenance of Property........................................................... 54
SECTION 4.06. Payment of Taxes and Other Claims................................................. 54
SECTION 4.07. Repurchase at the Option of Holders upon a Change of Control...................... 54
SECTION 4.08. Limitation on Asset Sales......................................................... 56
SECTION 4.09. Limitation on Consolidated Indebtedness........................................... 59
SECTION 4.10. Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries......... 62
SECTION 4.11. Limitation on Restricted Payments................................................. 64
SECTION 4.12. Limitation on Liens............................................................... 67
SECTION 4.13. Limitation on Sale and Leaseback Transactions..................................... 69
SECTION 4.14. Limitation on Dividends and Other Payment Restrictions Affecting Subsidiaries..... 69
SECTION 4.15. Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries....... 70
SECTION 4.16. Transactions with Affiliates...................................................... 71
SECTION 4.17. Restricted and Unrestricted Subsidiaries.......................................... 72
SECTION 4.18. Reports........................................................................... 73
SECTION 4.19. Compliance Certificate; Notice of Default or Event of Default..................... 73
ARTICLE V. CONSOLIDATION, MERGER,
CONVEYANCE, LEASE OR TRANSFER
SECTION 5.01. Merger, Consolidation or Sale of Assets........................................... 74
SECTION 5.02. Successor Corporation Substituted................................................. 75
ARTICLE VI. DEFAULTS AND REMEDIES
SECTION 6.01. Events of Default................................................................. 75
SECTION 6.02. Acceleration...................................................................... 78
SECTION 6.03. Other Remedies.................................................................... 79
SECTION 6.04. Waiver of Past Defaults........................................................... 79
SECTION 6.05. Control by Majority............................................................... 80
SECTION 6.06. Limitation on Suits............................................................... 80
SECTION 6.07. Rights of Holders to Receive Payment.............................................. 81
SECTION 6.08. Trustee May File Proofs of Claim.................................................. 81
SECTION 6.09. Priorities........................................................................ 81
SECTION 6.10. Undertaking for Costs............................................................. 82
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 6.11. Waiver of Stay or Extension Laws.................................. 82
SECTION 6.12. Trustee May Enforce Claims Without Possession of the Notes........ 82
SECTION 6.13. Restoration of Rights and Remedies................................ 83
SECTION 6.14. Rights and Remedies Cumulative.................................... 83
SECTION 6.15. Delay or Omission Not Waiver...................................... 83
ARTICLE VII. TRUSTEE
SECTION 7.01. Duties of Trustee................................................. 83
SECTION 7.02. Rights of Trustee................................................. 84
SECTION 7.03. Individual Rights of Trustee...................................... 85
SECTION 7.04. Trustee's Disclaimer.............................................. 85
SECTION 7.05. Notice of Defaults................................................ 86
SECTION 7.06. Preservation of Information; Reports by Trustee to Holders........ 86
SECTION 7.07. Compensation and Indemnity........................................ 87
SECTION 7.08. Replacement of Trustee............................................ 88
SECTION 7.09. Successor Trustee by Merger....................................... 90
SECTION 7.10. Eligibility; Disqualification..................................... 90
SECTION 7.11. Preferential Collection of Claims Against Company................. 91
ARTICLE VIII. DEFEASANCE
SECTION 8.01. Company's Option to Effect Legal Defeasance or Covenant
Defeasance....................................................... 91
SECTION 8.02. Legal Defeasance and Discharge.................................... 91
SECTION 8.03. Covenant Defeasance............................................... 92
SECTION 8.04. Conditions to Defeasance or Covenant Defeasance................... 92
SECTION 8.05. Deposited Money and U.S. Government Obligations to be Held
in Trust; Miscellaneous Provisions............................... 94
ARTICLE IX. AMENDMENTS
SECTION 9.01. Without Consent of Holders........................................ 95
SECTION 9.02. With Consent of Holders........................................... 95
SECTION 9.03. Effect of Supplemental Indentures................................. 96
SECTION 9.04. Compliance with Trust Indenture Act............................... 96
SECTION 9.05. Revocation and Effect of Consents and Waivers..................... 96
SECTION 9.06. Notation on or Exchange of Notes.................................. 97
SECTION 9.07. Trustee to Execute Supplemental Indentures........................ 97
ARTICLE X. MISCELLANEOUS
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
SECTION 10.01. Trust Indenture Act Controls........................... 97
SECTION 10.02. Notices................................................ 98
SECTION 10.03. Certificate and Opinion as to Conditions Precedent..... 98
SECTION 10.04. Statements Required in Certificate or Opinion.......... 98
SECTION 10.05. Rules by Trustee, Paying Agent and Note Registrar...... 98
SECTION 10.06. Payments on Business Days.............................. 99
SECTION 10.07. Governing Law.......................................... 99
SECTION 10.08. No Recourse Against Others............................. 99
SECTION 10.09. Successors............................................. 99
SECTION 10.10. Counterparts........................................... 99
SECTION 10.11. Table of Contents; Headings............................ 99
SECTION 10.12. Severability........................................... 99
SECTION 10.13. Further Instruments and Acts........................... 99
</TABLE>
ANNEX A FORM OF REGULATION S CERTIFICATE
ANNEX B FORM OF RESTRICTED SECURITIES CERTIFICATE
ANNEX C FORM OF UNRESTRICTED SECURITIES CERTIFICATE
iv
<PAGE>
INDENTURE, dated as of February 22, 1999, between MCLEODUSA INCORPORATED, a
Delaware corporation (the "Company"), having its principal office at 6400 C
Street, S.W., Cedar Rapids, Iowa 52406, and UNITED STATES TRUST COMPANY OF NEW
YORK, a bank and trust company organized under the New York banking law, as
trustee hereunder (the "Trustee"), having its Corporate Trust Office at 114 West
47th Street, New York, New York 10036.
RECITALS OF THE COMPANY
The Company has duly authorized the creation and issue of its 8 1/8% Senior
Notes Due 2009 (the "Notes") of substantially the tenor and amount hereinafter
set forth, and to provide therefor the Company has duly authorized the execution
and delivery of this Indenture.
All things necessary to make the Notes, when executed by the Company and
authenticated and delivered by the Trustee hereunder and duly issued by the
Company, the valid obligations of the Company, and to make this Indenture a
valid instrument of the Company, in accordance with their respective terms, have
been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in consideration
of the premises and the purchase of the Original Notes by the Holders thereof,
it is mutually covenanted and agreed, for the equal and proportionate benefit of
all Holders of the Notes, as follows:
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
SECTION I.1. Definitions. For all purposes of this Indenture, except as
-----------
otherwise expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned to
them in this Article, and include the plural as well as the singular; and
(b) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP.
"Acquired Indebtedness" means, with respect to any specified Person,
---------------------
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that such
Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding Indebtedness which is
<PAGE>
extinguished, retired or repaid in connection with such other Person merging
with or into or becoming a Subsidiary of such specified Person.
"Act" when used with respect to any Holder, has the meaning set forth in
---
Section 1.05 hereof.
"Affiliate" means, as to any Person, any other Person which directly or
---------
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of the Company and of each other Subsidiary of the Company; provided,
further, that neither the Company nor any of its Restricted Subsidiaries shall
be deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling," "under
common control with" and "controlled by"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of Voting Stock, by agreement or otherwise.
"Affiliate Transaction" has the meaning set forth in Section 4.16 hereof.
---------------------
"Agent Member" means any member of, or participant in, the Depositary.
------------
"Applicable Procedures" means, with respect to any transfer or transaction
---------------------
involving a Global Security or beneficial interest therein, the rules and
procedures of the Depositary for such Note, Euroclear and Cedel, in each case to
the extent applicable to such transaction and as in effect from time to time.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
----------
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person to
such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such
Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of
Capital Stock or other ownership interests of a Restricted Subsidiary of such
Person (other than as permitted by the provisions of Section 4.10 hereof), (ii)
substantially all of the assets of such Person or any of its Restricted
Subsidiaries representing a division or line of business (other than as part of
a Permitted Investment) or (iii) other assets or rights of such Person or any of
its Restricted Subsidiaries outside of the ordinary course of business and, in
each case, that is not governed by Article V hereof; provided that "Asset Sale"
shall not include (i) sales or other dispositions of inventory, receivables and
other current assets in the ordinary course of business, (ii) simultaneous
exchanges by the Company or any Restricted Subsidiary of Telecommunications
Assets for other Telecommunications Assets in the ordinary course of business;
provided that the applicable Telecommunications Assets received by the Company
or such Restricted
<PAGE>
Subsidiary have at least substantially equal Fair Market Value to the Company or
such Restricted Subsidiary (as determined by the Board of Directors whose good
faith determination shall be conclusive and evidenced by a Board Resolution),
and (iii) sales or other dispositions of assets with a Fair Market Value (as
certified in an Officers' Certificate) not in excess of $1 million.
"Asset Sale Offer" has the meaning set forth in Section 4.08(c) hereof.
----------------
"Asset Sale Payment Date" has the meaning set forth in Section 4.08(d)(ii)
-----------------------
hereof.
"Asset Sale Purchase Price" has the meaning set forth in Section 4.08(c)
-------------------------
hereof.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
-------------------------
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by the responsible accounting officer of such Person) of the payments
during the remaining term of the lease (including any period for which such
lease has been extended or may, at the option of the lessor, be extended) or
until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
------------
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"Board of Directors" means the Board of Directors of the Company or any
------------------
committee thereof duly authorized to act on behalf of the Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of
----------------
Directors in full force and effect at the time of determination.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
------------
that is not a day on which banking institutions in The City of New York are
authorized or obligated by law, executive order or regulation to close.
"Capital Lease Obligation" of any Person means the obligation to pay rent
------------------------
or other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted
3
<PAGE>
for as a capital lease or a liability on the face of a balance sheet of such
Person prepared in accordance with GAAP, and the stated maturity thereof shall
be the date of the last payment of rent or any amount due under such lease prior
to the first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
-------------
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Cash Proceeds" means, with respect to any Asset Sale or issuance or sale
-------------
of Capital Stock by any Person, the aggregate consideration received in respect
of such sale or issuance by such Person in the form of cash and Eligible Cash
Equivalents.
"Cedel" means Cedel Bank, S.A. (or any successor securities clearing
-----
agency).
"Change of Control shall be deemed to occur if (i) the sale, conveyance,
-----------------
transfer or lease of all or substantially all of the assets of the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act), other
than any Permitted Holder or any Restricted Subsidiary of the Company, shall
have occurred; or (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Exchange Act), other than any Permitted Holder, becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of more than 35 percent
of the total voting power of all classes of the Voting Stock of the Company
(including any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is greater
than or equal to the total voting power percentage then beneficially owned by
the Permitted Holders in the aggregate; or (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (together with any directors whose election or
appointment by the Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office.
"Change of Control Offer" has the meaning set forth in Section 4.07(a)
-----------------------
hereof.
"Change of Control Payment Date" has the meaning set forth in Section
------------------------------
4.07(b)(ii) hereof.
4
<PAGE>
"Change of Control Purchase Price" has the meaning set forth in Section
--------------------------------
4.07(a) hereof.
"clearing agency" has the meaning set forth in Section 3(a)(23) of the
---------------
Exchange Act.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Commission" means the United States Securities and Exchange Commission, as
----------
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this Indenture such commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, the body
performing such duties at such time.
"Common Stock" means Capital Stock other than Preferred Stock.
------------
"Company" means the party named as such in the preamble to this Indenture
-------
until a successor replaces it pursuant to the applicable provisions hereof and,
thereafter, means such successor.
"Company Order" means a written order signed in the name of the Company by
-------------
(i) its Chairman of the Board, President, a Vice Chairman or a Vice President,
and (ii) its Treasurer, an Assistant Treasurer, its Secretary or an Assistant
Secretary.
"Consolidated Capital Ratio" of any Person as of any date means the ratio
--------------------------
of (i) the aggregate consolidated principal amount of Indebtedness of such
Person then outstanding to (ii) the aggregate consolidated paid-in capital of
such Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
--------------------------------------------------
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated
Income Tax Expense of the Company and its Restricted Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of the Company and its Restricted Subsidiaries
for such period, plus (iv) any non-cash expense related to the issuance to
employees of the Company or any Restricted Subsidiary of the Company of options
to purchase Capital Stock of the Company or such Restricted Subsidiary, plus (v)
any charge related to any premium or penalty paid in connection with redeeming
or retiring any Indebtedness prior to its stated maturity; and plus (vi) any
non-cash expense related to a purchase accounting adjustment not requiring an
accrual or reserve and separately disclosed in the Company's Consolidated Income
Statement, and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in accordance
with GAAP; provided that there shall be excluded therefrom the Consolidated Cash
5
<PAGE>
Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of
the Company (calculated separately for such Restricted Subsidiary in the same
manner as provided above for the Company) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the Company
or another Restricted Subsidiary of the Company to the extent of such
restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
-------------------------------
amounts of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
-----------------------------
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with GAAP,
including without limitation or duplication (or, to the extent not so included,
with the addition of), (i) the amortization of Indebtedness discount; (ii) any
payments or fees with respect to letters of credit, bankers' acceptances or
similar facilities; (iii) fees with respect to interest rate swap or similar
agreements or foreign currency hedge, exchange or similar agreements; (iv)
Preferred Stock dividends of the Company and its Restricted Subsidiaries (other
than dividends paid in shares of Preferred Stock that is not Disqualified Stock)
declared and paid or payable; (v) accrued Disqualified Stock dividends of the
Company and its Restricted Subsidiaries, whether or not declared or paid; (vi)
interest on Indebtedness guaranteed by the Company and its Restricted
Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during
such period that is allocable to interest expense in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
-----------------------
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication
(i) all items classified as extraordinary, (ii) any net income (or net loss) of
any Person other than such Person and its Restricted Subsidiaries, except to the
extent of the amount of dividends or other distributions actually paid to such
Person or its Restricted Subsidiaries by such other Person during such period,
(iii) the net income of any Person acquired by such Person or any of its
Restricted Subsidiaries in a pooling-of-interests transaction for any period
prior to the date of the related acquisition, (iv) any gain or loss, net of
taxes, realized on the termination of any employee pension benefit plan, (v) net
gains (or net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries, (vi) the net income (or net loss) of any Restricted Subsidiary of
such Person to the extent that the payment of dividends or other distributions
to such Person is restricted by the terms of its charter or any agreement,
instrument, contract, judgment, order, decree, statute, rule, governmental
regulation or otherwise, except for any dividends or distributions actually paid
by such Restricted Subsidiary to such Person, (vii) with regard to a non-wholly
owned Restricted Subsidiary, any aggregate net income (or loss) in excess of
such Person's or such Restricted
6
<PAGE>
Subsidiary's pro rata share of such non-wholly owned Restricted Subsidiary's net
income (or loss) and (viii) the cumulative effect of changes in accounting
principles.
"Consolidated Net Worth" of any Person means, at any date of determination,
----------------------
the consolidated stockholders' equity or partners' capital (excluding
Disqualified Stock) of such Person and its subsidiaries, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" of any Person means the total amount of
----------------------------
assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person and
its Subsidiaries after deducting therefrom all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
"Corporate Trust Office" means the principal office of the Trustee in the
----------------------
Borough of Manhattan, The City of New York, New York which at any particular
time its corporate trust business shall be principally administered, which at
the date hereof is located at 114 West 47th Street, New York, New York 10036.
"Covenant Defeasance" has the meaning set forth in Section 8.03 hereof.
-------------------
"Default" means any event, act or condition, the occurrence of which is, or
-------
after notice or the passage of time or both would be, an Event of Default.
"Default Amount" means an amount equal to one hundred percent (100%) of the
--------------
originally issued principal amount of the Notes.
"Defaulted Interest" has the meaning set forth in Section 2.13 hereof.
------------------
"Defeasance" has the meaning set forth in Section 8.02 hereof.
----------
"Depositary" means, with respect to the Notes issuable or issued in whole
----------
or in part in the form of one or more Global Securities, The Depository Trust
Company for so long as it shall be a clearing agency registered under the
Exchange Act, or such successor as the Company shall designate from time to time
in an Officers' Certificate delivered to the Trustee.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
------------------
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the Notes.
7
<PAGE>
"Eligible Cash Equivalents" means (i) securities issued or directly and
-------------------------
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof, provided that the full faith and credit of the United
--------
States of America is pledged in support thereof; (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500,000,000 with a maturity date not
more than one year from the date of acquisition; (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above; (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within 270 calendar days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's or A-2 or better from Moody's; (v) commercial
paper issued by the parent corporation of any commercial bank organized in the
United States having capital and surplus in excess of $500,000,000 and
commercial paper issued by others having one of the two highest ratings
obtainable from either Standard & Poor's or Moody's and in each case maturing
within 270 calendar days after the date of acquisition; (vi) overnight bank
deposits and bankers' acceptances at any commercial bank organized in the United
States having capital and surplus in excess of $500,000,000; (vii) deposits
available for withdrawal on demand with a commercial bank organized in the
United States having capital and surplus in excess of $500,000,000; and (viii)
investments in money market funds substantially all of whose assets comprise
securities of the types described in clauses (i) through (vi).
"Euroclear" means the Euroclear Clearance System (or any successor
---------
securities clearing agency).
"Event of Default" has the meaning set forth in Section 6.01 hereof.
----------------
"Excess Proceeds" has the meaning set forth in Section 4.08(b) hereof.
---------------
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations promulgated thereunder.
"Exchange Note" means any Note issued in exchange for an Original Note or
-------------
Original Notes pursuant to the Registered Exchange Offer or otherwise registered
under the Securities Act and any Note with respect to which the next preceding
Predecessor Note of such Note was an Exchange Note.
"Exchange Offer Registration Statement" has the meaning set forth in the
-------------------------------------
form of the Notes contained in Section 2.02 hereof.
8
<PAGE>
"Existing Indebtedness" means Indebtedness outstanding on the date of this
---------------------
Indenture (other than under any Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the sale
-----------------
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy, as determined in good faith by the Board of
Directors.
"GAAP" means United States generally accepted accounting principles,
----
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided herein,
--------
all calculations made for purposes of determining compliance with Article IV or
Section 5.01 hereof shall utilize GAAP as in effect on the Issue Date.
"Global Security" or "Global Securities" means the Note or Notes that
--------------- -----------------
evidences all or part of the Notes and bears the legend set forth in Section
2.02 hereof.
"Guarantee" means any direct or indirect obligation, contingent or
---------
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner. The terms
"Guaranteed," "Guaranteeing" and "Guarantor" shall have correlative meanings.
"Holder" means (i) in the case of any certificated Note, the Person in
------
whose name such certificated Note is registered in the Note Register and (ii) in
the case of any Global Security, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
-----
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such Person that
exists at such time becoming Indebtedness shall not be deemed an Incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a Person before it becomes a Subsidiary of
the Company (whether by merger, consolidation, acquisition or otherwise) shall
9
<PAGE>
be deemed to have been incurred at the time at which such Person becomes a
Subsidiary of the Company.
"Indebtedness" means, at any time (without duplication), with respect to
------------
any Person, whether recourse as to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person issued
or assumed as the deferred purchase price of Property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by Persons other than such Person or its
Restricted Subsidiaries, the maximum fixed redemption or repurchase price of
Disqualified Stock of such Person's Restricted Subsidiaries, at the time of
determination, (vii) every obligation under Interest Rate and Currency
Protection Agreements of such Person, (viii) any Attributable Indebtedness with
respect to any Sale and Leaseback Transaction to which such Person is a party
and (ix) any obligation of the type referred to in clauses (i) through (viii) of
this definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to this Indenture; provided that, if
such Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at such
date of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided that the amount outstanding
at any time of any Indebtedness issued with original issue discount (including,
without limitation, the Senior Discount Notes) is the face amount of such
Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"Indenture" means this instrument as originally executed or as it may from
---------
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and
10
<PAGE>
any such supplemental indenture, the provisions of the Trust Indenture Act that
are deemed to be a part of and govern this instrument, and any such supplemental
indenture, respectively.
"Interest Payment Date" means the Stated Maturity of an installment of
---------------------
interest on the Notes.
"Interest Rate or Currency Protection Agreement" of any Person means any
----------------------------------------------
forward contract, futures contract, swap, option, future option or other
financial agreement or arrangement (including, without limitation, caps, floors,
collars and similar agreements) relating to, or the value of which is dependent
upon, interest rates or currency exchange rates or indices.
"Investment" in any Person means any direct, indirect or contingent (i)
----------
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
--------
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
---- -----
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups, write-
downs or write-offs with respect to such Investment. In determining the amount
of any Investment involving a transfer of any Property other than cash, such
Property or asset shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the Notes are first authenticated and
----------
delivered under this Indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
----
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other asset
(including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Maturity" means, when used with respect to a Note, the date on which the
--------
principal of such Note becomes due and payable as provided therein or in this
Indenture, whether on the date specified in such Note as the fixed date on which
the principal of such Note is due and payable, on a Change of Control Payment
Date or an Asset Sale Payment Date, or by declaration of acceleration, call for
redemption or otherwise.
11
<PAGE>
"Moody's" means Moody's Investors Service, Inc., or, if Moody's Investors
-------
Service, Inc. shall cease rating the specified debt securities and such ratings
business with respect thereto shall have been transferred to a successor Person,
such successor Person; provided that if Moody's Investors Service, Inc. ceases
rating the specified debt securities and its ratings business with respect
thereto shall not have been transferred to any successor Person or such
successor Person is Standard & Poor's, then "Moody's" shall mean any other
nationally recognized rating agency (other than Standard & Poor's) that rates
the specified debt securities and that shall have been designated by the Company
in an Officers' Certificate.
"NASD" means the National Association of Securities Dealers, Inc.
----
"Net Cash Proceeds" means, with respect to the sale of any Property or
-----------------
assets by any Person or any of its Restricted Subsidiaries, Cash Proceeds
received net of (i) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale, including, without
limitation, all legal, title and recording tax expenses, commissions and other
fees and expenses incurred (but excluding any finder's fee or broker's fee
payable to any Affiliate of such Person) and all federal, state, foreign and
local taxes arising in connection with such sale that are paid or required to be
accrued as a liability under GAAP by such Person or its Restricted Subsidiaries;
(ii) all payments made or required to be made by such Person or its Restricted
Subsidiaries on any Indebtedness which is secured by such Properties or other
assets in accordance with the terms of any Lien upon or with respect to such
Properties or other assets or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such transaction or by applicable law, be
repaid in connection with such sale; (iii) all contractually required
distributions and other payments made to minority interest holders (but
excluding distributions and payments to Affiliates of such Person) in Restricted
Subsidiaries of such Person as a result of such transaction; and (iv)
appropriate amounts to be provided by such Person or any Restricted Subsidiary
thereof, as the case may be, as a reserve in accordance with GAAP against any
liabilities associated with such assets and retained by such Person or any
Restricted Subsidiary thereof, as the case may be, after such transaction,
including, without limitation, liabilities under any indemnification obligations
and severance and other employee termination costs associated with such
transaction, in each case as determined by the Board of Directors of such
Person, in its reasonable good faith judgment evidenced by a resolution of the
Board of Directors filed with the Trustee; provided that, in the event that any
--------
consideration for a transaction (which would otherwise constitute Net Cash
Proceeds) is required to be held in escrow pending determination of whether a
purchase price adjustment will be made, such consideration (or any portion
thereof) shall become Net Cash Proceeds only at such time as it is released to
such Person or its Restricted Subsidiaries from escrow; and provided, further,
-------- -------
that any non-cash consideration received in connection with any transaction,
which is subsequently converted to cash, shall be deemed to be Net Cash Proceeds
at such time, and shall thereafter be applied in accordance with the applicable
provisions of this Indenture.
12
<PAGE>
"Note Register" and "Note Registrar" have the respective meanings specified
------------- --------------
in Section 2.06 hereof.
"Notes" has the meaning set forth in the Recitals of the Company and more
-----
particularly means any of the Notes authenticated and delivered under this
Indenture, including the Original Notes and the Registered Notes, as the context
may require.
"Officer" means the Chairman of the Board of Directors, a Vice Chairman of
-------
the Board of Directors, the President, the Chief Executive Officer, a Vice
President, the Chief Financial Officer, the Chief Accounting Officer, the
Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary.
"Officers' Certificate" means a certificate signed by (i) the Chairman of
---------------------
the Board of Directors, a Vice Chairman of the Board of Directors, the
President, the Chief Executive Officer or a Vice President, and (ii) the Chief
Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant
Treasurer, the Secretary or an Assistant Secretary, and delivered to the
Trustee, which certificate shall comply with the provisions of Section 10.04
hereof; provided that any Officers' Certificate delivered pursuant to the first
paragraph of Section 4.19 hereof shall be signed by the Chief Executive Officer,
the Chief Financial Officer or the Chief Accounting Officer.
"Opinion of Counsel" means a written opinion from legal counsel (who may be
------------------
counsel to the Company or the Trustee) who is acceptable to the Trustee, which
opinion shall comply with the provisions of Section 10.04 hereof.
"Original Notes" means all Notes other than Exchange Notes.
--------------
"Other Notes" means the Notes sold by the Purchasers in the initial
-----------
offering contemplated by the Purchase Agreement in reliance on an exemption from
the registration requirements of the Securities Act other than Rule 144A and
Regulation S.
"Paying Agent" means any Person authorized by the Company to make payments
------------
of principal, premium or interest with respect to the Notes on behalf of the
Company.
"Permitted Holders" means IES Industries Inc. and MidAmerican Energy
-----------------
Holdings Company and their respective successors and assigns, and Clark E. and
Mary E. McLeod and foundations and trusts controlled by them or either of them,
and Affiliates (other than the Company and the Restricted Subsidiaries) of each
of the foregoing.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
--------------------------------------------------------
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against
13
<PAGE>
fluctuations in interest rates or currency exchange rates with respect to
Indebtedness Incurred and which shall have a notional amount no greater than the
payments due with respect to the Indebtedness being hedged thereby and not for
purposes of speculation.
"Permitted Investments" means:
---------------------
(i) Eligible Cash Equivalents;
(ii) Investments in Property used in the ordinary course of
business;
(iii) Investments in any Person as a result of which such Person
becomes a Restricted Subsidiary in compliance with Section 4.17 hereof;
(iv) Investments pursuant to agreements or obligations of the
Company or a Restricted Subsidiary, in effect on the Issue Date, to make
such Investments;
(v) Investments in prepaid expenses, negotiable instruments held
for collection and lease, utility and workers' compensation, performance
and other similar deposits;
(vi) Permitted Interest Rate or Currency Protection Agreements with
respect to any floating rate Indebtedness that is permitted under Section
4.09 or Section 4.10 hereof to be outstanding;
(vii) bonds, notes, debentures or other debt securities received as a
result of Asset Sales permitted under Section 4.08 hereof;
(viii) Investments in existence at the Issue Date;
(ix) commission, payroll, travel and similar advances to employees
in the ordinary course of business to cover matters that are expected at
the time of such advances ultimately to be treated as expenses in
accordance with GAAP;
(x) stock, obligations or securities received in satisfaction of
judgments; and
(xi) Investments made pursuant to any deferred-compensation plan,
including any Investments made through a trust (including a grantor trust)
established in connection with any such plan, for the benefit of employees
of the Company or of any Restricted Subsidiary.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
---------------
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate
14
<PAGE>
proceedings, if a reserve or other appropriate provision, if any, as shall be
required in conformity with GAAP shall have been made therefor; (ii) other Liens
incidental to the conduct of the Company's and its Restricted Subsidiaries'
business or the ownership of its property and assets not securing any
Indebtedness, and which do not in the aggregate materially detract from the
value of the Company's and its Restricted Subsidiaries' property or assets when
taken as a whole, or materially impair the use thereof in the operation of its
business; (iii) Liens with respect to assets of a Restricted Subsidiary granted
by such Restricted Subsidiary to the Company to secure Indebtedness owing to the
Company; (iv) pledges and deposits made in the ordinary course of business in
connection with workers' compensation and unemployment insurance, statutory
Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen
and other types of statutory obligations; (v) deposits made to secure the
performance of tenders, bids, leases, and other obligations of like nature
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (vi) zoning restrictions, servitudes, easements,
rights-of-way, restrictions and other similar charges or encumbrances incurred
in the ordinary course of business which, in the aggregate, do not materially
detract from the value of the property subject thereto or interfere with the
ordinary conduct of the business of the Company or its Restricted Subsidiaries;
(vii) Liens arising out of judgments or awards against the Company or any
Restricted Subsidiary with respect to which the Company or such Restricted
Subsidiary is prosecuting an appeal or proceeding for review and the Company or
such Restricted Subsidiary is maintaining adequate reserves in accordance with
GAAP; (viii) any interest or title of a lessor in the property subject to any
lease other than a Capital Lease; (ix) Liens (including extensions and renewals
thereof) upon real or personal property acquired after the Issue Date; provided
that (a) such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with Section 4.09 hereof, (1) to finance the cost
(including the cost of improvement or construction) of the item of property or
assets subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion of
construction or the commencement of full operation of such property or (2) to
refinance any Indebtedness previously so secured, (b) the principal amount of
the Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (x) leases or
subleases granted to others that do not materially interfere with the ordinary
course of business of the Company and its Restricted Subsidiaries; (xi) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (xii) Liens arising from filing
precautionary Uniform Commercial Code financing statements regarding leases;
(xiii) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes a part of,
any Restricted Subsidiary; provided that such Liens do not extend to or cover
any property or assets of the Company or any Restricted Subsidiary other than
the property or assets acquired; (xiv) Liens in favor of the Company or any
Restricted Subsidiary; (xv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property relating
to such letters
15
<PAGE>
of credit and the products and proceeds thereof; (xvi) Liens in favor of customs
and revenue authorities arising as a matter of law to secure payment of customs
duties in connection with the importation of goods; (xvii) Liens encumbering
customary initial deposits and margin deposits, and other Liens that are either
within the general parameters customary in the industry and incurred in the
ordinary course of business, in each case, securing Indebtedness under Permitted
Interest Rate Agreements and Currency Agreements; and (xviii) Liens arising out
of conditional sale, title retention, consignment or similar arrangements for
the sale of goods entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business in accordance with the past
practices of the Company and its Restricted Subsidiaries prior to the Issue
Date.
"Person" means any individual, corporation, limited liability company,
------
partnership, limited liability partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Predecessor Note" of any particular Note means every previous Note
----------------
evidencing all or a portion of the same Indebtedness as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.09 hereof in exchange for or in lieu
of a mutilated, destroyed, lost or stolen Note shall be deemed to evidence the
same debt as the mutilated, destroyed, lost or stolen Note.
"Preferred Stock" of any Person means Capital Stock of such Person of any
---------------
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"pro forma" means, with respect to any calculation made or required to be
---------
made pursuant to the terms hereof, a calculation in accordance with Article 11
of Regulation S-X promulgated under the Securities Act (to the extent
applicable), as interpreted in good faith by the Board of Directors, or
otherwise, a calculation made in good faith by the Board of Directors, as the
case may be.
"Property" means, with respect to any Person, any interest of such Person
--------
in any kind of property or asset, whether real, personal or mixed, or tangible
or intangible, excluding Capital Stock in any other Person.
"Purchase Agreement" means the Purchase Agreement, dated as of February 11,
------------------
1999 between the Company and the Purchasers, as such agreement may be amended
from time to time.
"Purchase Money Indebtedness" means Indebtedness of the Company (including
---------------------------
Acquired Indebtedness and Capital Lease Obligations, mortgage financings and
purchase
16
<PAGE>
money obligations) incurred for the purpose of financing all or any part of the
cost of construction, acquisition, development or improvement by the Company or
any Restricted Subsidiary of any Telecommunications Assets of the Company or any
Restricted Subsidiary and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Purchasers" means Salomon Smith Barney Inc., Bear, Stearns & Co., Inc. and
----------
Chase Securities Inc.
"Qualified Receivable Facility" means Indebtedness of the Company or any
-----------------------------
Subsidiary Incurred from time to time pursuant to either (x) credit facilities
secured by Receivables or (y) receivable purchase facilities, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed
-------------------------------
solely for the purpose of obtaining a Qualified Receivable Facility and
substantially all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other than
---------------
Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents or
-----------
intangibles evidencing or relating to the right to payment of money and proceeds
and products thereof in each case generated in the ordinary course of business.
"Redemption Date" means, when used with respect to any Note or part thereof
---------------
to be redeemed hereunder, the date fixed for redemption of such Notes pursuant
to the terms of the Notes and this Indenture.
"Redemption Price" means, when used with respect to any Note or part
----------------
thereof to be redeemed hereunder, the price fixed for redemption of such Note
pursuant to the terms of the Notes and this Indenture, plus accrued and unpaid
interest thereon, if any, to the Redemption Date.
"Registered Exchange Offer" has the meaning set forth in the form of the
-------------------------
Notes contained in Section 2.02 hereof.
"Registered Notes" means the Exchange Notes and all other Notes sold or
----------------
otherwise disposed of pursuant to an effective registration statement under the
Securities Act, together with their respective Successor Notes.
17
<PAGE>
"Regular Record Date" means, for the interest payable on any Interest
-------------------
Payment Date, the date specified in Section 2.13 hereof.
"Regulation S" means Regulation S under the Securities Act (or any
------------
successor provision), as it may be amended from time to time.
"Regulation S Certificate" means a certificate substantially in the form
------------------------
set forth in Annex A hereof.
"Regulation S Global Security" has the meaning specified in Section 2.01
----------------------------
hereof.
"Regulation S Legend" means a legend substantially in the form of the
-------------------
legend required in the form of Note set forth in Section 2.02 hereof to be
placed upon each Regulation S Note.
"Regulation S Notes" means all Notes required pursuant to Section 2.08(c)
------------------
hereof to bear a Regulation S Legend. Such term includes the Regulation S
Global Security.
"Restricted Global Security" has the meaning specified in Section 2.01
--------------------------
hereof.
"Restricted Notes" means all Notes required pursuant to Section 2.08(c)
----------------
hereof to bear any Restricted Notes Legend. Such term includes the Restricted
Global Security.
"Restricted Notes Certificate" means a certificate substantially in the
----------------------------
form set forth in Annex B hereof.
"Restricted Notes Legend" means, collectively, the legends substantially in
-----------------------
the forms of the legends required in the form of Note set forth in Section 2.02
hereof to be placed upon each Restricted Note.
"Restricted Payment" means (i) a dividend or other distribution declared or
------------------
paid on the Capital Stock of the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary, in each case, other than dividends, distributions or
payments made solely in Qualified Stock of the Company or such Restricted
Subsidiary, (ii) a payment made by the Company or any of its Restricted
Subsidiaries (other than to the Company or any Restricted Subsidiary) to
purchase, redeem, acquire or retire any Capital Stock of the Company or of a
Restricted Subsidiary, (iii) a payment made by the Company or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
the Company) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory
19
<PAGE>
redemption payment, Indebtedness of the Company or such Restricted Subsidiary
which is subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the Notes and which was scheduled to mature on or after the
maturity of the Notes or (iv) an Investment in any Person, including an
Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted
Subsidiary, other than (a) a Permitted Investment, (b) an Investment by the
Company in a Wholly-Owned Restricted Subsidiary of the Company or (c) an
Investment by a Restricted Subsidiary in the Company or a Wholly-Owned
Restricted Subsidiary of the Company.
"Restricted Period" means the period of 41 consecutive days beginning on
-----------------
and including the later of (i) the day on which Notes are first offered to
persons other than distributors (as defined in Regulation S) in reliance on
Regulation S and (ii) the original issuance date of the Notes.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
---------------------
been designated as an Unrestricted Subsidiary pursuant to Section 4.17 hereof.
"Rule 144" means Rule 144 under the Securities Act (or any successor
--------
provision), as it may be amended from time to time.
"Rule 144A" means Rule 144A under the Securities Act (including any
---------
successor regulation thereto), as it may be amended from time to time.
"Rule 144A Notes" means the Notes purchased by the Purchasers from the
---------------
Company pursuant to the Purchase Agreement, other than the Other Notes and the
Regulation S Notes.
"Sale and Leaseback Transaction" means, with respect to any Person, any
------------------------------
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
"Securities Act Legend" means a Restricted Note Legend or a Regulation S
---------------------
Legend.
"Senior Credit Facility" means Indebtedness of the Company and its
----------------------
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to the Company
and its Subsidiaries, whether or not secured, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
19
<PAGE>
"Senior Discount Notes" means the Company's 10 1/2% Senior Discount Notes
---------------------
due March 1, 2007.
"Shelf Registration Statement" has the meaning set forth in the form of the
----------------------------
Notes contained in Section 2.02 hereof.
"Special Interest" has the meaning set forth in the form of Note contained
----------------
in Section 2.02 hereof. Unless the context otherwise requires, references
herein to "interest" on the Notes shall include Special Interest.
"Special Record Date" means a date fixed by the Trustee pursuant to Section
-------------------
2.13 hereof for the payment of Defaulted Interest.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of
-----------------
McGraw Hill Corporation, or, if Standard & Poor's Ratings Group shall cease
rating the specified debt securities and such ratings business with respect
thereto shall have been transferred to a successor Person, such successor
Person; provided that if Standard & Poor's Ratings Group ceases rating the
specified debt securities and its ratings business with respect thereto shall
not have been transferred to any successor Person or such successor Person is
Moody's, then "Standard & Poor's" shall mean any other nationally recognized
rating agency (other than Moody's) that rates the specified debt securities and
that shall have been designated by the Company in an Officers' Certificate.
"Stated Maturity" means, with respect to any security, the date specified
---------------
in such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Step-Up" has the meaning set forth in the form of the Note contained in
-------
Section 2.02 hereof.
"Strategic Equity Investment" means an equity investment made by a
---------------------------
Strategic Investor in the Company in an aggregate amount of not less than $25
million.
"Strategic Investor" means a Person (other than the Permitted Holders)
------------------
engaged in one or more Telecommunications Businesses that has, or 80% or more of
the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial Investment in the Company in excess of
$2.0 billion.
20
<PAGE>
"Subordinated Indebtedness" means Indebtedness of the Company as to which
-------------------------
the payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the Notes to at least the following extent: (i) no payments
of principal of (or premium, if any) or interest on or otherwise due in respect
of such Indebtedness may be permitted for so long as any default in the payment
of principal (or premium, if any) or interest on the Notes exists; (ii) in the
event that any other default that with the passing of time or the giving of
notice, or both, would constitute an event of default exists with respect to the
Notes, upon notice by 25% or more in principal amount of the Notes to the
Trustee, the Trustee shall give notice to the Company and the holders of such
Indebtedness (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be made for a period of 179
days from the date of such notice; and (iii) such Indebtedness may not (x)
provide for payments of principal of such Indebtedness at the stated maturity
thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by virtue of
acceleration of such Indebtedness upon an event of default thereunder), in each
case prior to the final Stated Maturity of the Notes or (y) permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company) of such other Indebtedness at the option of the holder thereof prior to
the final Stated Maturity of the Notes, other than a redemption or other
retirement at the option of the holder of such Indebtedness (including pursuant
to an offer to purchase made by the Company) which is conditioned upon a change
of control of the Company pursuant to provisions substantially similar to those
contained in Section 4.07 hereof (and which shall provide that such Indebtedness
will not be repurchased pursuant to such provisions prior to the Company's
repurchase of the Notes required to be repurchased by the Company pursuant to
Section 4.07 hereof).
"Subsidiary" means, with respect to any Person, (i) any corporation more
----------
than 50 percent of the outstanding shares of Voting Stock of which is owned,
directly or indirectly, by such Person, or by one of more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries of such
Person, (ii) any general partnership, limited liability company, joint venture
or similar entity, more than 50 percent of the outstanding partnership,
membership or similar interests of which are owned, directly or indirectly, by
such Person, or by one or more other Subsidiaries of such Person, or by such
Person and one or more other Subsidiaries of such Person and (iii) any limited
partnership of which such Person or any Subsidiary of such Person is a general
partner.
"Successor Note" of any particular Note means every Note issued after, and
--------------
evidencing all or a portion of the same Indebtedness as that evidenced by, such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 2.09 hereof
21
<PAGE>
in exchange for or in lieu of a mutilated, destroyed, lost or stolen Note shall
be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen
Note.
"Surviving Entity" has the meaning set forth in Section 5.01(a) hereof.
----------------
"Telecommunications Assets" means all assets, rights (contractual or
-------------------------
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
---------------------------
providing services relating to the transmission of, voice, video or data through
owned or leased wireline or wireless transmission facilities, (ii) creating,
developing, constructing, installing, repairing, maintaining or marketing
communications-related systems, network equipment and facilities, software and
other products, (iii) creating, developing, producing or marketing audiotext or
videotext, (iv) publishing or distributing telephone (including Internet)
directories, whether in paper, electronic, audio or video format, (v) marketing
(including direct marketing and telemarketing), or (vi) evaluating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i), (ii), (iii), (iv) or (v) above
(in the case of clauses (iii), (iv) and (v), however, in a manner consistent
with the Company's manner of business on the Issue Date), and shall, in any
event, include all businesses in which the Company or any of its Subsidiaries
are engaged on the Issue Date; provided that the determination of what
constitutes a Telecommunications Business shall be made in good faith by the
Board of Directors.
"Temporary Notes" has the meaning set forth in Section 2.11 hereof.
---------------
"Trading Day" means, with respect to a security traded on a securities
-----------
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
-------------------
(S)(S)77aaa-77bbbb) as in effect on the date of this Indenture except as
required by Section 9.04 hereof; provided that in the event the Trust Indenture
Act of 1939 is amended after such date, "Trust Indenture Act" means, to the
extent required by any such amendment, the Trust Indenture Act of 1939, as so
amended.
"Trust Officer" means any officer assigned to the Corporate Trust Division
-------------
(or any successor thereto), including any Vice President, Assistant Vice
President, Trust Officer, any Assistant Secretary, any trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and having direct
responsibility for the administration of this Indenture.
22
<PAGE>
"Trustee" means the party named as such in this Indenture until a successor
-------
replaces it in accordance with the provisions of this Indenture and, thereafter,
means such successor.
"Unrestricted Notes Certificate" means a certificate substantially in the
------------------------------
form set forth in Annex C hereof.
"Unrestricted Subsidiary" means any Subsidiary of the Company that the
-----------------------
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to Section 4.17 hereof.
"U.S. Government Obligations" means (x) securities that are (i) direct
---------------------------
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such Bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Obligation or the specific payment
of principal or interest of the U.S. Government Obligation evidenced by such
depository receipt.
"Voting Stock" means, with respect to any Person, securities of any class
------------
or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary of
----------------------------------
such Person all of the outstanding Capital Stock or other ownership interests
(other than director's qualifying shares) of which shall at the time be owned by
such Person or by one or more other Wholly-Owned Restricted Subsidiary of such
Person or by such Person and one or more other Wholly-Owned Restricted
Subsidiary of such Person.
SECTION I.2. Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
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Whenever this Indenture refers to a provision of the Trust Indenture Act,
the provision is incorporated by reference in and made a part of this Indenture.
The following Trust Indenture Act terms incorporated by reference in this
Indenture have the following meanings:
"indenture securities" means the Notes.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company or other obligor on
the Notes, if any.
All other Trust Indenture Act terms used or incorporated by reference in
this Indenture that are defined by the Trust Indenture Act, defined by Trust
Indenture Act reference to another statute or defined by Commission rule have
the meanings assigned to them therein.
SECTION I.3. Rules of Construction. Unless the context otherwise
---------------------
requires:
(a) the words "herein," "hereof" and "hereunder," and other words of
similar import, refer to this Indenture as a whole and not to any
particular Article, Section or other subdivision;
(b) "or" is not exclusive;
(c) "including" means including without limitation;
(d) the principal amount of any noninterest bearing or other discount
security, at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP;
(e) when used with respect to the Notes, the term "principal amount"
shall mean the principal amount thereof that would be shown on a balance
sheet of the issuer dated such date prepared in accordance with GAAP; and
(f) unless otherwise expressly provided herein, the principal amount
of any Preferred Stock shall be the greater of (i) the maximum liquidation
value of such Preferred Stock or (ii) the maximum mandatory redemption or
mandatory repurchase price with respect to such Preferred Stock.
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SECTION I.4. Form of Documents Delivered to Trustee. In any case where
--------------------------------------
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified by,
or covered by the opinion of, only one such Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion with respect to some matters and one or more other such Persons as to
other matters, and any such Person may certify or give an opinion as to such
matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous. Where any Person is required to make, give or execute
two or more applications, requests, consents, certificates, statements, opinions
or other instruments under this Indenture, they may, but need not, be
consolidated and form one instrument.
SECTION I.5. Acts of Holders. (a) Any request, demand, authorization,
---------------
direction, notice, consent, waiver or other action provided by this Indenture to
be given or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by an agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and (subject to Section 7.01 hereof) conclusive in
favor of the Trustee and the Company, if made in the manner provided in this
Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by an acknowledgment of a notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than such signer's
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of the signer's authority. The fact and date of the execution
of any such instrument or writing, or
25
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the authority of the person executing the same, may also be proved in any other
manner which the Trustee deems sufficient.
SECTION 1.06. Satisfaction and Discharge. This Indenture shall cease to
--------------------------
be of further effect (except as to the rights of Holders under Sections 2.09,
2.11, 4.02, 4.03 and 4.04 hereof) and the Trustee, on receipt of a Company Order
requesting such action, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when (a) either (i) all
outstanding Notes have been delivered to the Trustee for cancellation or (ii)
all such Notes not theretofore delivered to the Trustee for cancellation (A)
have become due and payable, (B) will become due and payable at their Stated
Maturity within one year or (C) are to be called for redemption within one year
under irrevocable arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the expense, of the
Company, and the Company, in the case of (A), (B) or (C) above, has irrevocably
deposited or caused to be deposited with the Trustee as trust funds in trust for
the purpose an amount sufficient to pay and discharge the entire indebtedness on
such Notes, for principal (and premium, if any) and interest to the date of such
deposit (in the case of Notes which have become due and payable) or to the
Stated Maturity or Redemption Date, as the case may be, together with
irrevocable instructions from the Company in form and substance satisfactory to
the Trustee directing the Trustee to apply such funds to the payment thereof;
(b) the Company has paid or caused to be paid all other sums payable hereunder
by the Company; and (c) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with. Notwithstanding the satisfaction and
discharge of this Indenture pursuant to this Section 1.06, the obligations of
the Company to the Trustee under Section 7.07 hereof, and, if money shall have
been deposited with the Trustee in trust for the Holders pursuant to this
Section 1.06, the obligations of the Trustee under this Section 1.06 and Section
4.03 hereof shall survive.
All money deposited with the Trustee pursuant to this Section 1.06 shall be
held in trust and applied by it, in accordance with the provisions of the Notes
and this Indenture, to the payment, either directly or through any Paying Agent,
to the Persons entitled thereto, of the principal (and premium, if any) and
interest for the payment of which such money has been deposited with the
Trustee. If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with this Section 1.06 by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Notes shall
be revived and reinstated as though no deposit had occurred pursuant to this
Section 1.06 until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with this
Section 1.06; provided that, if the Company has made any payment of interest on
or principal of any Notes because of the reinstatement of its obligations, the
Company shall be subrogated
26
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to the rights of the Holders of such Notes to receive such payment from the cash
or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE II.
THE NOTES
SECTION II.1. Form and Dating. (a) The Notes and the certificate of
---------------
authentication of the Trustee thereon shall be substantially in the form
contained in this Article II, with such appropriate insertions, substitutions
and other variations as are required or permitted under this Indenture. Upon
issuance, any such Note shall be duly executed by the Company and authenticated
by the Trustee as hereinafter provided.
(b) The Notes may have such letters, numbers or other marks of
identification and such legends and endorsements, stamped, printed, lithographed
or engraved thereon, (i) as the Company may deem appropriate and as are not
inconsistent with the provisions of this Indenture, (ii) as may be required to
comply with this Indenture, any law or any rule of any securities exchange on
which the Notes may be listed and (iii) as may be necessary to conform to
customary usage. Each Note shall be dated the date of its authentication by the
Trustee.
(c) Upon their original issuance, Rule 144A Notes shall be issued in the
form of one or more Global Securities registered in the name of the Depositary
or its nominee and deposited with the Trustee, as custodian for the Depositary,
for credit by the Depositary to the respective accounts of beneficial owners of
the Notes represented thereby (or such other accounts as they may direct). Such
Global Securities, together with their Successor Notes which are Global
Securities other than the Regulation S Global Security, are collectively herein
called the "Restricted Global Security". Upon their original issuance,
Regulation S Notes shall be issued in the form of one or more Global Securities
registered in the name of the Depositary, or its nominee and deposited with the
Trustee, as custodian for the Depositary, for credit to the respective accounts
of the beneficial owners of the Notes represented thereby (or such other
accounts as they may direct), provided that upon such deposit all such Notes
shall be credited to or through accounts maintained at the Depositary by or on
behalf of Euroclear or Cedel. Such Global Securities, together with their
Successor Notes which are Global Securities other than the Restricted Global
Security, are collectively herein called the "Regulation S Global Security".
Upon their original issuance, Other Notes shall not be issued in the form
of a Global Note or in any other form intended to facilitate book-entry trading
in beneficial interests in such Notes.
SECTION II.2. Form of Face of Note.
--------------------
27
<PAGE>
[If a Global Security, then insert -- THIS NOTE IS A GLOBAL SECURITY WITHIN
THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE
NAME OF A DEPOSITARY OR A NOMINEE THEREOF. THIS NOTE MAY NOT BE EXCHANGEABLE IN
WHOLE OR IN PART FOR A NOTE REGISTERED, AND NO TRANSFER OF THIS NOTE IN WHOLE OR
IN PART MAY BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY
OR A NOMINEE THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE
INDENTURE.]
[If a Global Security to be held by the Depository, then insert -- UNLESS
THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY
TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO
SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY
TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON
IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.]
[If Restricted Notes, then insert -- THIS SECURITY HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE HOLDER
HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE BENEFIT OF THE COMPANY AND
THE INITIAL PURCHASERS OF THIS SECURITY THAT THIS SECURITY MAY NOT BE RESOLD,
PLEDGED OR OTHERWISE TRANSFERRED (X) PRIOR TO THE SECOND ANNIVERSARY OF THE
ISSUANCE HEREOF (OR A PREDECESSOR SECURITY HERETO) OR (Y) BY ANY HOLDER THAT WAS
AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE MONTHS PRECEDING THE
DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN (1) TO THE COMPANY, (2) SO LONG
AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, UNDER THE
SECURITIES ACT ("RULE 144A"), TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), (3) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER
28
<PAGE>
THE SECURITIES ACT (AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE
CERTIFICATE OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND, IF SUCH TRANSFER
IS BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE (AS DEFINED
BELOW) PRIOR TO APRIL 3, 1999, A CERTIFICATE WHICH MAY BE OBTAINED FROM THE
COMPANY OR THE TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE
TRUSTEE, (4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED BY THE
BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON THE REVERSE OF
THIS SECURITY) THAT IS ACQUIRING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT
FOR DISTRIBUTION, AND A CERTIFICATE IN THE FORM ATTACHED TO THIS SECURITY IS
DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE (PROVIDED THAT
CERTAIN HOLDERS SPECIFIED IN THE INDENTURE MAY NOT TRANSFER THIS SECURITY
PURSUANT TO THIS CLAUSE (4) ON OR PRIOR TO APRIL 3, 1999) OR (5) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN EACH CASE IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED
STATES. AN INSTITUTIONAL ACCREDITED INVESTOR HOLDING THIS SECURITY AGREES THAT
IT WILL FURNISH TO THE COMPANY AND THE TRUSTEE SUCH CERTIFICATES AND OTHER
INFORMATION AS THEY MAY REASONABLY REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF
THIS SECURITY COMPLIES WITH THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY
PURCHASING THIS SECURITY, REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY
AND THE INITIAL PURCHASERS THAT IT IS (1) A QUALIFIED INSTITUTIONAL BUYER WITHIN
THE MEANING OF RULE 144A OR (2) AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR"
AS DEFINED IN RULE 501(A)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT
IT IS HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION OR
(3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING OF (OR AN
ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (O)(2) OF RULE 902 UNDER)
REGULATION S UNDER THE SECURITIES ACT.]
8 1/8% SENIOR NOTES DUE FEBRUARY 15, 2009
[IF RESTRICTED GLOBAL SECURITY - CUSIP NO. 582266AM4]
[IF ANY REGULATION S NOTE - CUSIP NO. U58159AE1]
[IF REGULATION S GLOBAL SECURITY - ISIN NO. USU58159AE15]
[IF OTHER NOTE - CUSIP NO. ___________]
No. R-_____ $__________________
29
<PAGE>
McLeodUSA Incorporated, a corporation duly organized and existing under the
laws of Delaware (herein called the "Company", which term includes any successor
Person under the Indenture hereinafter referred to), for value received, hereby
promises to pay to _____________, or registered assigns, the principal sum of
________________ Dollars [if this Note is a Global Security, then insert: (which
principal amount may from time to time be increased or decreased to such other
principal amounts (which, taken together with the principal amounts of all other
outstanding Notes, shall not exceed FIVE HUNDRED MILLION DOLLARS ($500,000,000)
in the aggregate at any time) by adjustments made on the records of the Trustee
hereinafter referred to in accordance with the Indenture)] on February 15, 2009,
and to pay interest thereon from the Issue Date, semi-annually in arrears on
February 15 and August 15 of each year, commencing August 15, 1999 at the rate
of 8.125% per annum, until the principal hereof is paid or made available for
payment [If Original Notes, then insert: provided, however, that if (i) the
Company has not filed a registration statement (the "Exchange Offer Registration
Statement") under the Securities Act of 1933, as amended (the "Act"),
registering a security substantially identical to this Note (except that such
Note will not contain terms with respect to the Special Interest payments
described below or transfer restrictions) pursuant to an exchange offer (the
"Registered Exchange Offer") (or, in lieu thereof, a registration statement
registering this Note for resale (a "Shelf Registration Statement")) by April
23, 1999, or (ii) the Exchange Offer Registration Statement relating to the
Registered Exchange Offer has not become or been declared effective by July 22,
1999, or (iii) neither the Registered Exchange Offer has been consummated nor
the Shelf Registration Statement has been declared effective prior to August 21,
1999, or (iv) either the Exchange Offer Registration Statement or, if
applicable, the Shelf Registration Statement is filed and declared effective
(except as specifically permitted therein) but shall thereafter cease to be
effective without being succeeded promptly by an additional registration
statement filed and declared effective, in each case (i) through (iv) upon the
terms and conditions set forth in the Registration Agreement (each such event
referred to in clauses (i) through (iv), a "Registration Default"), then
interest will accrue (in addition to any stated interest on the Notes) (the
"Step-Up") at a rate of 0.5% per annum, during the 90-day period from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured and shall
increase by 0.25% per annum at the end of each subsequent 90-day period, but in
no event shall such rate exceed 2.00% per annum, in the aggregate regardless of
the number of Registration Defaults. Interest accruing as a result of the Step-
Up is referred to herein as "Special Interest." Accrued Special Interest, if
any, shall be paid semi-annually on February 15 and August 15 of each year; and
the amount of accrued Special Interest shall be determined on the basis of the
number of days actually elapsed. Any accrued and unpaid interest (including
Special Interest) on this Note upon the issuance of an Exchange Note (as defined
in the Indenture) in exchange for this Note shall cease to be payable to the
Holder hereof but such accrued and unpaid interest (including Special Interest)
shall be payable on the next Interest Payment Date for such Exchange Note to the
Holder thereof on the related Regular Record Date.] The interest so
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<PAGE>
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the Person in whose name this
Note (or one or more Predecessor Notes) is registered at the close of business
on the Regular Record Date for such interest, which shall be February 1 or
August 1 (whether or not a Business Day), as the case may be, immediately
preceding such Interest Payment Date. Any such interest not so punctually paid
or duly provided for will forthwith cease to be payable to the Holder on such
Regular Record Date and may either be paid to the Person in whose name this Note
(or one or more Predecessor Notes) is registered at the close of business on a
Special Record Date for the payment of such Defaulted Interest to be fixed by
the Trustee, notice whereof shall be given to Holders of Notes not more than 15
calendar days and not less than 10 calendar days prior to such Special Record
Date, or be paid at any time in any other lawful manner not inconsistent with
the requirements of any securities exchange on which the Notes may be listed,
and upon such notice as may be required by such exchange, all as more fully
provided in said Indenture.
The principal of this Note shall accrue interest at the rate of 8.125% per
annum, and in the case of a default in payment of principal and premium, if any,
upon acceleration or redemption, in which case interest shall be payable
pursuant to the preceding paragraph on such overdue principal (and premium, if
any), such interest shall be payable on demand and, if not so paid on demand,
such interest shall itself bear interest at the rate of 9.125% per annum (to the
extent that the payment of such interest shall be legally enforceable), and
shall accrue from the date of such demand for payment to the date payment of
such interest has been made or duly provided for, and such interest on unpaid
interest shall also be payable on demand.
Payment of the principal of (and premium, if any) and interest on this Note
will be made at the corporate trust office of the Trustee and at the office or
agency of the Company maintained for that purpose in the Borough of Manhattan,
The City of New York, New York, and at any other office or agency maintained by
the Company for such purpose, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, that at the option of the Company payment of
interest may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Note Register.
Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
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<PAGE>
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Indenture or be valid or obligatory for
any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated:
MCLEODUSA INCORPORATED
By____________________________
Attest:
______________________________
SECTION II.3. Form of Reverse of Note.
-----------------------
This Note is one of a duly authorized issue of Notes of the Company
designated as its 8 1/2% Senior Notes due February 15, 2009 (the "Notes") issued
under an Indenture, dated as of February 22, 1999 (herein called the
"Indenture"), between the Company and United States Trust Company of New York,
as trustee (herein called the "Trustee", which term includes any successor
trustee under the Indenture). The Notes are limited in aggregate principal
amount to $500,000,000. Reference is hereby made to the Indenture and all
indentures supplemental thereto for a statement of the respective rights,
limitations of rights, duties and immunities thereunder of the Company, the
Trustee and the Holders of the Notes and of the terms upon which the Notes are,
and are to be, authenticated and delivered.
The Notes are subject to redemption upon not less than 30 nor more than 60
days' notice by mail to each Holder of Notes to be redeemed at such Holder's
address appearing in the Note Register, in amounts of $1,000 or an integral
multiple of $1,000, at any time on or after February 15, 2004 and prior to
maturity, as a whole or in part, at the election of the Company, at the
following Redemption Prices (expressed as percentages of the principal amount)
plus accrued interest to but excluding the Redemption Date (subject to the right
of
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<PAGE>
Holder on the relevant Regular Record Date to receive interest due on an
Interest Payment Date that is on or prior to the Redemption Date), if redeemed
during the 12-month period beginning February 15 of each of the years indicated
below:
Redemption
Year Price
---- ----------
2004 104.063%
2005 102.708%
2006 101.354%
2007 100.000%
and thereafter at a Redemption Price equal to 100% of the principal amount,
together in the case of any such redemption with accrued interest to but
excluding the Redemption Date, but interest installments whose Stated Maturity
is on or prior to such Redemption Date will be payable to the Holders of such
Notes, or one or more Predecessor Notes, of record at the close of business on
the relevant Regular Record Dates referred to on the face hereof, all as
provided in the Indenture.
The Notes are further subject to redemption prior to February 15, 2002 only
in the event that the Company receives net proceeds from any sale of its Common
Stock in a Strategic Equity Investment on or before February 15, 2002, in which
case the Company may, at its option, use all or a portion of any such net
proceeds to redeem Notes in a principal amount of up to an aggregate amount
equal to 33 1/3% of the original principal amount of the Notes, provided,
however, that Notes in an amount equal to at least 66 2/3% of the original
principal amount of the Notes remain outstanding after such redemption. Such
redemption must occur on a Redemption Date within 90 days of any such sale and
upon not less than 30 nor more than 60 days' notice by mail to each Holder of
Notes to be redeemed at such Holder's address appearing in the Note Register, in
amounts of $1,000 or an integral multiple of $1,000 at a Redemption Price equal
to 108.125% of the principal amount of the Notes so redeemed, plus accrued and
unpaid interest thereon (if any) to but excluding the Redemption Date.
The Notes do not have the benefit of any sinking fund obligations.
The Indenture provides that, subject to certain conditions, if (i) a Change
of Control (as defined in the Indenture) occurs or (ii) certain Excess Proceeds
are available to the Company
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<PAGE>
as a result of any Asset Sale, the Company shall be required to make a Change of
Control Offer or an Asset Sale Offer, as the case may be, for all or a specified
portion of the Notes.
[If not a Global Security insert -- In the event of redemption or purchase
pursuant to an Asset Sale Offer of this Note in part only, a new Note or Notes
of like tenor for the unredeemed or unpurchased portion hereof will be issued in
the name of the Holder hereof upon the cancellation hereof.]
[If a Global Security insert -- In the event of a deposit or withdrawal of
an interest in this Note (including upon an exchange, transfer, redemption or
repurchase of this Note in part only) effected in accordance with the Applicable
Procedures, the Note Registrar, upon receipt of notice of such event from the
Depositary's custodian for this Note, shall make an adjustment on its records to
reflect an increase or decrease of the outstanding principal amount of this Note
resulting from such deposit or withdrawal, as the case may be.]
If an Event of Default shall occur and be continuing, the principal of all
the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (i) the
entire indebtedness of this Note, or (ii) certain restrictive covenants and
Events of Default with respect to this Note, in each case upon compliance with
certain conditions set forth therein.
Unless the context otherwise requires, the Original Notes (as defined in
the Indenture) and the Exchange Notes (as defined in the Indenture) shall
constitute one series for all purposes under the Indenture, including without
limitation, amendments, waivers, redemptions, Change of Control Offers and Asset
Sale Offers.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Notes under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding.
The Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time outstanding,
on behalf of the Holders of all the Notes, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Note shall be conclusive and binding upon such Holder and upon all future
Holders of this Note and of any Note issued upon the registration of transfer
hereof or in exchange herefor or in lieu hereof, whether or not notation of such
consent or waiver is made upon this Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to
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pay the principal of (and premium, if any) and interest on this Note at the
times, place and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registrable in the Note Register, upon
surrender of this Note for registration of transfer at the office or agency of
the Company in the Borough of Manhattan, The City of New York, New York, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Note Registrar duly executed by, the Holder
hereof or his attorney duly authorized in writing, and thereupon one or more new
Notes, of authorized denominations and like tenor and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, Notes are
exchangeable for a like tenor and aggregate principal amount of Notes of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Note for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Note is registered as the owner hereof for all
purposes, whether or not this Note be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
Interest on this Note shall be computed on the basis of a 360-day year of
twelve 30-day months; provided, however, that Special Interest shall be computed
on the basis of a 365- or 366-day year, as the case may be, and the number of
days actually elapsed.
THE INDENTURE AND THE NOTES, INCLUDING THIS NOTE, SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO
AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
All terms used in this Note which are defined in the Indenture shall have
the meanings assigned to them in the Indenture.
CERTIFICATE OF TRANSFER
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The transferor hereof (the "Transferor") hereby certifies in connection
with the transfer of this Note as follows:
(Please check one)
[_] The Transferor has requested that this Note be transferred to a person
(the "Transferee") who will take delivery in the form of a Regulation S Note. In
connection with such transfer, the Transferor hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 904 or Rule 144
under the Securities Act and with all applicable securities laws of the states
of the United States and other jurisdictions. Accordingly, the Transferor hereby
further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
------------------
accordance with Rule 904:
(A) the Transferor is not a distributor of the Notes, an
affiliate of the Company or any such distributor or a person acting on
behalf of any of the foregoing;
(B) the offer of this Note was not made to a person in the
United States;
(C) either:
(i) at the time the buy order was originated, the
Transferee was outside the United States or the Transferor and
any person acting on its behalf reasonably believed that the
Transferee was outside the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Transferor or any affiliate thereof;
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(E) if the Transferor is a dealer in securities or has received
a selling concession, fee or other remuneration in respect of this
Note, and the transfer is to occur during the Restricted Period, then
the requirements of Rule 904(c)(1) have been satisfied; and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
------------------
Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
two years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
[_] The Transferor has requested that this Note be transferred to the
Transferee who will take delivery in the form of a Restricted Note. In
connection with such transfer, the Transferor hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 144A, Rule 144
or to an Institutional Accredited Investor under Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and in compliance with all applicable securities laws
of the states of the United States and other jurisdictions. Accordingly, the
Transferor hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) this Note is being transferred to a person that the
Transferor and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Transferor and any person acting on its behalf have
taken reasonable steps to ensure that the Transferee is aware that the
Transferor may be relying on Rule 144A in connection with the
transfer; and
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(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since this Note was last acquired from the Company or from an
affiliate of the Company, whichever is later, and is being effected in
accordance with the applicable amount, manner of sale and notice
requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
two years has elapsed since this Note was last acquired from the
Company or from an affiliate of the Company, whichever is later, and
the Transferor is not, and during the preceding three months has not
been, an affiliate of the Company.
(3) Institutional Accredited Investor Transfers. If the transfer is
-------------------------------------------
being effected to an Institutional Accredited Investor as defined under
Rule 501(a)(1), (2), (3) or (7), this Note is being transferred to such an
Institutional Accredited Investor as therein so defined who is purchasing
for investment purposes and not for distribution.
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the Company pursuant to
Section 4.07 or 4.08 of the Indenture, check the box:
[_]
If you want to elect to have only a part of this Note purchased by the
Company pursuant to Section 4.07 or 4.08 of the Indenture, state the amount:
$_________________
Dated:____________________ Your Signature:______________________
(Sign exactly as name appears
on the other side of this Note)
Signature Guarantee:____________________________________________________________
Notice: Signature(s) must be guaranteed by an "eligible guarantor
institution" meeting the requirements of the Note Registrar which
requirements will include membership or participation in STAMP or such
other "signature guarantee program" as may be determined by the
Trustee in addition to, or in substitution for STAMP, all in
accordance with the Securities Exchange Act of 1934, as amended.
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SECTION II.4. Form of Trustee's Certificate of Authentication.
-----------------------------------------------
This is one of the Notes referred to in the within-mentioned Indenture.
Date:
_______________________,
as Trustee
By____________________
Authorized Signatory
SECTION II.5. Execution and Authentication. The aggregate principal
----------------------------
amount of Notes outstanding at any time shall not exceed $500,000,000. The
Notes shall be executed on behalf of the Company by its Chief Executive Officer,
its President or any Executive Vice President and shall be attested by the
Company's Secretary or one of its Assistant Secretaries, in each case by manual
or facsimile signature.
The Notes shall be authenticated by manual signature of an authorized
officer of the Trustee and shall not be valid for any purpose unless so
authenticated.
In case any officer of the Company whose signature shall have been placed
upon any of the Notes shall cease to be such officer of the Company before
authentication of such Notes by the Trustee and the issuance and delivery
thereof, such Notes may, nevertheless, be authenticated by the Trustee and
issued and delivered with the same force and effect as though such Person had
not ceased to be such officer of the Company.
Notwithstanding any other provision hereof, the Trustee shall authenticate
and deliver Notes only upon receipt by the Trustee of an Officers' Certificate
complying with Section 10.04 hereof with respect to satisfaction of all
conditions precedent contained in this Indenture to authentication and delivery
of such Notes.
Upon compliance by the Company with the provisions of the previous
paragraph, the Trustee shall, upon receipt of a Company Order requesting such
action, authenticate Notes for original issuance in an aggregate principal
amount not to exceed $500,000,000. Such Company Order shall specify the amount
of Notes to be authenticated and the date on which the Notes are to be
authenticated and shall further provide instructions concerning registration,
amounts for each Holder and delivery.
A Note shall not be valid or entitled to any benefit under this Indenture
or obligatory for any purpose unless executed by the Company and authenticated
by the manual signature of
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the Trustee as provided herein. The signature of an authorized officer of the
Trustee shall be conclusive evidence, and the only evidence, that such Note has
been authenticated and delivered under this Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Notes. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Notes whenever the Trustee
may do so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. Any authenticating agent of the Trustee
shall have the same rights hereunder as any Registrar or Paying Agent. The
Trustee shall not be liable for any failure to act of the authenticating agent
in performing any duty either required herein or authorized herein to be
performed by such person in accordance with the Indenture.
SECTION II.6. Note Registrar and Paying Agent. The Company shall
-------------------------------
maintain, pursuant to Section 4.02 hereof, an office or agency where the Notes
may be presented for registration of transfer or for exchange. The Company
shall cause to be kept at such office a register (the register maintained in
such office being herein sometimes referred to as the "Note Register") in which,
subject to such reasonable regulations as it may prescribe, the Company shall
provide for the registration of Notes and of transfers of Notes entitled to be
registered or transferred as provided herein. The Trustee, at its Corporate
Trust Office, is initially appointed "Note Registrar" for the purpose of
registering Notes and transfers of Notes as herein provided. The Company may,
upon written notice to the Trustee, change the designation of the Trustee as
Note Registrar and appoint another Person to act as Note Registrar for purposes
of this Indenture. If any Person other than the Trustee acts as Note Registrar,
the Trustee shall have the right at any time, upon reasonable notice, to inspect
or examine the Note Register and to make such inquiries of the Note Registrar as
the Trustee shall in its discretion deem necessary or desirable in performing
its duties hereunder.
The Company shall enter into an appropriate agency agreement with any
Person designated by the Company as Note Registrar or Paying Agent that is not a
party to this Indenture, which agreement shall incorporate the provisions of the
Trust Indenture Act and shall implement the provisions of this Indenture that
relate to such Note Registrar or Paying Agent. Prior to the designation of any
such Person, the Company shall, by written notice (which notice shall include
the name and address of such Person), inform the Trustee of such designation.
If the Company fails to maintain a Note Registrar or Paying Agent, the Trustee
shall act as such.
Upon surrender for registration of transfer of any Note at an office or
agency of the Company designated for such purpose, the Company shall execute,
and the Trustee shall authenticate and deliver, in the name of the designated
transferee or transferees, one or more new Initial Notes or Exchange Notes, as
the case may be, of any authorized denomination or denominations, of like tenor
and aggregate principal amount, all as requested by the transferor.
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<PAGE>
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company, the Trustee or the Note
Registrar) be duly endorsed, or be accompanied by a duly executed instrument of
transfer in form satisfactory to the Company, the Trustee and the Note
Registrar, by the Holder thereof or such Holder's attorney duly authorized in
writing.
SECTION II.7. Paying Agent to Hold Money in Trust. On or prior to 10:00
-----------------------------------
a.m. on each due date of the principal, premium, or any payment of interest with
respect to any Note, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal, premium or interest when so becoming due.
The Company shall require each Paying Agent (other than the Trustee) to
agree in writing that such Paying Agent, shall hold in trust for the benefit of
Holders or the Trustee all money held by such Paying Agent for the payment of
principal, premium, or interest with respect to the Notes, shall notify the
Trustee of any default by the Company in making any such payment and at any time
during the continuance of any such default, upon the written request of the
Trustee, shall forthwith pay to the Trustee all sums held in trust by such
Paying Agent.
The Company at any time may require a Paying Agent to pay all money held by
it to the Trustee and to account for any funds disbursed by such Paying Agent.
Upon complying with this Section 2.07, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
SECTION II.8. Registration, Registration of Transfer and Exchange.
---------------------------------------------------
(a) At the option of the Holder, and subject to the other provisions of
this Section 2.08, Notes may be exchanged for other Notes of any authorized
denominations and of a like tenor and aggregate principal amount, upon surrender
of the Notes to be exchanged at such office or agency. Whenever any Notes are
so surrendered for exchange, the Company shall execute, and the Trustee shall
authenticate and deliver, the Notes which the Holder making the exchange is
entitled to receive.
All Notes issued upon any registration of transfer or exchange of Notes
shall be the valid obligations of the Company, evidencing the same debt, and
(subject to the provisions in the Original Notes regarding the payment of
Special Interest) entitled to the same benefits under this Indenture, as the
Notes surrendered upon such registration of transfer or exchange.
Every Note presented or surrendered for registration of transfer or for
exchange shall (if so required by the Company or the Trustee) be duly endorsed,
or be accompanied by a written instrument of transfer in form satisfactory to
the Company and the Note Registrar duly executed, by the Holder thereof or his
attorney duly authorized in writing.
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<PAGE>
No service charge shall be made to the Holder for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes, other than
exchanges pursuant to Sections 2.11, 3.06 or 9.06 hereof or in accordance with
any offer pursuant to Section 4.07 or 4.08 hereof not involving any transfer.
Any holder of a Global Security shall, by acceptance of such Global
Security, agree that transfers of beneficial interests in such Global Security
may be effected through a book entry system maintained by the holder of such
Global Security (or its agent) and the ownership of a beneficial interest in the
Note shall be reflected in a book entry.
The Company shall not be required (i) to issue, register the transfer of or
exchange any Note during a period beginning at the opening of business 15 days
before the day of the mailing of a notice of redemption of Notes selected for
redemption under Section 3.03 and ending at the close of business on the day of
such mailing, or (ii) to register the transfer of or exchange any Note so
selected for redemption in whole or in part, except the unredeemed portion of
any Note being redeemed in part.
(b) Certain Transfers and Exchanges. Notwithstanding any other provision
-------------------------------
of this Indenture or the Notes, transfers and exchanges of Notes and beneficial
interests in a Global Security of the kinds specified in this Section 2.08(b)
shall be made only in accordance with this Section 2.08(b).
(i) Restricted Global Security to Regulation S Global Security. If
----------------------------------------------------------
the owner of a beneficial interest in the Restricted Global Security wishes
at any time to transfer such interest to a Person who wishes to acquire the
same in the form of a beneficial interest in the Regulation S Global
Security, such transfer may be effected only in accordance with the
provisions of this Clause (b)(i) and Clause (b)(vii) below and subject to
the Applicable Procedures. Upon receipt by the Trustee, as Note Registrar,
of (A) an order given by the Depositary or its authorized representative
directing that a beneficial interest in the Regulation S Global Security in
a specified principal amount be credited to a specified Agent Member's
account and that a beneficial interest in the Restricted Global Security in
an equal principal amount be debited from another specified Agent Member's
account and (B) a Regulation S Certificate, satisfactory to the Trustee and
duly executed by the owner of such beneficial interest in the Restricted
Global Security or his attorney duly authorized in writing, then the
Trustee, as Note Registrar but subject to Clause (b)(vii) below, shall
reduce the principal amount of the Restricted Global Security and increase
the principal amount of the Regulation S Global Security by such specified
principal amount as provided in Section 2.08(d)(3) hereof.
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<PAGE>
(ii) Regulation S Global Security to Restricted Global Security. If
----------------------------------------------------------
the owner of a beneficial interest in the Regulation S Global Security
wishes at any time to transfer such interest to a Person who wishes to
acquire the same in the form of a beneficial interest in the Restricted
Global Security, such transfer may be effected only in accordance with this
Clause (b)(ii) and subject to the Applicable Procedures. Upon receipt by
the Trustee, as Note Registrar, of (A) an order given by the Depositary or
its authorized representative directing that a beneficial interest in the
Restricted Global Security in a specified principal amount be credited to a
specified Agent Member's account and that a beneficial interest in the
Regulation S Global Security in an equal principal amount be debited from
another specified Agent Member's account and (B) if such transfer is to
occur during the Restricted Period, a Restricted Notes Certificate,
satisfactory to the Trustee and duly executed by the owner of such
beneficial interest in the Regulation S Global Security or his attorney
duly authorized in writing, then the Trustee, as Note Registrar, shall
reduce the principal amount of the Regulation S Global Security and
increase the principal amount of the Restricted Global Security by such
specified principal amount as provided in Section 2.08(d)(3) hereof.
(iii) Restricted Non-Global Security to Restricted Global Security or
-------------------------------------------- ------------------
Regulation S Global Security. Subject to Section 2.08(d)(2) hereof, if the
----------------------------
Holder of a Restricted Note (other than a Global Security) wishes at any
time to transfer all or any portion of such Restricted Note to a Person who
wishes to take delivery thereof in the form of a beneficial interest in the
Restricted Global Security or the Regulation S Global Security, such
transfer may be effected only in accordance with the provisions of this
Clause (b)(iii) and Clause (b)(vii) below and subject to the Applicable
Procedures. Upon receipt by the Trustee, as Note Registrar, of (A) such
Restricted Note as provided in Section 2.08(a) hereof and instructions
satisfactory to the Trustee directing that a beneficial interest in the
Restricted Global Security or Regulation S Global Security in a specified
principal amount not greater than the principal amount of such Note be
credited to a specified Agent Member's account and (B) a Restricted Notes
Certificate (or the completion of the Certificate of Transfer on the Note),
if the specified account is to be credited with a beneficial interest in
the Restricted Global Security, or a Regulation S Certificate (or the
completion of the Certificate of Transfer on the Note), if the specified
account is to be credited with a beneficial interest in the Regulation S
Global Security, in either case satisfactory to the Trustee and duly
executed by such Holder or his attorney duly authorized in writing, then
the Trustee, as Note Registrar but subject to Clause (b)(vii) below, shall
cancel such Restricted Note (and issue a new Restricted Note in respect of
any untransferred portion thereof) as provided in Section 2.08(a) hereof
and increase the principal amount of the Restricted Global Security or the
Regulation S Global Security , as the case may be, by the specified
principal amount as provided in Section 2.08(d)(3).
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<PAGE>
(iv) Regulation S Non-Global Security to Restricted Global Security or
---------------------------------------------- ------------------
Regulation S Global Security. Subject to Section 2.08(d)(2) hereof, if the
----------------------------
Holder of a Regulation S Note (other than a Global Security) wishes at any
time to transfer all or any portion of such Regulation S Note to a Person
who wishes to acquire the same in the form of a beneficial interest in the
Restricted Global Security or the Regulation S Global Security, such
transfer may be effected only in accordance with this Clause (b)(iv) and
Clause (b)(vii) below and subject to the Applicable Procedures. Upon
receipt by the Trustee, as Note Registrar, of (A) such Regulation S Note as
provided in Section 2.08(a) hereof and instructions satisfactory to the
Trustee directing that a beneficial interest in the Restricted Global
Security or Regulation S Global Security in a specified principal amount
not greater than the principal amount of such Note be credited to a
specified Agent Member's account and (B) if the transfer is to occur during
the Restricted Period and the specified account is to be credited with a
beneficial interest in the Restricted Global Security, a Restricted Notes
Certificate (or the completion of the Certificate of Transfer on the Note)
satisfactory to the Trustee and duly executed by such Holder or his
attorney duly authorized in writing, then the Trustee, as Note Registrar
but subject to Clause (b)(vii) below, shall cancel such Regulation S Note
(and issue a new Regulation S Note in respect of any untransferred portion
thereof) as provided in Section 2.08(a) hereof and increase the principal
amount of the Restricted Global Security or the Regulation S Global
Security, as the case may be, by the specified principal amount as provided
in Section 2.08(d)(3) hereof.
(v) Non-Global Security to Non-Global Security. A Note that is not a
------------------------------------------
Global Security may be transferred, in whole or in part, to a Person who
takes delivery in the form of another Note that is not a Global Security as
provided in Section 2.08(a) hereof, provided that, if the Note to be
transferred in whole or in part is a Restricted Note, or is a Regulation S
Note and the transfer is to occur during the Restricted Period, then the
Trustee shall have received (A) a Restricted Notes Certificate (or the
completion of the Certificate of Transfer on the Note), satisfactory to the
Trustee and duly executed by the transferor Holder or his attorney duly
authorized in writing, in which case the transferee Holder shall take
delivery in the form of a Restricted Note or (B) a Regulation S Certificate
(or the completion of the Certificate of Transfer on the Note),
satisfactory to the Trustee and duly executed by the transferor Holder or
his attorney duly authorized in writing; in which case the transferee
Holder shall take delivery in the form of a Regulation S Note (subject in
every case to Section 2.08(c) hereof).
(vi) Exchanges between Global Security and Non-Global Security. A
---------------------------------------------------------
beneficial interest in a Global Security may be exchanged for a Note that
is not a Global Security as provided in Section 2.08(d)(2) hereof, provided
that, if such interest is a beneficial interest in the Restricted Global
Security, or if such interest is a beneficial interest in the Regulation S
Global Security and such exchange is to occur during the Restricted
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<PAGE>
Period, then such interest shall be exchanged for a Restricted Note
(subject in each case to Section 2.08(c) hereof). A Note that is not a
Global Security may be exchanged for a beneficial interest in a Global
Security only if (A) such exchange occurs in connection with a transfer
effected in accordance with Clause (b)(iii) or (iv) above or (B) such Note
is a Regulation S Note and such exchange occurs after the Restricted
Period.
(vii) Regulation S Global Security to be Held Through Euroclear or
------------------------------------------------------------
Cedel during Restricted Period. The Company shall use its best efforts to
------------------------------
cause the Depositary to ensure that, until the expiration of the Restricted
Period, beneficial interests in the Regulation S Global Security may be
held only in or through accounts maintained at the Depositary by Euroclear
or Cedel (or by Agent Members acting for the account thereof), and no
person shall be entitled to effect any transfer or exchange that would
result in any such interest being held otherwise than in or through such an
account; provided that this Clause (b)(vii) shall not prohibit any transfer
or exchange of such an interest in accordance with Clause (b)(ii) or (vi)
above.
(c) Securities Act Legends. Rule 144A Notes, Other Notes and their
----------------------
respective Successor Notes shall bear a Restricted Note Legend, and the
Regulation S Notes and their Successor Notes shall bear a Regulation S Legend,
subject to the following:
(i) subject to the following Clauses of this Section 2.08(c), a Note
or any portion thereof which is exchanged, upon transfer or otherwise, for
a Global Security or any portion thereof shall bear the Securities Act
Legend borne by such Global Security while represented thereby;
(ii) subject to the following Clauses of this Section 2.08(c), a new
Note which is not a Global Security and is issued in exchange for another
Note (including a Global Security) or any portion thereof, upon transfer or
otherwise, shall bear the Securities Act Legend borne by such other Note,
provided that, if such new Note is required pursuant to Section 2.08(b)(v)
or (vi) hereof to be issued in the form of a Restricted Note, it shall bear
a Restricted Note Legend and, if such new Note is so required to be issued
in the form of a Regulation S Note, it shall bear a Regulation S Legend;
(iii) Registered Notes shall not bear a Securities Act Legend;
(iv) at any time after the Notes may be freely transferred without
registration under the Securities Act or without being subject to transfer
restrictions pursuant to the Securities Act, a new Note which does not bear
a Securities Act Legend may be issued in exchange for or in lieu of a Note
(other than a Global Security) or any portion thereof which bears such a
legend if the Trustee has received an Unrestricted Note Certificate,
satisfactory to the Trustee and duly executed by the Holder of such
legended Note or his attorney duly authorized in writing, and after such
date and
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receipt of such certificate, the Trustee shall authenticate and
deliver such a new Note in exchange for or in lieu of such other Note as
provided in this Article II;
(v) a new Note which does not bear a Securities Act Legend may be
issued in exchange for or in lieu of a Note (other than a Global Security)
or any portion thereof which bears such a legend if, in the Company's
judgment, placing such a legend upon such new Note is not necessary to
ensure compliance with the registration requirements of the Securities Act,
and the Trustee, at the direction of the Company, shall authenticate and
deliver such a new Note as provided in this Article II; and
(vi) notwithstanding the foregoing provisions of this Section
2.08(c), a Successor Note of a Note that does not bear a particular form of
Securities Act Legend shall not bear such form of legend unless the Company
has reasonable cause to believe that such Successor Note is a "restricted
security" within the meaning of Rule 144, in which case the Trustee, at the
direction of the Company, shall authenticate and deliver a new Note bearing
a Restricted Note Legend in exchange for such Successor Note as provided in
this Article II.
(d) The provisions of Clauses (1), (2), (3), (4) and (5) below shall apply
only to Global Securities:
(1) Each Global Security authenticated under this Indenture shall be
registered in the name of the Depositary or a nominee thereof and delivered
to the Depositary or a nominee thereof or custodian therefor, and each such
Global Security shall constitute a single Note for all purposes of this
Indenture.
(2) Notwithstanding any other provision in this Indenture, no Global
Security may be exchanged in whole or in part for Notes registered, and no
transfer of a Global Security in whole or in part may be registered, in the
name of any Person other than the Depositary or a nominee thereof unless
(i) the Depositary notifies the Company that it is unwilling or unable to
continue as a depositary for such Global Security or if at any time the
Depositary ceases to be a clearing agency registered under the Exchange
Act, and a successor depositary is not appointed by the Company within 90
days, (ii) the Company executes and delivers to the Trustee a notice that
such Global Security shall be so transferable, registrable and
exchangeable, and such transfer shall be registrable or (iii) there shall
have occurred and be continuing an Event of Default with respect to the
Notes represented by such Global Security.
(3) If any Global Security is to be exchanged for other Notes or
canceled in whole, it shall be surrendered by or on behalf of the
Depositary or its nominee to the Trustee, as Note Registrar, for exchange
or cancellation as provided in this Article II. If any Global Security is
to be exchanged for other Notes or canceled in part, or if
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another Note is to be exchanged in whole or in part for a beneficial
interest in any Global Security, then either (i) such Global Security shall
be so surrendered for exchange or cancellation as provided in this Article
II or (ii) the principal amount thereof shall be reduced or increased by an
amount equal to the portion thereof to be so exchanged or canceled, or
equal to the principal amount of such other Note to be so exchanged for a
beneficial interest therein, as the case may be, by means of an appropriate
adjustment made on the records of the Trustee, as Note Registrar, whereupon
the Trustee, in accordance with the Applicable Procedures, shall instruct
the Depositary or its authorized representative to make a corresponding
adjustment to its records. Upon any such surrender or adjustment of a
Global Security, the Trustee shall, subject to Section 2.08(d)(2) hereof
and as otherwise provided in this Article II, authenticate and deliver any
Notes issuable in exchange for such Global Security (or any portion
thereof) to or upon the order of, and registered in such names as may be
directed by, the Depositary or its authorized representative. Upon the
request of the Trustee in connection with the occurrence of any of the
events specified in the preceding paragraph, the Company shall promptly
make available to the Trustee a reasonable supply of Notes that are not in
the form of Global Securities. The Trustee shall be entitled to rely upon
any order, direction or request of the Depositary or its authorized
representative which is given or made pursuant to this Article II if such
order, direction or request is given or made in accordance with the
Applicable Procedures.
(4) Every Note authenticated and delivered upon registration of
transfer of, or in exchange for or in lieu of, a Global Security or any
portion thereof, whether pursuant to this Section, Section 2.05, 2.09,
3.06, 4.07, 4.08 or 9.06 hereof or otherwise, shall be authenticated and
delivered in the form of, and shall be, a Global Security, unless such Note
is registered in the name of a Person other than the Depositary or a
nominee thereof.
(5) None of the Company, the Trustee, any agent of the Trustee, any
Paying Agent or the Note Registrar will have any responsibility or
liability for any aspect of the Depository's records (or the records of the
participant of such Depository) relating to or payments made on account of
beneficial ownership interests of a Global Security or for maintaining,
supervising or reviewing any records of the Depository relating to such
beneficial ownership interests.
SECTION II.9. Replacement Notes. If any mutilated Note is surrendered to
-----------------
the Trustee, the Company shall execute and upon its written request the Trustee
shall authenticate and deliver, in exchange for any such mutilated Note, a new
Note containing identical provisions and of like principal amount, bearing a
number not contemporaneously outstanding.
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If there shall be delivered to the Company and the Trustee (i) evidence to
their satisfaction of the destruction, loss or theft of any Note and (ii) such
security or indemnity as may be required by them to save either of them and any
agent of each of them harmless, then, in the absence of notice to the Company or
the Trustee that such Note has been acquired by a bona fide purchaser, the
Company shall execute and upon its request the Trustee shall authenticate and
deliver, in lieu of any such destroyed, lost or stolen Note, a new Note
containing identical provisions and of like principal amount, bearing a number
not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Note has become or is
about to become due and payable, the Company in its discretion may, instead of
issuing a new Note, pay such Note.
Upon the issuance of any new Note under this Section 2.09, the Company may
require the payment by the Holder of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Note issued pursuant to this Section 2.09 in lieu of any
destroyed, lost or stolen Note shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Note shall be at any time enforceable by anyone, and shall be entitled to
all the benefits of this Indenture equally and proportionately with any and all
other Notes duly issued hereunder.
The provisions of this Section 2.09 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Notes.
SECTION 2.10. Outstanding Notes. Notes outstanding at any time are all
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Notes authenticated by the Trustee except for those canceled by it, those
delivered to it for cancellation and those described in this Section 2.10 as not
outstanding. A Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds such Note.
If a Note is replaced pursuant to Section 2.09 hereof, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that such replaced Note is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a redemption date or Maturity date money sufficient to pay all
principal, premium, if any, and interest payable on that date with respect to
the Notes (or portions thereof) to be redeemed or maturing, as the case may be,
then on and after that date such Notes (or such portions thereof) shall cease to
be outstanding and interest on them shall cease to accrue.
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In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent or any amendment,
modification or other change to this Indenture, Notes held or beneficially owned
by the Company or a Restricted Subsidiary of the Company or by an Affiliate of
the Company or a Restricted Subsidiary of the Company or by agents of any of the
foregoing shall be disregarded, except that for the purposes of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent or any amendment, modification or other change to this Indenture,
only Notes which a Trust Officer knows are so owned shall be so disregarded.
Notes so owned which have been pledged in good faith shall not be disregarded if
the pledgee establishes to the satisfaction of the Trustee such pledgee's right
so to act with respect to the Notes and that the pledgee is not the Company or
an Affiliate of the Company or any of their agents.
SECTION 2.11. Temporary Notes. Pending the preparation of definitive
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Notes, the Company may execute, and the Trustee shall authenticate, temporary
notes ("Temporary Notes") which are printed, lithographed, or otherwise
produced, substantially of the tenor of the definitive Notes in lieu of which
they are issued and with such appropriate insertions, omissions, substitutions
and other variations.
If Temporary Notes are issued, the Company shall cause definitive Notes to
be prepared without unreasonable delay. After the preparation of definitive
Notes, the Temporary Notes shall be exchangeable for definitive Notes upon
surrender of the Temporary Notes to the Trustee, without charge to the Holder.
Until so exchanged, Temporary Notes will evidence the same debt and will be
entitled to the same benefits under this Indenture as the definitive Notes in
lieu of which they have been issued.
SECTION 2.12. Cancellation. The Company at any time may deliver Notes to
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the Trustee for cancellation. The Note Registrar and the Paying Agent shall
forward to the Trustee any Notes surrendered to them for registration of
transfer, exchange, purchase or payment. The Trustee shall cancel all Notes
surrendered for registration of transfer, exchange, purchase, payment or
cancellation and shall destroy such canceled Notes unless the Company shall by
Company Order otherwise direct. The Company may not issue new Notes to replace
Notes that have been delivered to the Trustee for cancellation.
SECTION 2.13. Payment of Interest; Interest Rights Preserved. Interest on
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any Note which is payable, and is punctually paid or duly provided for, on any
Interest Payment Date shall be paid to the Person in whose name such Note is
registered at the close of business on the Regular Record Date for such interest
payment, which shall be the February 1 or August 1 (whether or not a Business
Day) immediately preceding such Interest Payment Date.
Any interest on any Note which is payable, but is not punctually paid or
duly provided for, on any Interest Payment Date (herein called "Defaulted
Interest") shall forthwith cease to
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be payable to the registered Holder on the relevant Regular Record Date, and,
except as hereinafter provided, such Defaulted Interest, and any interest
payable on such Defaulted Interest, may be paid by the Company, at its election,
as provided in clause (a) or (b) below:
(a) The Company may elect to make payment of any Defaulted Interest,
and any interest payable on such Defaulted Interest, to the Persons in
whose names the Notes are registered at the close of business on a Special
Record Date for the payment of such Defaulted Interest, which shall be
fixed in the following manner. The Company shall notify the Trustee in
writing of the amount of Defaulted Interest proposed to be paid on the
Notes and the date of the proposed payment, and at the same time the
Company shall deposit with the Trustee an amount of money equal to the
aggregate amount proposed to be paid in respect of such Defaulted Interest
or shall make arrangements satisfactory to the Trustee for such deposit
prior to the date of the proposed payment, such money when deposited to be
held in trust for the benefit of the Persons entitled to such Defaulted
Interest as provided in this Clause. Thereupon the Trustee shall fix a
Special Record Date for the payment of such Defaulted Interest which shall
be not more than 15 calendar days and not less than 10 calendar days prior
to the date of the proposed payment and not less than 10 calendar days
after the receipt by a Trust Officer of the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company of such
Special Record Date and, in the name and at the expense of the Company,
shall cause notice of the proposed payment of such Defaulted Interest and
the Special Record Date therefor to be sent, first class mail, postage
prepaid, to each Holder at such Holder's address as it appears in the Note
Register, not less than 10 calendar days prior to such Special Record Date.
Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been mailed as aforesaid, such Defaulted
Interest shall be paid to the Persons in whose names the Notes are
registered at the close of business on such Special Record Date and shall
no longer be payable pursuant to the following clause (b).
(b) The Company may make payment of any Defaulted Interest, and any
interest payable on such Defaulted Interest, on the Notes in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Company to the
Trustee of the proposed payment pursuant to this clause, such manner of
payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.13, each Note
delivered under this Indenture upon registration of transfer of, or in exchange
for, or in lieu of, any other Note, shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Note.
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SECTION 2.14. Authorized Denominations. The Notes shall be issuable in
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minimum denominations of $1,000 and any integral multiple thereof.
SECTION 2.15. Computation of Interest. Interest on the Notes shall be
-----------------------
computed on the basis of a 360-day year of twelve 30-day months; provided that
Special Interest shall be computed on the basis of a 365- or 366-day year, as
the case may be, and the number of days actually elapsed from the date Special
Interest commences to accrue to but not including the date on which Special
Interest ceases to accrue.
SECTION 2.16. Persons Deemed Owners. Prior to the due presentation for
---------------------
registration of transfer of any Note, the Company, the Trustee, the Paying
Agent, the Note Registrar or any co-registrar may deem and treat the person in
whose name Note is registered as the absolute owner of such Note for the purpose
of receiving payment of principal of, premium, if any, and interest on such Note
and for all other purposes whatsoever, whether or not such Note is overdue, and
none of the Company, the Trustee, the Paying Agent, the Note Registrar or any
co-Registrar shall be affected by notice to the contrary.
SECTION 2.17. CUSIP Numbers. The Company, in issuing the Notes, may use
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"CUSIP" and "ISIN" numbers for each series of Notes and, if so, the Trustee
shall use the relevant CUSIP and ISIN numbers in any notices to Holders as a
convenience to such Holders; provided that any such notice may state that no
representation is made as to the correctness or accuracy of the CUSIP and ISIN
numbers printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. The Company
shall promptly notify the Trustee of any change in any CUSIP or "ISIN" numbers
used.
SECTION 2.18. Holder Lists. The Trustee shall preserve in as current a
------------
form as is reasonably practicable the most recent list available to it of the
names and addresses of Holders and shall otherwise comply with Trust Indenture
Act (S) 312(a). If the Trustee is not the Note Registrar, the Company shall
furnish to the Trustee as of each Regular Record Date and at such other times as
the Trustee may request in writing a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of Holders,
including the aggregate principal amount of Notes held by each Holder.
ARTICLE III.
REDEMPTION
SECTION III.1. Notice to Trustee. If the Company elects to redeem Notes
-----------------
pursuant to paragraph two or three of the reverse side of the Notes, it shall
notify the Trustee in writing of the Redemption Date and the principal amount of
Notes to be redeemed. The Company shall give each such notice to the Trustee at
least 60 calendar days prior to the Redemption Date
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unless the Trustee consents in writing to a shorter period. Such notice shall be
accompanied by an Officers' Certificate and an Opinion of Counsel from the
Company to the effect that such redemption will comply with any conditions to
such redemption set forth herein and in the Notes.
SECTION III.2. Selection of Notes to be Redeemed. If less than all the
---------------------------------
Notes are to be redeemed at any time, the Trustee shall select the Notes to be
redeemed by lot, on a pro rata or other basis as it shall deem fair and
appropriate; provided that the Trustee may select for redemption in part only
Notes in denominations larger than $1,000. In selecting Notes to be redeemed
pursuant to this Section 3.02, the Trustee shall make such adjustments,
reallocations and eliminations as it shall deem proper so that the principal
amount of each Note to be redeemed shall be $1,000 or an integral multiple
thereof, by increasing, decreasing or eliminating any amount less than $1,000
which would be allocable to any Holder. If the Notes to be redeemed are
certificated Notes, the certificated Notes to be redeemed shall be selected by
the Trustee by prorating, as nearly as may be, the principal amount of
certificated Notes to be redeemed among the Holders of certificated Notes
registered in their respective names. The Trustee in its discretion may
determine the particular Notes (if there are more than one) registered in the
name of any Holder which are to be redeemed, in whole or in part. Provisions of
this Indenture that apply to Notes called for redemption also apply to portions
of Notes called for redemption. The Trustee shall notify the Company promptly
of the Notes or portions of Notes to be redeemed.
SECTION III.3. Notice of Redemption. At least 30 calendar days but not
--------------------
more than 60 calendar days before a Redemption Date, the Company shall send a
notice of redemption, first class mail, postage prepaid, to Holders of Notes to
be redeemed at the addresses of such Holders as they appear in the Note
Register.
The notice shall identify the Notes to be redeemed and shall state:
(a) the Redemption Date;
(b) the Redemption Price (and shall specify the portion of such
Redemption Price that constitutes the amount of accrued and unpaid interest
to be paid, if any);
(c) the name and address of the Paying Agent;
(d) that the Notes called for redemption must be surrendered to the
Paying Agent to collect the Redemption Price;
(e) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the Redemption
Date, a new Note or Notes in principal amount equal to the unredeemed
portion will be issued;
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(f) if fewer than all the outstanding Notes are to be redeemed, the
identification and principal amounts of the particular Notes to be
redeemed;
(g) that, unless the Company defaults in making the redemption
payment, interest on the Notes (or portions thereof) called for redemption
shall cease and such Notes (or portions thereof) shall cease to accrue
interest on and after the Redemption Date;
(h) the paragraph of the Notes pursuant to which the Notes are being
called for redemption; and
(i) any other information necessary to enable Holders to comply with
the notice of redemption.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense. In such event, the Company
shall provide the Trustee with the information required by this Section 3.03 in
a timely manner.
SECTION III.4. Effect of Notice of Redemption. Once notice of redemption
------------------------------
is mailed, Notes called for redemption shall become due and payable on the
Redemption Date and at the Redemption Price stated in such notice. Upon
surrender to the Paying Agent, such Notes shall be paid at the Redemption Price
stated in such notice. Failure to give notice or any defect in the notice to
any Holder shall not affect the validity of the notice to any other Holder.
SECTION III.5. Deposit of Redemption Price. On or prior to 10:00 a.m.,
---------------------------
New York City time, on each Redemption Date, the Company shall deposit with the
Paying Agent (or, if the Company, one of its Subsidiaries or any of their
Affiliates is the Paying Agent, the Paying Agent shall segregate and hold in
trust for the benefit of the Holders) money, in federal or other immediately
available funds, sufficient to pay the Redemption Price on all Notes to be
redeemed on that date other than Notes or portions of Notes called for
redemption on such date which have been delivered by the Company to the Trustee
for cancellation.
So long as the Company complies with the preceding paragraph and the other
provisions of this Article III, interest on the Notes to be redeemed on the
applicable Redemption Date shall cease to accrue from and after such date and
such Notes or portions thereof shall be deemed not to be entitled to any benefit
under this Indenture except to receive payment of the Redemption Price on the
Redemption Date. If any Note called for redemption shall not be so paid upon
surrender for redemption, then, from the Redemption Date until such principal is
paid, interest shall be paid on the unpaid principal and, to the extent
permitted by law, on any accrued but unpaid interest thereon, in each case at
the rate prescribed therefor by such Notes.
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SECTION III.6. Notes Redeemed in Part. Upon surrender and cancellation of
----------------------
a Note that is redeemed in part, the Company shall issue and the Trustee shall
authenticate and deliver to the surrendering Holder (at the Company's expense) a
new Note equal in principal amount to the unredeemed portion of the Note
surrendered and canceled; provided that each such Note shall be in a principal
amount of $1,000 or an integral multiple thereof.
ARTICLE IV.
COVENANTS
SECTION IV.1. Payment of Notes. The Company shall promptly pay the
----------------
principal of, premium, if any, and interest on, the Notes on the dates and in
the manner provided in the Notes and in this Indenture. Principal, premium and
interest shall be considered paid on the date due if, on such date, the Trustee
or the Paying Agent holds in accordance with this Indenture money sufficient to
pay all principal, premium and interest then due.
To the extent lawful, the Company shall pay interest on (i) any overdue
principal of (and premium, if any, on) the Notes, at the interest rate borne on
the Notes, plus 1% per annum, and (ii) Defaulted Interest (without regard to any
applicable grace period), at the same rate. The Company's obligation pursuant
to the previous sentence shall apply whether such overdue amount is due at its
Stated Maturity, as a result of the Company's obligations pursuant to Section
3.05, Section 4.07 or Section 4.08 hereof, or otherwise.
SECTION IV.2. Maintenance of Office or Agency. The Company shall maintain
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in the Borough of Manhattan, The City of New York, an office or agency where
Notes may be presented or surrendered for payment, where Notes may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Company in respect of the Notes and this Indenture may be
served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the Corporate Trust
Office of the Trustee, and the Company hereby appoints the Trustee its agent to
receive all presentations, surrenders, notices and demands.
The Company may also from time to time designate one or more other offices
or agencies (in or outside of The City of New York) where the Notes may be
presented or surrendered for any or all of such purposes, and may from time to
time rescind such designations; provided that no such designation or rescission
shall in any manner relieve the Company of its obligation to maintain an office
or agency in The City of New York, for such purposes. The Company shall give
prompt written notice to the Trustee of any such designation and any change in
the location of any such other office or agency.
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SECTION IV.3. Money for the Note Payments to be Held in Trust. If the
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Company, any Subsidiary of the Company or any of their respective Affiliates
shall at any time act as Paying Agent with respect to the Notes, such Paying
Agent shall, on or before each due date of the principal of (and premium, if
any) or interest on any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto money sufficient to pay the principal
(and premium, if any) or interest so becoming due until such money shall be paid
to such Persons or otherwise disposed of as herein provided, and shall promptly
notify the Trustee of its action or failure so to act.
Whenever the Company shall have one or more Paying Agents with respect to
the Notes, it shall, prior to or on each due date of the principal of (and
premium, if any) or interest on any of the Notes, deposit with a Paying Agent a
sum sufficient to pay the principal (and premium, if any) or interest so
becoming due, such sum to be held in trust for the benefit of the Persons
entitled to such principal, premium or interest, and (unless such Paying Agent
is the Trustee) the Paying Agent shall promptly notify the Trustee of the
Company's action or failure so to act.
SECTION IV.4. Corporate Existence. Subject to the provisions of Article
-------------------
IV and Article V hereof, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect the corporate existence,
rights (charter and statutory) and franchises of the Company and each of its
Restricted Subsidiaries; provided that the Company and any such Restricted
Subsidiary shall not be required to preserve the corporate existence of any such
Restricted Subsidiary or any such right or franchise if the Board of Directors
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and provided further that any Restricted
Subsidiary may consolidate with, merge into, or sell, convey, lease or otherwise
dispose of all of its property and assets to the Company or any wholly owned
Restricted Subsidiary.
SECTION IV.5. Maintenance of Property. The Company shall cause all
-----------------------
Property used or useful in the conduct of its business or the business of any of
its Restricted Subsidiaries and material to the Company and its Restricted
Subsidiaries taken as a whole to be maintained and kept in good condition,
repair and working order and supplied with all necessary equipment and shall
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as, in the judgment of the Company, may be necessary
so that the business carried on in connection therewith may be properly and
advantageously conducted at all times; provided that nothing in this Section
4.05 shall prevent the Company from discontinuing the operation or maintenance
of any of such Property if such discontinuance is, in the judgment of the
Company, desirable in the conduct of its business or the business of any of its
Restricted Subsidiaries.
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SECTION IV.6. Payment of Taxes and Other Claims. The Company shall pay or
---------------------------------
discharge or cause to be paid or discharged, before the same shall become
delinquent, (a) all material taxes, assessments and governmental charges levied
or imposed upon the Company or any of its Restricted Subsidiaries or upon the
income, profits or Property of the Company or any of its Restricted Subsidiaries
and (b) all material lawful claims for labor, materials and supplies which, if
unpaid, might by law become a Lien upon the Property of the Company or any of
its Restricted Subsidiaries; provided that the Company shall not be required to
pay or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings upon stay of execution or the enforcement
thereof and for which adequate reserves in accordance with GAAP or other
appropriate provision has been made.
SECTION IV.7. Repurchase at the Option of Holders upon a Change of
----------------------------------------------------
Control. (a) Upon the occurrence of a Change of Control, each Holder shall
have the right to require the Company to purchase such Holder's Notes, in whole
or in part, in a principal amount that is an integral multiple of $1,000,
pursuant to the offer described in Section 4.07(b) hereof (the "Change of
Control Offer"), at a purchase price (the "Change of Control Purchase Price") in
cash equal to 101 percent of the principal amount of such Notes (or portions
thereof), plus accrued and unpaid interest, if any, to the Change of Control
Payment Date.
(b) Within 30 calendar days of the date of any Change of Control, the
Company, or the Trustee at the request and expense of the Company, shall send to
each Holder by first class mail, postage prepaid, a notice prepared by the
Company stating:
(i) that a Change of Control has occurred and a Change of Control
Offer is being made pursuant to this Section 4.07, and that all Notes that
are timely tendered will be accepted for payment;
(ii) the Change of Control Purchase Price, and the date Notes are to
be purchased pursuant to the Change of Control Offer (the "Change of
Control Payment Date"), which date shall be a date occurring no earlier
than 30 calendar days nor later than 60 calendar days subsequent to the
date such notice is mailed;
(iii) that any Notes or portions thereof not tendered or accepted for
payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the Change
of Control Purchase Price with respect thereto, all Notes or portions
thereof accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest from and after the Change of Control Payment Date;
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(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to
surrender such Notes, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of such Notes completed, to the Paying Agent at
the address specified in the notice, prior to the close of business on the
third Business Day preceding the Change of Control Payment Date;
(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date, a
telegram, telex, facsimile transmission or letter, setting forth the name
of the Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have
such Notes or portions thereof purchased pursuant to the Change of Control
Offer;
(vii) that any Holder electing to have Notes purchased pursuant to
the Change of Control Offer must specify the principal amount that is being
tendered for purchase, which principal amount must be $1,000 or an integral
multiple thereof;
(viii) that any Holder whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Note or Notes surrendered, which unpurchased portion will be
equal in principal amount to $1,000 or an integral multiple thereof; and
(ix) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.07.
(c) On the Change of Control Payment Date, the Company shall (i) accept
for payment any Notes or portions thereof properly tendered pursuant to the
Change of Control Offer; (ii) irrevocably deposit with the Paying Agent, by
10:00 a.m., New York City time, on such date, in immediately available funds, an
amount equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so accepted; and (iii) deliver, or cause to be delivered, to
the Trustee the Notes so accepted together with an Officers' Certificate listing
the Notes or portions thereof tendered to the Company and accepted for payment.
The Paying Agent shall promptly send by first class mail, postage prepaid, to
each Holder of Notes or portions thereof so accepted for payment, payment in an
amount equal to the Change of Control Purchase Price for such Notes or portions
thereof. The Company shall publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Payment
Date.
(d) Upon surrender and cancellation of a Note that is purchased in part
pursuant to a Change of Control Offer, the Company shall promptly issue and the
Trustee shall authenticate and deliver to the surrendering Holder of such Note,
a new Note equal in principal amount to
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the unpurchased portion of such surrendered Note; provided that each such new
Note shall be in a principal amount of $1,000 or an integral multiple thereof.
(e) The Company shall comply with the requirements of Section 14(e) under
the Exchange Act and any other securities laws or regulations, to the extent
such laws and regulations are applicable, in connection with the purchase of
Notes pursuant to a Change of Control Offer.
SECTION IV.8. Limitation on Asset Sales. (a) The Company shall not, and
-------------------------
shall not permit any of its Restricted Subsidiaries, directly or indirectly, to,
consummate any Asset Sale, unless:
(i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration for such Asset Sale at least equal to the Fair
Market Value (as evidenced by a Board Resolution delivered to the Trustee)
of the Property or assets sold or otherwise disposed of;
(ii) at least 75 percent of the consideration received in respect of
such Asset Sale by the Company or such Restricted Subsidiary, as the case
may be, for such Property or assets consists of (a) Cash Proceeds and/or
Telecommunications Assets; (b) shares of publicly-traded Voting Stock of
any Person engaged in the Telecommunications Business in the United States;
or (c) the assumption of Indebtedness of the Company or such Restricted
Subsidiary (other than Indebtedness that is subordinated to the Notes) and
the release of the Company or the Restricted Subsidiary, as the case may
be, from all liability on the Indebtedness assumed; and
(iii) the Company or such Restricted Subsidiary, as the case may be,
uses the Net Cash Proceeds from such Asset Sale in the manner set forth in
Section 4.08(b) hereof.
(b) Within 360 calendar days after the closing of any Asset Sale, the
Company or such Restricted Subsidiary, as the case may be, may, at its option:
(i) reinvest an amount equal to the Net Cash Proceeds, or any
portion thereof, from such Asset Sale in Telecommunications Assets or in
Capital Stock of any Person engaged in the Telecommunications Business;
and/or
(ii) apply an amount equal to such Net Cash Proceeds, or remaining
Net Cash Proceeds, to the permanent reduction of Indebtedness of the
Company (other than Indebtedness to a Restricted Subsidiary of the Company)
that is senior to or pari passu with the Notes or to the permanent
---- -----
reduction of Indebtedness or Preferred Stock of any
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Restricted Subsidiary of the Company (other than Indebtedness to, or
Preferred Stock owned by, the Company or another Restricted Subsidiary of
the Company).
Net Cash Proceeds from any Asset Sale that are not applied pursuant to clause
(i) or (ii) above within 360 calendar days of the closing of such Asset Sale
shall constitute "Excess Proceeds."
(c) If at any time the aggregate amount of Excess Proceeds calculated as
of such date exceeds $5 million, the Company shall use the then-existing Excess
Proceeds to make an offer, as described in Section 4.08(d) hereof (an "Asset
Sale Offer"), to purchase from all Holders, on a pro rata basis, Notes in an
aggregate principal amount equal to the maximum principal amount that may be
purchased out of the then-existing Excess Proceeds, at a purchase price (the
"Asset Sale Purchase Price") in cash equal to 100 percent of the principal
amount of such Notes, plus accrued and unpaid interest, if any, to the Asset
Sale Payment Date.
(d) Within 30 calendar days of the date the amount of Excess Proceeds
exceeds $5 million, the Company, or the Trustee at the request and expense of
the Company, shall send to each Holder by first class mail, postage prepaid, a
notice prepared by the Company stating:
(i) that an Asset Sale Offer is being made pursuant to this Section
4.08, and that all Notes that are timely tendered will be accepted for
payment, subject to proration in the event the amount of Excess Proceeds is
less than the aggregate Asset Sale Purchase Price of all Notes timely
tendered pursuant to the Asset Sale Offer;
(ii) the Asset Sale Purchase Price, the amount of Excess Proceeds
that are available to be applied to purchase tendered Notes, and the date
Notes are to be purchased pursuant to the Asset Sale Offer (the "Asset Sale
Payment Date"), which date shall be a date no earlier than 30 calendar days
nor later than 40 calendar days subsequent to the date such notice is
mailed;
(iii) that any Notes or portions thereof not tendered or accepted for
payment will continue to accrue interest;
(iv) that, unless the Company defaults in the payment of the Asset
Sale Purchase Price with respect thereto, all Notes or portions thereof
accepted for payment pursuant to the Asset Sale Offer shall cease to accrue
interest from and after the Asset Sale Payment Date;
(v) that any Holder electing to have any Notes or portions thereof
purchased pursuant to the Asset Sale Offer will be required to surrender
such Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of such Notes completed, to the Paying Agent at the address
specified in the notice, prior to the close of business on the third
Business Day preceding the Asset Sale Payment Date;
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(vi) that any Holder shall be entitled to withdraw such election if
the Paying Agent receives, not later than the close of business on the
second Business Day preceding the Asset Sale Payment Date, a telegram,
telex, facsimile transmission or letter, setting forth the name of the
Holder, the principal amount of Notes delivered for purchase, and a
statement that such Holder is withdrawing such Holder's election to have
such Notes or portions thereof purchased pursuant to the Asset Sale Offer;
(vii) that any Holder electing to have Notes purchased pursuant to
the Asset Sale Offer must specify the principal amount that is being
tendered for purchase, which principal amount must be $1,000 or an integral
multiple thereof;
(viii) that any Holder whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased
portion of the Note or Notes surrendered, which unpurchased portion will be
equal in principal amount to $1,000 or an integral multiple thereof; and
(ix) any other information necessary to enable any Holder to tender
Notes and to have such Notes purchased pursuant to this Section 4.08.
(e) If the aggregate Asset Sale Purchase Price of the Notes surrendered by
Holders exceeds the amount of Excess Proceeds as indicated in the notice
required by Section 4.08(d) hereof, the Trustee shall select the Notes to be
purchased on a pro rata basis based on the principal amount of the Notes
tendered, with such adjustments as may be deemed appropriate by the Trustee, so
that only Notes in denominations of $1,000 or integral multiples thereof shall
be purchased.
(f) On the Asset Sale Payment Date, the Company shall (i) accept for
payment any Notes or portions thereof properly tendered and selected for
purchase pursuant to the Asset Sale Offer and Section 4.08(e) hereof; (ii)
irrevocably deposit with the Paying Agent, by 10:00 a.m., New York City time, on
such date, in immediately available funds, an amount equal to the Asset Sale
Purchase Price in respect of all Notes or portions thereof so accepted; and
(iii) deliver, or cause to be delivered, to the Trustee the Notes so accepted
together with an Officers' Certificate listing the Notes or portions thereof
tendered to the Company and accepted for payment. The Paying Agent shall
promptly send by first class mail, postage prepaid, to each Holder of Notes or
portions thereof so accepted for payment, payment in an amount equal to the
Asset Sale Purchase Price for such Notes or portions thereof. The Company shall
publicly announce the results of the Asset Sale Offer on or as soon as
practicable after the Asset Sale Payment Date.
(g) Upon surrender and cancellation of a Note that is purchased in part,
the Company shall promptly issue and the Trustee shall authenticate and deliver
to the
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surrendering Holder of such Note a new Note equal in principal amount to the
unpurchased portion of such surrendered Note; provided that each such new Note
shall be in a principal amount of $1,000 or an integral multiple thereof.
(h) Upon completion of an Asset Sale Offer (including payment of the Asset
Sale Purchase Price for accepted Notes), any surplus Excess Proceeds that were
the subject of such offer shall cease to be Excess Proceeds, and the Company may
then use such amounts for general corporate purposes.
(i) The Company shall comply with the requirements of Section 14(e) under
the Exchange Act and any other securities laws or regulations, to the extent
such laws and regulations are applicable, in connection with the purchase of
Notes pursuant to an Asset Sale Offer.
SECTION IV.9. Limitation on Consolidated Indebtedness. (a) The Company
---------------------------------------
shall not, and shall not permit any Restricted Subsidiary to, Incur any
Indebtedness after the Issue Date unless either (a) the ratio of (i) the
aggregate consolidated principal amount of Indebtedness of the Company
outstanding as of the most recent available quarterly or annual balance sheet,
after giving pro forma effect to the Incurrence of such Indebtedness and any
other Indebtedness Incurred since such balance sheet date and the receipt and
application of the proceeds thereof, to (ii) Consolidated Cash Flow Available
for Fixed Charges for the four full fiscal quarters immediately preceding the
Incurrence of such Indebtedness for which consolidated financial statements of
the Company have been filed with the Commission or have otherwise become
publicly available, determined on a pro forma basis as if any such Indebtedness
had been Incurred and the proceeds thereof had been applied at the beginning of
such four fiscal quarters, would be less than 5.5 to 1.0 for such four-quarter
periods ending on or prior to December 31, 2000 and 5.0 to 1.0 for such periods
ending thereafter, or (b) the Company's Consolidated Capital Ratio as of the
most recent quarterly or annual balance sheet of the Company that has been filed
with the Commission or has otherwise become publicly available, after giving pro
forma effect to (x) the Incurrence of such Indebtedness and any other
Indebtedness Incurred since such balance sheet date and (y) paid-in capital
received since such balance sheet date or concurrently with the Incurrence of
such Indebtedness, and in each case the receipt and application of the proceeds
thereof, is less than 2.0 to 1.0.
(b) Notwithstanding the foregoing limitation, the Company and any
Restricted Subsidiary may Incur each and all of the following:
(i) Indebtedness under Senior Credit Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed
$100 million, and any renewal, extension, refinancing or refunding thereof
in an amount which, together with any principal amount remaining
outstanding or available
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under all Senior Credit Facilities, does not exceed the aggregate principal
amount outstanding or available under all Senior Credit Facilities
immediately prior to such renewal, extension, refinancing or refunding;
(ii) Indebtedness under Qualified Receivable Facilities in an
aggregate principal amount outstanding or available at any one time not to
exceed the greater of (x) $150 million or (y) an amount equal to 85% of net
Receivables determined in accordance with GAAP, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available under all Qualified
Receivable Facilities, does not exceed the aggregate principal amount
outstanding or available under all Qualified Receivable Facilities
immediately prior to such renewal, extension, refinancing or refunding;
(iii) Purchase Money Indebtedness, provided that the amount of such
Purchase Money Indebtedness does not exceed 90% of the cost of the
construction, acquisition or improvement of the applicable
Telecommunications Assets;
(iv) Indebtedness owed by the Company to any Wholly-Owned Restricted
Subsidiary of the Company or Indebtedness owed by a Restricted Subsidiary
of the Company to the Company or a Wholly-Owned Restricted Subsidiary of
the Company; provided that upon either (x) the transfer or other
disposition by such Wholly-Owned Restricted Subsidiary or the Company of
any Indebtedness so permitted to a Person other than the Company or another
Wholly-Owned Restricted Subsidiary of the Company or (y) the issuance
(other than directors' qualifying shares), sale, lease, transfer or other
disposition of shares of Capital Stock (including by consolidation or
merger) of such Wholly-Owned Restricted Subsidiary to a Person other than
the Company or another such Wholly-Owned Restricted Subsidiary, the
provisions of this clause (iv) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(v) Indebtedness Incurred to renew, extend, refinance or refund
(each, a "refinancing") the Notes or Indebtedness outstanding at the date
of the Indenture or Purchase Money Indebtedness Incurred pursuant to clause
(iii) of this paragraph in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Indebtedness so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Indebtedness so
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus the expenses of the Company
incurred in connection with such refinancing; provided that Indebtedness
the proceeds of which are used to refinance the Notes or Indebtedness which
is pari passu to the Notes or Indebtedness which is subordinate in right of
payment to the Notes shall only be permitted under this clause (v) if (A)
in the case of any refinancing of the Notes or Indebtedness which is
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pari passu to the Notes, the refinancing Indebtedness is made pari passu to
the Notes or constitutes Subordinated Indebtedness, and, in the case of any
refinancing of Subordinated Indebtedness, the refinancing Indebtedness
constitutes Subordinated Indebtedness and (B) in any case, the refinancing
Indebtedness by its terms, or by the terms of any agreement or instrument
pursuant to which such Indebtedness is issued, (x) does not provide for
payments of principal of such Indebtedness at stated maturity or by way of
a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of the
acceleration of any payment with respect to such Indebtedness upon any
event of default thereunder), in each case prior to the time the same are
required by the terms of the Indebtedness being refinanced and (y) does not
permit redemption or other retirement (including pursuant to an offer to
purchase made by the Company) of such Indebtedness at the option of the
Holder thereof prior to the time the same are required by the terms of the
Indebtedness being refinanced, other than a redemption or other retirement
at the option of the Holder of such Indebtedness (including pursuant to an
offer to purchase made by the Company) which is conditioned upon a change
of control pursuant to provisions substantially similar to those described
in Section 4.07 hereof;
(vi) Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
(vii) Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred
by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of the Company for the purpose of financing such
acquisition) and in an aggregate principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; and
(viii) Indebtedness not otherwise permitted to be Incurred pursuant
to clauses (i) through (vii) above, which, together with any other
outstanding Indebtedness Incurred pursuant to this clause (viii), has an
aggregate principal amount not in excess of $10 million at any time
outstanding.
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(c) Notwithstanding any other provision of this Section 4.09, the maximum
amount of Indebtedness that the Company or a Restricted Subsidiary may Incur
pursuant to this Section 4.09, shall not be deemed to be exceeded due solely as
the result of fluctuations in the exchange rates of currencies.
(d) For purposes of determining any particular amount of Indebtedness
under this Section 4.09, (1) Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included and (2) any Liens
granted pursuant to the equal and ratable provisions referred to in Section 4.12
hereof shall not be treated as Indebtedness. For purposes of determining
compliance with this Section 4.09, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, the Company, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
SECTION IV.10. Limitation on Indebtedness and Preferred Stock of Restricted
------------------------------------------------------------
Subsidiaries. The Company shall not permit any Restricted Subsidiary of the
- ------------
Company to Incur any Indebtedness or issue any Preferred Stock except:
(i) Indebtedness or Preferred Stock outstanding on the date of the
Indenture after giving effect to the application of the proceeds of the
Notes;
(ii) Indebtedness Incurred or Preferred Stock issued to and held by
the Company or a Wholly-Owned Restricted Subsidiary of the Company
(provided that such Indebtedness or Preferred Stock is at all times held by
the Company or a Wholly-Owned Restricted Subsidiary of the Company);
(iii) Indebtedness Incurred or Preferred Stock issued by a Person
prior to the time (A) such Person became a Restricted Subsidiary of the
Company, (B) such Person merges into or consolidates with a Restricted
Subsidiary of the Company or (C) another Restricted Subsidiary of the
Company merges into or consolidates with such Person (in a transaction in
which such Person becomes a Restricted Subsidiary of the Company), which
Indebtedness or Preferred Stock was not Incurred or issued in anticipation
of such transaction and was outstanding prior to such transaction;
(iv) Indebtedness under a Senior Credit Facility which is permitted
to be outstanding under clause (i) of Section 4.09(b);
(v) in the case of a Restricted Subsidiary that is a Qualified
Receivable Subsidiary, Indebtedness under a Qualified Receivable Facility
which is permitted to be outstanding under clause (ii) of Section 4.09(b);
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(vi) Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
(vii) Indebtedness (A) in respect of performance, surety and appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds
or performance bonds securing any obligation of such Restricted Subsidiary
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of such
Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition) and in
an aggregate principal amount not to exceed the gross proceeds actually
received by such Restricted Subsidiary in connection with such disposition;
(viii) Indebtedness or Preferred Stock which is exchanged for, or the
proceeds of which are used to refinance, refund or redeem, any Indebtedness
or Preferred Stock permitted to be outstanding pursuant to clauses (i) and
(iii) hereof or any extension or renewal thereof (for purposes hereof, a
"refinancing"), in an aggregate principal amount, in the case of
Indebtedness, or with an aggregate liquidation preference in the case of
Preferred Stock, not to exceed the aggregate principal amount of the
Indebtedness so refinanced or the aggregate liquidation preference of the
Preferred Stock so refinanced, plus the amount of any premium required to
be paid in connection with such refinancing pursuant to the terms of the
Indebtedness or Preferred Stock so refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase,
plus the amount of expenses of the Company and the applicable Restricted
Subsidiary Incurred in connection therewith and provided the Indebtedness
or Preferred Stock Incurred or issued upon such refinancing by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness or Preferred Stock is Incurred or issued, (x) does not provide
for payments of principal or liquidation value at the stated maturity of
such Indebtedness or Preferred Stock or by way of a sinking fund applicable
to such Indebtedness or Preferred Stock or by way of any mandatory
redemption, defeasance, retirement or repurchase of such Indebtedness or
Preferred Stock by the Company or any Restricted Subsidiary of the Company
(including any redemption, retirement or repurchase which is contingent
upon events or circumstances, but excluding any retirement required by
virtue of acceleration of such Indebtedness upon an event of default
thereunder), in each case prior to the time the same are required by the
terms of the Indebtedness or Preferred Stock being refinanced and (y) does
not permit redemption or other retirement (including pursuant to an offer
to purchase made by the Company or a Restricted Subsidiary of the Company)
of such
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Indebtedness or Preferred Stock at the option of the holder thereof prior
to the stated maturity of the Indebtedness or Preferred Stock being
refinanced, other than a redemption or other retirement at the option of
the holder of such Indebtedness or Preferred Stock (including pursuant to
an offer to purchase made by the Company or a Restricted Subsidiary of the
Company) which is conditioned upon the change of control of the Company
pursuant to provisions substantially similar to those described in Section
4.07 hereof and provided, further, that in the case of any exchange or
redemption of Preferred Stock of a Restricted Subsidiary of the Company,
such Preferred Stock may only be exchanged for or redeemed with Preferred
Stock of such Restricted Subsidiary; and
(ix) Indebtedness Incurred or Preferred Stock issued by a Restricted
Subsidiary, provided that the Fair Market Value of the Company's Investment
in all Restricted Subsidiaries which Incur Indebtedness or issue Preferred
Stock pursuant to this clause (ix) shall not exceed, at any time,
$30,000,000 in the aggregate, and provided further that such Indebtedness
Incurred is otherwise permitted pursuant to Section 4.09 hereof.
SECTION IV.11. Limitation on Restricted Payments. (a) The Company shall
---------------------------------
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment unless, at the time of and after giving
effect to such proposed Restricted Payment:
(i) no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
(ii) after giving effect, on a pro forma basis, to such Restricted
Payment and the incurrence of any Indebtedness the net proceeds of which
are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
Section 4.09 hereof; and
(iii) after giving effect to such Restricted Payment on a pro forma
basis, the aggregate amount expended (the amount so expended, if other than
cash, to be determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be conclusive
and evidenced by a resolution thereof) or declared for all Restricted
Payments after the Issue Date does not exceed the sum of (A) 50% of the
Consolidated Net Income of the Company (or, if Consolidated Net Income
shall be a deficit, minus 100% of such deficit) for the period (taken as
one accounting period) beginning on the last day of the fiscal quarter
immediately preceding the Issue Date and ending on the last day of the
fiscal quarter for which the Company's financial statements have been filed
with the Commission or otherwise become publicly available immediately
preceding the date of such Restricted Payment, plus (B) 100% of the net
reduction in Investments, subsequent to the Issue Date, in any Person,
resulting from payments of interest on Indebtedness, dividends, repayments
of loans or advances,
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or other transfers of Property (but only to the extent such interest,
dividends, repayments or other transfers of Property are not included in
the calculation of Consolidated Net Income), in each case to the Company or
any Restricted Subsidiary from any Person (including, without limitation,
from Unrestricted Subsidiaries) or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investments" in Section 1.01 hereof), not to exceed in
the case of any Person the amount of Investments previously made subsequent
to the Issue Date by the Company or any Restricted Subsidiary in such
Person and which was treated as a Restricted Payment; provided that the
Company or a Restricted Subsidiary of the Company may make any Restricted
Payment with the aggregate net proceeds received after the date of the
Indenture, including the fair value of property other than cash (determined
in good faith by the Board of Directors as evidenced by a resolution of the
Board of Directors filed with the Trustee), (x) as capital contributions to
the Company, (y) from the issuance (other than to a Restricted Subsidiary)
of Capital Stock (other than Disqualified Stock) of the Company and
warrants, rights or options on Capital Stock (other than Disqualified
Stock) of the Company, or (z) from the conversion of Indebtedness of the
Company into Capital Stock (other than Disqualified Stock and other than by
a Restricted Subsidiary) of the Company after the date of this Indenture.
(b) The foregoing limitations shall not prevent the Company from:
(i) paying a dividend on its Capital Stock at any time within 60
days after the declaration thereof if, on the declaration date, the Company
could have paid such dividend in compliance with the preceding paragraph of
this Section 4.11;
(ii) retiring (A) any Capital Stock of the Company or any Restricted
Subsidiary of the Company, (B) Indebtedness of the Company that is
subordinated in right of payment to the Notes, or (C) Indebtedness of a
Restricted Subsidiary of the Company, in exchange for, or out of the
proceeds of the substantially concurrent sale of Qualified Stock of the
Company;
(iii) retiring any Indebtedness of the Company subordinated in right
of payment to the Notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of the Company (other
than Indebtedness to a Subsidiary of the Company), provided that such new
Indebtedness (A) is subordinated in right of payment to the Notes at least
to the same extent as, (B) has an Average Life at least as long as, and (C)
has no scheduled principal payments due in any amount earlier than, any
equivalent amount of principal under the Indebtedness so retired;
(iv) retiring any Indebtedness of a Restricted Subsidiary of the
Company in exchange for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of the Company or any Restricted
Subsidiary that is permitted under
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Section 4.09 hereof (in the case of Indebtedness of the Company) and
Section 4.10 hereof (in the case of Indebtedness of Restricted
Subsidiaries) and that (A) is not secured by any assets of the Company or
any Restricted Subsidiary to a greater extent than the retired Indebtedness
was so secured, (B) has an Average Life at least as long as the retired
Indebtedness, and (C) is subordinated in right of payment to the Notes at
least to the same extent as the retired Indebtedness;
(v) retiring any Capital Stock or options to acquire Capital Stock
of the Company or any Restricted Subsidiary of the Company held by any
directors, officers or employees of the Company or any Restricted
Subsidiary, provided that the aggregate price paid for all such retired
Capital Stock shall not exceed, in the aggregate, the sum of $2 million
plus the aggregate cash proceeds received by the Company subsequent to the
Issue Date from issuances of Capital Stock or options to acquire Capital
Stock by the Company to directors, officers or employees of the Company and
its Subsidiaries;
(vi) making payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger or
transfer of assets permitted in Article V hereof;
(vii) retiring any Capital Stock of the Company to the extent
necessary (as determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be conclusive
and evidenced by a resolution thereof) to prevent the loss, or to secure
the renewal or reinstatement, of any license or franchise held by the
Company or any Restricted Subsidiary from any governmental agency;
(viii) making Investments in any Person primarily engaged in the
Telecommunications Business; provided, that the aggregate amount of such
Investments does not exceed at any time the sum of (A) $30,000,000 plus (B) the
amount of Net Cash Proceeds received by the Company after the Issue Date as a
capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of the Company, except
to the extent such Net Cash Proceeds are used to make Restricted Payments
permitted pursuant to clauses (x), (y) and (z) of clause (iii) of Section
4.11(a) hereof or clause (ii) of Section 4.11(b) hereof or this clause (viii),
plus (C) the net reduction in Investments made pursuant to this clause (viii)
resulting from distributions on or repayments of such Investments or from the
Net Cash Proceeds from the sale of any such Investment (except in each case to
the extent any such payment or proceeds are included in the calculation of
Consolidated Net Income) or from such Person becoming a Restricted Subsidiary
(valued in each case as provided in the definition of "Investment" set forth in
Section 1.01 hereof), provided that the net reduction in any Investment shall
not exceed the amount of such Investment; and
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(ix) making Investments not otherwise permitted in an aggregate
amount not to exceed $15 million at any time outstanding.
(c) In determining the amount of Restricted Payments permissible under
this Section 4.11, amounts expended pursuant to clauses (ii), (iii) and (iv) of
the foregoing paragraph shall not be included as Restricted Payments.
(d) Not later than the date of making any Restricted Payment (including
any Restricted Payment permitted to be made pursuant to the two previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
SECTION IV.12. Limitation on Liens. (a) The Company shall not, and shall
-------------------
not permit any Restricted Subsidiary of the Company to, Incur or suffer to exist
any Lien on or with respect to any property or assets now owned or hereafter
acquired to secure any Indebtedness without making, or causing such Restricted
Subsidiary to make, effective provision for securing the Notes (x) equally and
ratably with such Indebtedness as to such property for so long as such
Indebtedness will be so secured or (y) in the event such Indebtedness is
Indebtedness of the Company which is subordinate in right of payment to the
Notes, prior to such Indebtedness as to such property for so long as such
Indebtedness will be so secured.
(b) The foregoing restrictions shall not apply to:
(i) Liens existing on the date of the Indenture and securing
Indebtedness outstanding on the date of the Indenture or Incurred on or
after the Issue Date pursuant to any Senior Credit Facility or Qualified
Receivable Facility;
(ii) Liens securing Indebtedness in an amount which, together with
the aggregate amount of Indebtedness then outstanding or available under
all Senior Credit Facilities (or under refinancings or amendments of such
Senior Credit Facilities), does not exceed 1.5 times the Company's
Consolidated Cash Flow Available for Fixed Charges for the four full fiscal
quarters preceding the Incurrence of such Lien for which the Company's
consolidated financial statements have been filed with the Commission or
become publicly available, determined on a pro forma basis as if such
Indebtedness had been Incurred and the proceeds thereof had been applied at
the beginning of such four fiscal quarters;
(iii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary of the Company;
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(iv) Liens on Property of the Company or a Restricted Subsidiary
acquired, constructed or constituting improvements made after the Issue
Date of the Notes to secure Purchase Money Indebtedness which is otherwise
permitted under the Indenture, provided that (a) the principal amount of
any Indebtedness secured by any such Lien does not exceed 100% of such
purchase price or cost of construction or improvement of the Property
subject to such Lien, (b) such Lien attaches to such property prior to, at
the time of or within 180 days after the acquisition, completion of
construction or commencement of operation of such Property and (c) such
Lien does not extend to or cover any Property other than the specific item
of Property (or portion thereof) acquired, constructed or constituting the
improvements made with the proceeds of such Purchase Money Indebtedness;
(v) Liens to secure Acquired Indebtedness, provided that (a) such
Lien attaches to the acquired asset prior to the time of the acquisition of
such asset and (b) such Lien does not extend to or cover any other
Property;
(vi) Liens to secure Indebtedness Incurred to extend, renew,
refinance or refund (or successive extensions, renewals, refinancings or
refundings), in whole or in part, Indebtedness secured by any Lien referred
to in the foregoing clauses (i), (ii), (iv) and (v) so long as such Lien
does not extend to any other Property and the principal amount of
Indebtedness so secured is not increased except as otherwise permitted
under clause (v) of Section 4.09(b) hereof (in the case of Indebtedness of
the Company) or clause (viii) of Section 4.10 hereof (in the case of
Indebtedness of Restricted Subsidiaries);
(vii) Liens not otherwise permitted by the foregoing clauses (i)
through (vi) in an aggregate amount not to exceed 5% of the Company's
Consolidated Tangible Assets;
(viii) Liens granted after the Issue Date pursuant to the immediately
preceding paragraph to secure the Notes; and
(ix) Permitted Liens.
SECTION IV.13. Limitation on Sale and Leaseback Transactions. The Company
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shall not, and shall not permit any of its Restricted Subsidiaries to, directly
or indirectly, enter into, assume, Guarantee or otherwise become liable with
respect to any Sale and Leaseback Transaction (other than a Sale and Leaseback
Transaction between the Company or a Restricted Subsidiary on the one hand and a
Restricted Subsidiary or the Company on the other hand), unless (i) the Company
or such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Sale and Leaseback Transaction at least equal to the Fair Market
Value (as evidenced by a Board Resolution delivered to the Trustee) of the
Property
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subject to such transaction; (ii) the Attributable Indebtedness of the Company
or such Restricted Subsidiary with respect thereto is included as Indebtedness
and would be permitted by Section 4.09 hereof or Section 4.10 hereof, as the
case may be; (iii) the Company or such Restricted Subsidiary would be permitted
to create a Lien on such Property without securing the Notes by Section 4.12
hereof; and (iv) the Net Cash Proceeds from such transaction are applied in
accordance with Section 4.08 hereof; provided that the Company shall be
permitted to enter into Sale and Leaseback Transactions for up to $30 million
with respect to construction of the Company's headquarters buildings located in
Cedar Rapids, Iowa, provided that any such transaction is entered into within
180 days of the earlier of (x) substantial completion or (y) occupation of the
applicable phase of such headquarters building.
SECTION IV.14. Limitation on Dividends and Other Payment Restrictions
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Affecting Subsidiaries. The Company shall not, and shall not permit any
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Restricted Subsidiary to, directly or indirectly, cause or suffer to exist or
become effective, or enter into, any encumbrance or restriction (other than
pursuant to law or regulation) on the ability of any Restricted Subsidiary (i)
to pay dividends or make any other distributions in respect of its Capital Stock
or pay any Indebtedness or other obligation owed to the Company or any
Restricted Subsidiary; (ii) to make loans or advances to the Company or any
Restricted Subsidiary; or (iii) to transfer any of its Property to the Company
or any other Restricted Subsidiary, except:
(a) any encumbrance or restriction existing as of the Issue Date or
any other agreement relating to any Existing Indebtedness or any
Indebtedness under a Qualified Receivable Facility otherwise permitted
under this Indenture;
(b) any encumbrance or restriction pursuant to an agreement relating
to an acquisition of Property, so long as the encumbrances or restrictions
in any such agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of
any Restricted Subsidiary existing on the date on which such Restricted
Subsidiary is acquired by the Company or another Restricted Subsidiary
(other than any such Indebtedness Incurred by such Restricted Subsidiary in
connection with or in anticipation of such acquisition);
(d) any encumbrance or restriction pursuant to an agreement effecting
a permitted refinancing of Indebtedness issued pursuant to an agreement
referred to in the foregoing clauses (a) through (c), so long as the
encumbrances and restrictions contained in any such refinancing agreement
are not materially more restrictive than the encumbrances and restrictions
contained in such agreements;
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(e) customary provisions (A) that restrict the subletting, assignment
or transfer of any property or asset that is a lease, license, conveyance
or contract or similar property or asset; (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of the Company or any Restricted Subsidiary
not otherwise prohibited by the Indenture or (C) arising or agreed to in
the ordinary course of business, not relating to any Indebtedness, and that
do not, individually or in the aggregate, detract from the value of
property or assets of the Company or any Restricted Subsidiary in any
manner material to the Company or any Restricted Subsidiary;
(f) in the case of clause (iii) above, restrictions contained in any
security agreement (including a Capital Lease Obligation) securing
Indebtedness of the Company or a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement; and
(g) any restriction with respect to a Restricted Subsidiary of the
Company imposed pursuant to an agreement which has been entered into for
the sale or disposition of all or substantially all of the Capital Stock or
assets of such Restricted Subsidiary, provided that the consummation of
such transaction would not result in an Event of Default or an event that,
with the passing of time or the giving of notice or both, would constitute
an Event of Default, that such restriction terminates if such transaction
is not consummated and that the consummation or abandonment of such
transaction occurs within one year of the date such agreement was entered
into.
Nothing contained in this Section 4.14 shall prevent the Company or any
other Restricted Subsidiary from (1) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted under Section 4.12 hereof or (2)
restricting the sale or other disposition of property or assets of the Company
or any of its Restricted Subsidiaries that secure Indebtedness of the Company or
any of its Restricted Subsidiaries otherwise permitted under Section 4.09 hereof
or Section 4.10 hereof, as the case may be.
SECTION IV.15. Limitation on Issuance and Sale of Capital Stock of
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Restricted Subsidiaries. The Company (i) shall not permit any Restricted
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Subsidiary to issue any Capital Stock other than to the Company or a Wholly-
Owned Restricted Subsidiary unless immediately after giving effect thereto such
Restricted Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment of the Company or any other Restricted Subsidiary in such Restricted
Subsidiary would have been permitted under Section 4.11 hereof if made on the
date of such issuance and (ii) shall not permit any Person other than the
Company or a Wholly-Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, other than directors' qualifying shares and except for:
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(a) a sale of 100% of the Capital Stock of a Restricted Subsidiary
sold in a transaction not prohibited by the covenant described under
Section 4.08 hereof;
(b) a sale of the Capital Stock of a Restricted Subsidiary sold in a
transaction not prohibited by the covenant described under Section 4.08
hereof if, after giving effect thereto, greater than 50% of the Capital
Stock of such Restricted Subsidiary is owned by the Company or by a Wholly-
Owned Restricted Subsidiary;
(c) Capital Stock of a Restricted Subsidiary issued and outstanding
on the Issue Date and held by Persons other than the Company or any
Restricted Subsidiary;
(d) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in anticipation or contemplation of
such Person's becoming a Restricted Subsidiary or otherwise being acquired
by the Company;
(e) any Preferred Stock permitted to be issued under Section 4.10
hereof; and
(f) ownership by any Person other than the Company or a Subsidiary of
the Company of less than 50% of the Capital Stock of a Person (A) in which
the Company or a Restricted Subsidiary has made a Permitted Investment
pursuant to clause (iii) of the definition of "Permitted Investments" set
forth in Section 1.01 hereof, (B) of which more than 50% of such Person's
Capital Stock is owned, directly or indirectly, by the Company and (C) as
to which the Company has the power to direct the policies, management and
affairs.
SECTION IV.16. Transactions with Affiliates. The Company shall not, and
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shall not permit any of its Restricted Subsidiaries to, directly or indirectly,
sell, lease, transfer, or otherwise dispose of, any of its Properties or assets
to, or purchase any Property or assets from, or enter into any contract,
agreement, understanding, loan, advance or Guarantee with or for the benefit of,
any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (a)
such Affiliate Transaction or series of Affiliate Transactions is on terms that
are no less favorable to the Company or such Restricted Subsidiary than those
that would have been obtained in a comparable arm's-length transaction by the
Company or such Restricted Subsidiary with a Person that is not an Affiliate
(or, in the event that there are no comparable transactions involving Persons
who are not Affiliates of the Company or the relevant Restricted Subsidiary to
apply for comparative purposes, is otherwise on terms that, taken as a whole,
the Company has determined to be fair to the Company or the relevant Restricted
Subsidiary) and (b) the Company delivers to the Trustee (i) with respect to any
Affiliate Transaction involving aggregate payments in excess of $1 million, a
certificate of the chief executive, operating or financial officer of the
Company evidencing such officer's determination that such Affiliate
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Transaction or series of Affiliate Transactions complies with clause (a) above
and is in the best interests of the Company or such Restricted Subsidiary and
(ii) with respect to any Affiliate Transaction or series of Affiliate
Transactions involving aggregate payments in excess of $5 million, a Board
Resolution certifying that such Affiliate Transaction or series of Affiliate
Transactions complies with clause (a) above and that such Affiliate Transaction
or series of Affiliate Transactions has been approved by a majority of the
disinterested members of the Board of Directors who have determined that such
Affiliate Transaction or series of Affiliate Transactions is in the best
interest of the Company or such Restricted Subsidiary; provided that the
following shall not be deemed Affiliate Transactions:
(i) any employment agreement entered into by the Company or any of
its Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice;
(ii) any agreement or arrangement with respect to the compensation
of a director or officer of the Company or any Restricted Subsidiary
approved by a majority of the disinterested members of the Board of
Directors and consistent with industry practice;
(iii) transactions between or among the Company and its Restricted
Subsidiaries;
(iv) transactions permitted by Section 4.11 hereof;
(v) transactions pursuant to any agreement or arrangement existing
on the Issue Date; and
(vi) transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiberoptic lines,
equipment, rights-of-way or other access rights, between the Company or any
Restricted Subsidiary and any other Person; provided, in any case, that
such transaction is on terms that are no less favorable, taken as a whole,
to the Company or the relevant Restricted Subsidiary than those that could
have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with Persons who are not Affiliates of the Company or
the relevant Restricted Subsidiary (or, in the event that there are no
comparable transactions involving Persons who are not Affiliates of the
Company or the relevant Restricted Subsidiary to apply for comparative
purposes, is otherwise on terms that, taken as a whole, the Company has
determined to be fair to the Company or the relevant Restricted
Subsidiary).
SECTION IV.17. Restricted and Unrestricted Subsidiaries. (a) The Company
----------------------------------------
may designate a Subsidiary (including a newly formed or newly acquired
Subsidiary) of the Company or any of its Restricted Subsidiaries as an
Unrestricted Subsidiary if such Subsidiary
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does not have any obligations which, if in Default, would result in a cross
default on Indebtedness of the Company or a Restricted Subsidiary (other than
Indebtedness to the Company or a Wholly-Owned Restricted Subsidiary), and (i)
such Subsidiary has total assets of $1,000 or less, (ii) such Subsidiary has
assets of more than $1,000 and an Investment in such Subsidiary in an amount
equal to the Fair Market Value of such Subsidiary would then be permitted under
Section 4.11(a) hereof or (iii) such designation is effective immediately upon
such Person becoming a Subsidiary. Unless so designated as an Unrestricted
Subsidiary, any Person that becomes a Subsidiary of the Company or any of its
Restricted Subsidiaries shall be classified as a Restricted Subsidiary thereof.
(b) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness (other than Indebtedness to the Company or a
Restricted Subsidiary) at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise), unless, after giving effect to such action,
transaction or series of transactions on a pro forma basis, (i) the Company
could incur at least $1 of additional Indebtedness pursuant to Section 4.09(a)
hereof and (ii) no Default or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be a
redesignated as a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary in compliance with clause (b) shall be made by the Board
of Directors pursuant to a Board Resolution delivered to the Trustee and shall
be effective as of the date specified in such Board Resolution, which shall not
be prior to the date such Board Resolution is delivered to the Trustee.
SECTION IV.18. Reports. For as long as any Notes remain outstanding, the
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Company shall furnish to the Holders of the Notes and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act. The Company
shall file with the Trustee within 15 days after it files them with the
Commission copies of the annual and quarterly reports and the information,
documents, and other reports that the Company is required to file with the
Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). In the event the Company shall cease to be required to file SEC
Reports pursuant to the Exchange Act, the Company shall nevertheless continue to
file such reports with the Commission (unless the Commission shall not accept
such a filing) and in any event with the Trustee. The Company shall furnish
copies of the SEC Reports to the Holders of Notes at the time the Company is
required to file the same with the Trustee and will make such information
available to investors who request it in writing.
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SECTION IV.19. Compliance Certificate; Notice of Default or Event of
-----------------------------------------------------
Default. The Company shall deliver to the Trustee within 120 calendar days
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after the end of each fiscal year of the Company ending after the date hereof,
an Officers' Certificate stating whether or not, to the best knowledge of such
officer, the Company has complied with all conditions and covenants under this
Indenture, and, if the Company shall be in Default, specifying all such Defaults
and the nature thereof of which such officer may have knowledge.
For the purposes of this Section 4.19, compliance shall be determined
without regard to any period of grace or requirement of notice under this
Indenture.
The Company shall deliver written notice to the Trustee within 30 calendar
days after any executive officer of the Company becomes aware of the occurrence
of any event which constitutes, or with the giving of notice or the lapse of
time or both would constitute, a Default or Event of Default, describing such
Default or Event of Default, its status and what action the Company is taking or
proposes to take with respect thereto.
ARTICLE V.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
SECTION V.1. Merger, Consolidation or Sale of Assets. The Company shall
---------------------------------------
not in any transaction or series of related transactions, consolidate with, or
merge with or into, any other Person or permit any other Person to merge with or
into the Company (other than a merger of a Restricted Subsidiary of the Company
into the Company in which the Company is the continuing corporation), or sell,
convey, assign, transfer, lease or otherwise dispose of all or substantially all
of the Property and assets of the Company and its Restricted Subsidiaries taken
as a whole to any other Person, unless:
(a) either (i) the Company shall be the continuing corporation or
(ii) the corporation (if other than the Company) formed by such
consolidation or into which the Company is merged, or the Person which
acquires, by sale, assignment, conveyance, transfer, lease or disposition,
all or substantially all of the Property and assets of the Company and its
Restricted Subsidiaries taken as a whole (any such corporation or Person
being the "Surviving Entity") shall be a corporation organized and validly
existing under the laws of the United States of America, any political
subdivision thereof, any state thereof or the District of Columbia, and
shall expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form reasonably satisfactory to the Trustee,
the due and punctual payment of the principal of (and premium, if any) and
interest on all the Notes and the performance of every covenant and
obligation in this Indenture on the part of the Company to be performed or
observed;
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(b) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of related transactions), no
Default or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction or series of
related transactions on a pro forma basis (including, without limitation,
any Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of transactions), the Company
(or the Surviving Entity, if the Company is not continuing) would (A) be
permitted to Incur $1.00 of additional Indebtedness under Section 4.09(a)
hereof and (B) have a Consolidated Net Worth that is not less than the
Consolidated Net Worth of the Company immediately before such transaction
or series of transactions; and
(d) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the
Indenture described under Section 4.12 hereof, the Company or the successor
entity to the Company shall have secured the Notes as required thereby.
In connection with any consolidation, merger, conveyance, lease or other
disposition contemplated by this Section 5.01, the Company shall deliver, or
cause to be delivered, to the Trustee, in form reasonably satisfactory to the
Trustee, an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger, conveyance, lease or disposition and any
supplemental indenture in respect thereto comply with this Article V and that
all conditions precedent herein provided for relating to such transaction have
been complied with.
SECTION V.2. Successor Corporation Substituted. Upon any consolidation
---------------------------------
with, or merger by the Company with or into, any other corporation, or any sale,
assignment, transfer, lease, conveyance or other disposition of all or
substantially all of the Property and assets of the Company and its Restricted
Subsidiaries taken as a whole in accordance with Section 5.01 hereof, the
successor corporation formed by such consolidation or into which the Company is
merged, or the Person to which such sale, conveyance, assignment, transfer,
lease, conveyance or other disposition is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person has been named
as the Company herein; and thereafter the predecessor corporation shall be
relieved of all obligations and covenants under this Indenture and the Notes,
except for the obligation to pay the principal of (and premium, if any) and
interest on the Notes.
ARTICLE VI.
DEFAULTS AND REMEDIES
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SECTION VI.1. Events of Default. "Event of Default," wherever used herein
-----------------
with respect to the Notes, means any one of the following events (whatever the
reason for such event, and whether it shall be voluntary or involuntary, or be
effected by operation of law, pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(a) default in the payment of interest on any Note when the same
becomes due and payable, and the continuance of such Default for a period
of 30 calendar days; or
(b) default in the payment of the principal of (or premium, if any,
on) any Note when the same becomes due and payable whether upon Maturity,
optional redemption, required repurchase (including pursuant to a Change of
Control Offer or an Asset Sale Offer) or otherwise, or the failure to make
an offer to purchase any Note as herein required; or
(c) default in the performance, or breach, of any covenant or
agreement contained in Section 4.07, Section 4.08 or Article V hereof; or
(d) default in the performance, or breach, of any covenant or
warranty of the Company contained in this Indenture or the Notes (other
than a covenant or warranty addressed in Section 6.01(a), Section 6.01(b)
or Section 6.01(c) hereof), and the continuance of such Default or breach
for a period of 60 calendar days after written notice thereof has been
given to the Company by the Trustee or to the Company and the Trustee by
the Holders of at least 25 percent of the aggregate principal amount of the
outstanding Notes specifying such Default and stating that such notice is a
"Notice of Default" delivered in connection with this Indenture; or
(e) a default or defaults under any bond, debenture, note or other
evidence of Indebtedness by the Company or any Restricted Subsidiary of the
Company (or under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness by the Company or any such Restricted Subsidiary) having,
individually or in the aggregate, a principal or similar amount outstanding
of at least $10 million, whether such indebtedness now exists or shall
hereafter be created, which default or defaults shall have resulted in the
acceleration of the maturity of such Indebtedness prior to its express
maturity or shall constitute a failure to pay such Indebtedness when due
and payable after the expiration of any applicable grace period with
respect thereto or shall have resulted in such Indebtedness becoming or
being declared due and payable; or
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(f) a final judgment or final judgments for the payment of money
(other than to the extent covered by insurance as to which the insurance
company has acknowledged coverage and other than to the extent covered by
an indemnity given by an insurance company) is entered against the Company
or any Restricted Subsidiary of the Company in an aggregate amount in
excess of $10 million by a court or courts of competent jurisdiction, which
judgment is not discharged, waived, stayed, bonded or satisfied for a
period of 45 consecutive calendar days; or
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Restricted
Subsidiary of the Company in an involuntary case or proceeding under United
States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state, or foreign bankruptcy, insolvency, or other
similar law or (ii) a decree or order adjudging the Company or any
Restricted Subsidiary of the Company a bankrupt or insolvent, or approving
as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of, or in respect of, the Company or any
Restricted Subsidiary of the Company under United States bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency, or similar law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of the Company or any Restricted Subsidiary of the Company or of
any substantial part of the Property or assets of the Company or any
Restricted Subsidiary of the Company, or ordering the winding-up or
liquidation of the affairs of the Company or any Restricted Subsidiary of
the Company, and the continuance of any such decree or order for relief or
any such other decree or order unstayed and in effect for a period of 60
consecutive calendar days; or
(h) the commencement by the Company or any Restricted Subsidiary of
the Company of a voluntary case or proceeding under United States
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency or other similar law or
of any other case or proceeding to be adjudicated a bankrupt or insolvent;
or (ii) the consent by the Company or any Restricted Subsidiary of the
Company to the entry of a decree or order for relief in respect of the
Company or any Restricted Subsidiary of the Company in an involuntary case
or proceeding under United States bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state, or foreign bankruptcy,
insolvency, or other similar law or to the commencement of any bankruptcy
or insolvency case or proceeding against the Company or any Restricted
Subsidiary of the Company; or (iii) the filing by the Company or any
Restricted Subsidiary of the Company of a petition or answer or consent
seeking reorganization or relief under United States bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state or
foreign bankruptcy, insolvency or other similar law; or (iv) the consent by
the Company or any Restricted Subsidiary of the Company to the filing of
such petition or to the
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appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of the Company or any
Restricted Subsidiary of the Company or of any substantial part of the
Property or assets of the Company or any Restricted Subsidiary of the
Company, or the making by the Company or any Restricted Subsidiary of the
Company of an assignment for the benefit of creditors; or (v) the admission
by the Company or any Restricted Subsidiary of the Company in writing of
its inability to pay its debts generally as they become due; or (vi) the
taking of corporate action by the Company or any Restricted Subsidiary of
the Company in furtherance of any such action.
SECTION VI.2. Acceleration. If any Event of Default (other than an Event
------------
of Default specified in Section 6.01(g) or Section 6.01(h) hereof) occurs and is
continuing, then and in every such case, the Trustee by a notice in writing to
the Company may, and at the direction of the Holders of not less than 25 percent
of the outstanding aggregate principal amount of Notes by a notice in writing to
the Company and the Trustee, shall declare the Default Amount and any accrued
and unpaid interest on all Notes then outstanding to be immediately due and
payable. Upon any such declaration, such Default Amount and any accrued and
unpaid interest on all Notes then outstanding will become and be immediately due
and payable.
If an Event of Default specified in Section 6.01(g) or Section 6.01(h)
hereof occurs, the Default Amount and any accrued and unpaid interest on all
Notes then outstanding shall ipso facto become and be immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holder of Notes.
In the event of a declaration of acceleration because an Event of Default
set forth in Section 6.01(e) hereof has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to Section 6.01(e)
hereof shall be remedied, or cured, or waived by the holders of the relevant
Indebtedness, within 60 calendar days after such event of default; provided no
judgment or decree for the payment of the money due on the Notes has been
obtained by the Trustee as hereinafter in this Article VI provided.
At any time after a declaration of acceleration with respect to Notes has
been made and before a judgment or decree for payment of the money due has been
obtained by the Trustee as hereinafter in this Article VI provided, the Holders
of a majority in principal amount of the outstanding Notes, by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if,
(a) the Company has paid or deposited with the Trustee a sum
sufficient to pay:
(i) all overdue installments of interest on all Notes,
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(ii) the principal of (and premium, if any, on) any Notes which have
become due otherwise than by such declaration of acceleration and interest
thereon at the rate or rates prescribed therefor in such Notes,
(iii) to the extent that payment of such interest is lawful, interest
on the Defaulted Interest at the rate prescribed therefor in the Notes and
this Indenture, and
(iv) all moneys paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and all other amounts due to the Trustee
pursuant to Section 7.07 hereof; and
(b) all Events of Default with respect to the Notes, other than
the non-payment of the principal of Notes which have become due solely by
such declaration of acceleration, have been cured or waived by the Holders
as provided herein.
No such rescission shall affect any subsequent Default or impair any right
consequent thereon.
SECTION VI.3. Other Remedies. The Company covenants that if an Event of
--------------
Default specified in Section 6.01(a) or Section 6.01(b) hereof occurs the
Company shall, upon demand of the Trustee, pay to the Trustee, for the benefit
of the Holders, the whole amount then due and payable on the Notes for principal
(and premium, if any) and interest and, to the extent that payment of such
interest shall be legally enforceable, interest upon the overdue principal (and
premium, if any) and upon Defaulted Interest, at the rate or rates prescribed
therefor in such Notes; and, in addition thereto, such further amount as shall
be sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and all other amounts due to the Trustee pursuant to
Section 7.07 hereof.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may and, at the
direction of the Holders of not less than a majority of the outstanding
aggregate principal amount of the Notes, shall institute a judicial proceeding
for the collection of the sums so due and unpaid, and may prosecute such
proceeding to judgment or final decree, and may enforce the same against the
Company or any other obligor upon such Notes and collect the moneys adjudged or
decreed to be payable in the manner provided by law out of the Property and
assets of the Company or any other obligor upon such Notes, wherever situated.
If an Event of Default with respect to the Notes occurs and is continuing,
the Trustee may in its discretion proceed to protect and enforce its rights and
the rights of the Holders by
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such appropriate judicial proceedings as the Trustee shall deem most effectual
to protect and enforce any such rights, whether for the specific enforcement of
any covenant or agreement in this Indenture or in aid of the exercise of any
power granted herein, or to enforce any other proper remedy.
SECTION VI.4. Waiver of Past Defaults. The Holders of not less than a
-----------------------
majority in principal amount of the outstanding Notes may, on behalf of the
Holders of all the Notes, waive any past Default and its consequences under this
Article VI, except a Default (a) in the payment of the principal of (or
premium, if any) or interest on, any Note, or (b) in respect of a covenant or
provision hereof which under Section 9.02 hereof cannot be modified or amended
without the consent of the Holders of each outstanding Note affected.
SECTION VI.5. Control by Majority. The Holders of not less than a
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majority in principal amount of the outstanding Notes shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee; provided that
(a) such direction shall not be in conflict with any rule of law or
with this Indenture or unduly prejudicial to the rights of other Holders
and would not subject the Trustee to personal liability, and
(b) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
SECTION VI.6. Limitation on Suits. No Holder of Notes shall have any
-------------------
right to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless:
(a) such Holder has previously given written notice to the Trustee of
a continuing Event of Default with respect to the Notes;
(b) the Holders of not less than 25 percent in principal amount of
the outstanding Notes shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name
as Trustee hereunder;
(c) such Holder or Holders have offered and, if requested, provided
to the Trustee security or indemnity satisfactory to the Trustee in its
reasonable discretion against the costs, expenses and liabilities to be
incurred in compliance with such request;
(d) the Trustee for 30 calendar days after its receipt of such
notice, request and offer of indemnity has failed to institute any such
proceeding; and
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(e) no direction inconsistent with such written request has been
given to the Trustee during such 30-day period by the Holders of a majority
in principal amount of the outstanding Notes;
in any event, it being understood and intended that no one or more Holders of
Notes shall have any right in any manner whatever by virtue of, or by availing
of, any provision of this Indenture to affect, disturb or prejudice the rights
of any other Holders of Notes, or to obtain or to seek to obtain priority or
preference over any other of such Holders or to enforce any right under this
Indenture, except in the manner herein provided and for the equal and ratable
benefit of all Holders of Notes.
SECTION VI.7. Rights of Holders to Receive Payment. Notwithstanding any
------------------------------------
other provision of this Indenture, the right of any Holder to receive payment of
principal of (premium, if any) and interest on the Notes held by such Holder, on
or after the respective due dates expressed in the Notes or the redemption dates
or purchase dates provided for therein, or to bring suit for the enforcement of
any such payment on or after such respective dates, shall be absolute and
unconditional and shall not be impaired or affected without the consent of such
Holder.
SECTION VI.8. Trustee May File Proofs of Claim. In case of the pendency
--------------------------------
of any receivership, insolvency, liquidation, bankruptcy, reorganization,
arrangement, adjustment, composition or other judicial proceedings, or any
voluntary or involuntary case under United States bankruptcy laws, as now or
hereafter constituted, relative to the Company or any other obligor upon the
Notes or the Property and assets of the Company or of such other obligor or
their creditors, the Trustee (irrespective of whether the principal of such
Notes shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise, (i) to file and
prove a claim for the whole amount of principal (and premium, if any) and
interest owing and unpaid in respect of the Notes, to file such other papers or
documents and to take such other actions, including participating as a member or
otherwise in any official committee of creditors appointed in the matter, as may
be necessary or advisable in order to have the claims of the Trustee (including
any claim for the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel and all other amounts due to the Trustee
pursuant to Section 7.07 hereof) and of the Holders allowed in such judicial
proceeding, and (ii) to collect and receive any moneys or other Property payable
or deliverable on any such claims and to distribute the same; and any receiver,
assignee, trustee, custodian, liquidator, sequestrator (or other similar
official) in any such proceeding is hereby authorized by each Holder to make
such payments to the Trustee, and in the event that the Trustee shall consent to
the making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
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advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 7.07 hereof. Nothing contained herein shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf of
any Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION VI.9. Priorities. Any money collected by the Trustee pursuant to
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this Article VI shall be applied in the following order, at the date or dates
fixed by the Trustee and, in case of the distribution of such money on account
of principal (premium, if any) or interest, upon presentation of the Notes and
the notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under Section
7.07 hereof;
SECOND: To the payment of the amounts then due and unpaid for
principal of (and premium, if any) and interest on the Notes, ratably,
without preference or priority of any kind, according to the amounts due
and payable on such Notes for principal (and premium, if any) and interest,
respectively; and
THIRD: To the Company.
The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.09. At least 15 calendar days before such
record date, the Company shall mail to each Holder and the Trustee a notice that
states such record date, the payment date and amount to be paid. The Trustee
may mail such notice in the name and at the expense of the Company.
SECTION 6.10. Undertaking for Costs. All parties to this Indenture agree,
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and each Holder of any Note by such Holder's acceptance thereof shall be deemed
to have agreed, that any court may in its discretion require, in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted by it as Trustee,
the filing by any party litigant in such suit of an undertaking to pay the costs
of such suit and that such court may in its discretion assess reasonable costs,
including reasonable attorneys' fees, against any party litigant in such suit,
having due regard to the merits and good faith of the claims or defenses made by
such party litigant; but the provisions of this Section shall not apply to any
suit instituted by the Trustee, to any suit instituted by any Holder, or group
of Holders, holding in the aggregate more than 10 percent in principal amount of
the outstanding Notes, or to any suit instituted by any Holder for the
enforcement of the payment of the principal of (or premium, if any) or interest
on any Note on or after its Stated Maturity.
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SECTION 6.11. Waiver of Stay or Extension Laws. The Company (to the
--------------------------------
extent it may lawfully do so) shall not at any time insist upon, or plead, or in
any manner whatsoever claim or take the benefit or advantage of, any stay or
extension law wherever enacted, now or at any time hereafter in force, which may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and shall not hinder, delay or impede the execution
of any power herein granted to the Trustee, but shall suffer and permit the
execution of every such power as though no such law had been enacted.
SECTION 6.12. Trustee May Enforce Claims Without Possession of the Notes.
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All rights of action and claims under this Indenture or the Notes may be
prosecuted and enforced by the Trustee without the possession of any of the
Notes or the production thereof in any proceeding relating thereto, and any such
proceeding instituted by the Trustee shall be brought in its own name, as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Notes.
SECTION 6.13. Restoration of Rights and Remedies. If the Trustee or any
----------------------------------
Holder of Notes has instituted any proceeding to enforce any right or remedy
under this Indenture and such proceeding has been discontinued or abandoned for
any reason, or has been determined adversely to the Trustee or to such Holder,
then and in every such case the Company, the Trustee and the Holders shall,
subject to any determination in such proceeding, be restored severally and
respectively to their former positions hereunder, and thereafter all rights and
remedies of the Trustee and the Holders shall continue as though no such
proceeding had been instituted.
SECTION 6.14. Rights and Remedies Cumulative. Except as otherwise
------------------------------
provided in Section 2.09 hereof, no right or remedy herein conferred upon or
reserved to the Trustee or to the Holders is intended to be exclusive of any
other right or remedy, and every right and remedy shall, to the extent permitted
by law, be cumulative and in addition to every other right and remedy given
hereunder or now or hereafter existing at law or in equity or otherwise. The
assertion or employment of any right or remedy hereunder, or otherwise, shall
not prevent the concurrent assertion or employment of any other appropriate
right or remedy.
SECTION 6.15. Delay or Omission Not Waiver. No delay or omission of the
----------------------------
Trustee or of any Holder of any Note to exercise any right or remedy accruing
upon any Event of Default shall impair any such right or remedy or constitute a
waiver of any such Event of Default or an acquiescence therein. Every right and
remedy given by this Article VI or by law to the Trustee or to the Holders may
be exercised from time to time, and as often as may be deemed expedient, by the
Trustee or by the Holders, as the case may be.
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ARTICLE VII.
TRUSTEE
SECTION VII.1. Duties of Trustee. (a) If an Event of Default has occurred and
-----------------
is continuing, the Trustee shall exercise the rights and powers vested in it by
this Indenture and shall use the same degree of care and skill in their exercise
as a prudent person would exercise or use under the circumstances in the conduct
of such person's own affairs.
(b) Except during the continuance of an Event of Default of which a Trust
Officer has actual knowledge: (i) the Trustee undertakes to perform such duties
and only such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture against the
Trustee; and (ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of the
opinions expressed therein, upon certificates or opinions furnished to the
Trustee and conforming to the requirements of this Indenture; provided that in
the case of any such certificates or opinions that by any provision of this
Indenture are specifically required to be furnished to the Trustee, the Trustee
shall examine such certificates and opinions to determine whether or not they
conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct; provided
that: (i) this paragraph (c) shall not limit the effect of paragraph (b) of
this Section 7.01; (ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and (iii) the Trustee
shall not be liable with respect to any action it takes or omits to take in good
faith in accordance with a direction received by it pursuant to Section 6.05
hereof.
(d) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights or
powers, if it shall have reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk of liability is not reasonably
assured to it.
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(f) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Article VII and to the provisions of the Trust Indenture Act.
SECTION VII.2. Rights of Trustee. (a) The Trustee may rely on any
-----------------
document believed by it to be genuine and to have been signed or presented by
the proper Person. Except as provided in Section 7.01(b) hereof, the Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be liable
for any action it takes or omits to take in good faith in reliance on any
Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any such agent; provided that such agent was
appointed with due care by the Trustee.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided that the Trustee's conduct does not constitute willful
misconduct or gross negligence.
(e) The Trustee shall not be charged with knowledge of any Default or
Event of Default under Section 6.01(c), 6.01(d), 6.01(e) or 6.01(f) hereof, of
the identity of any Restricted Subsidiary or of the existence of any Change of
Control or Asset Sale unless either (i) a Trust Officer shall have actual
knowledge thereof, or (ii) the Trustee shall have received notice thereof in
accordance with Section 10.02 hereof from the Company or any Holder of Notes.
(f) The Trustee may consult with counsel and the written advice of such
counsel or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it hereunder
in good faith and in reliance thereon.
(g) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, direction, consent, order, bond, debenture or
other paper or document, but the Trustee, in its discretion may make such
further inquiry or investigation into such facts or matters as it may see fit,
and, if the Trustee shall determine to make such further inquiry or
investigation, it shall be entitled to examine the books, records and premises
of the Company, personally or by agent or attorney.
(h) The Trustee shall not be liable for any action it takes or omits to
take in good faith in accordance with the direction of the Holders of a majority
of the aggregate outstanding principal amount of Notes relating to the time,
method and place of conducting any proceeding
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for any remedy available to the Trustee, or exercising any trust or power
conferred upon the Trustee, under this Indenture.
SECTION VII.3. Individual Rights of Trustee. The Trustee, any Paying
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Agent or Note Registrar, in its individual or any other capacity, may become the
owner or pledgee of Notes and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee, Paying
Agent or Note Registrar hereunder, as the case may be; provided that the Trustee
must in any event comply with Sections 7.10 and 7.11 hereof.
SECTION VII.4. Trustee's Disclaimer. The Trustee shall not be
--------------------
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Notes, it shall not be accountable for the Company's use
of the proceeds from the Notes, and it shall not be responsible (a) for any
statement of the Company in this Indenture, including the recitals contained
herein, or in any document issued in connection with the sale of the Notes or in
the Notes other than the Trustee's certificate of authentication or (b) for
compliance by the Company with the Registration Agreement.
SECTION VII.5. Notice of Defaults. Within 90 calendar days after the
------------------
occurrence of any Default hereunder known to a Trust Officer with respect to the
Notes, the Trustee shall transmit by mail to all Holders, as their names and
addresses appear in the Note Register, notice of such Default hereunder known to
the Trustee, unless such Default shall have been cured or waived; provided that,
except in the case of a Default in the payment of the principal of (or premium,
if any) or interest on any Note, the Trustee shall be protected in withholding
such notice if and so long as the board of directors, the executive committee or
a trust committee of directors and/or Trust Officers of the Trustee in good
faith determine that the withholding of such notice is in the interest of the
Holders.
SECTION VII.6. Preservation of Information; Reports by Trustee to Holders.
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(a) The Company shall furnish or cause to be furnished to the Trustee:
(i) semiannually, not less than 10 calendar days prior to each
Interest Payment Date, a list, in such form as the Trustee may reasonably
require, of the names and addresses of the Holders as of the Regular Record
Date immediately preceding such Interest Payment Date, and
(ii) at such other times as the Trustee may request in writing, within
30 calendar days after the receipt by the Company of any such request, a
list of similar form and content as of a date not more than 15 calendar
days prior to the time such list is furnished;
provided that if and so long as the Trustee shall be the Note Registrar for the
Notes, no such list need be furnished with respect to the Notes.
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(b) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list furnished to the Trustee as provided in Section 7.06(a) hereof and the
names and addresses of Holders received by the Trustee in its capacity as Note
Registrar, if so acting. The Trustee may destroy any list furnished to it as
provided in Section 7.06(a) hereof upon receipt of a new list so furnished.
(c) Holders may communicate as provided in Section 312(b) of the Trust
Indenture Act with other Holders with respect to their rights under this
Indenture or under the Notes.
(d) Each Holder of Notes, by receiving and holding the same, agrees with
the Company and the Trustee that neither the Company nor the Trustee shall be
held accountable by reason of the disclosure of any such information as to the
names and addresses of the Holders in accordance with this Section 7.06,
regardless of the source from which such information was derived, and that the
Trustee shall not be held accountable by reason of mailing any material pursuant
to a request made under this Section 7.06.
(e) Within 60 calendar days after April 15 of each year commencing with
the year 1999, the Trustee shall transmit by mail to all Holders of Notes, a
brief report dated as of such April 15 if and to the extent required under
Section 313(a) of the Trust Indenture Act.
(f) The Trustee shall comply with Sections 313(b) and 313(c) of the Trust
Indenture Act.
(g) A copy of each report described in Section 7.06(e) hereof shall, at
the time of its transmission to Holders, be filed by the Trustee with each stock
exchange, if any, upon which the Notes are then listed, with the Commission and
also with the Company. The Company shall promptly notify the Trustee of any
stock exchange upon which the Notes are listed.
SECTION VII.7. Compensation and Indemnity. The Company shall pay to the
--------------------------
Trustee from time to time reasonable compensation for its services. The Company
shall reimburse the Trustee upon request for all reasonable out-of-pocket
expenses incurred or made by it, including costs of collection, in addition to
the compensation for its services. Such expenses shall include the reasonable
compensation and expenses, disbursements and advances of the Trustee's agents
and counsel. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust.
The Company shall indemnify the Trustee for, and hold it harmless against,
any and all loss, liability or expense (including reasonable attorneys' fees)
arising out of or incurred by it in connection with the acceptance or
administration of the trust created by this Indenture and the performance of its
duties hereunder, except as set forth in the next paragraph. The Trustee shall
notify the Company promptly of any claim for which it may seek indemnity.
Failure by
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the Trustee to so notify the Company shall not relieve the Company of its
obligations hereunder. The Company shall defend any such claim and the Trustee
shall cooperate in the defense of such claim. The Trustee may have separate
counsel and the Company shall pay the reasonable fees and expenses of such
counsel. The Company need not pay for any settlement made without its consent,
which consent shall not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any loss,
liability or expense incurred by the Trustee through the Trustee's own willful
misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Notes on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of, premium, if any, and interest on, particular Notes.
The Company's payment obligations pursuant to this Section 7.07 shall
survive the resignation or removal of the Trustee and discharge of this
Indenture. Subject to any other rights available to the Trustee under
applicable bankruptcy law, when the Trustee incurs expenses after the occurrence
of a Default specified in Section 6.01(g) or Section 6.01(h) hereof, the
expenses are intended to constitute expenses of administration under bankruptcy
law.
SECTION VII.8. Replacement of Trustee. (a) No resignation or removal of
----------------------
the Trustee and no appointment of a successor Trustee pursuant to this Article
VII shall become effective until the acceptance of appointment by the successor
Trustee under this Section 7.08.
(b) The Trustee may resign at any time by giving written notice thereof to
the Company. If an instrument of acceptance by a successor Trustee shall not
have been delivered to the Trustee within 30 calendar days after the giving of
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
(c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the outstanding Notes, delivered to the Trustee
and to the Company.
(d) If at any time:
(i) the Trustee shall fail to comply with Section 310(b) of the Trust
Indenture Act after written request therefor by the Company or by any
Holder who has been a bona fide Holder of a Note for at least six months,
unless the Trustee's duty to resign is stayed in accordance with the
provisions of Section 310(b) of the Trust Indenture Act; or
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(ii) the Trustee shall cease to be eligible under Section 7.10 hereof
and shall fail to resign after written request therefor by the Company or
by any such Holder; or
(iii) the Trustee shall become incapable of acting or a decree or
order for relief by a court having jurisdiction in the premises shall have
been entered in respect of the Trustee in an involuntary case under the
United States bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal or state bankruptcy, insolvency or similar law; or
a decree or order by a court having jurisdiction in the premises shall have
been entered for the appointment of a receiver, custodian, liquidator,
assignee, trustee, sequestrator (or other similar official) of the Trustee
or of its Property and assets or affairs, or any public officer shall take
charge or control of the Trustee or of its Property and assets or affairs
for the purpose of rehabilitation, conservation, winding up or liquidation;
or
(iv) the Trustee shall commence a voluntary case under the United
States bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal or state bankruptcy, insolvency or similar law or shall
consent to the appointment of or taking possession by a receiver,
custodian, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Trustee or its Property and assets or affairs, or shall
make an assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts generally as they become due, or shall take
corporate action in furtherance of any such action,
then, in any such case, (i) the Company by a Board Resolution may remove the
Trustee with respect to the Notes, or (ii) subject to Section 6.10 hereof, any
Holder who has been a bona fide Holder of a Note for at least six months may, on
behalf of such Holder and all others similarly situated, petition any court of
competent jurisdiction for the removal of the Trustee and the appointment of a
successor Trustee for the Notes.
(e) If the Trustee shall resign, be removed or become incapable of acting,
or if a vacancy shall occur in the office of Trustee for any cause, the Company,
by or pursuant to a Board Resolution, shall promptly appoint a successor
Trustee. If, within one year after such resignation, removal or incapability,
or the occurrence of such vacancy, a successor Trustee shall be appointed by the
Holders of a majority in principal amount of the outstanding Notes delivered to
the Company and the retiring Trustee, the successor Trustee so appointed shall,
forthwith upon its acceptance of such appointment in accordance with this
Section 7.08, become the successor Trustee and to that extent replace any
successor Trustee appointed by the Company. If no successor Trustee shall have
been so appointed by the Company or the Holders and shall have accepted
appointment in the manner hereinafter provided, any Holder that has been a bona
fide Holder of a Note for at least six months may, subject to Section 6.10
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hereof, on behalf of himself and all others similarly situated, petition any
court of competent jurisdiction for the appointment of a successor Trustee.
(f) The Company shall give notice of each resignation and each removal of
the Trustee and each appointment of a successor Trustee by mailing written
notice of such resignation, removal and appointment by first class mail, postage
prepaid, to the Holders as their names and addresses appear in the Note
Register. Each notice shall include the name of the successor Trustee with
respect to the Notes and the address of its Corporate Trust Office.
(g) In the event of an appointment hereunder of a successor Trustee, each
such successor Trustee so appointed shall execute, acknowledge and deliver to
the Company and to the retiring Trustee an instrument accepting such
appointment, and thereupon the resignation or removal of the retiring Trustee
shall become effective and such successor Trustee, without any further act, deed
or conveyance, shall become vested with all the rights, powers, trusts and
duties of the retiring Trustee but, on request of the Company or the successor
Trustee, such retiring Trustee shall, upon payment of its charges, execute and
deliver an instrument transferring to such successor Trustee all the rights,
powers and trusts of the retiring Trustee, and shall duly assign, transfer and
deliver to such successor Trustee all Property and money held by such former
Trustee hereunder, subject to its Lien, if any, provided for in Section 7.07
hereof.
(h) Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in
Section 7.08(g) hereof.
(i) No successor Trustee shall accept its appointment unless at the time
of such acceptance such successor Trustee shall be qualified and eligible under
this Article VII and under the Trust Indenture Act.
SECTION VII.9. Successor Trustee by Merger. Any corporation into which
---------------------------
the Trustee may be merged or converted or with which it may be consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Trustee shall be a party, or any corporation succeeding to all or
substantially all of the corporate trust business of the Trustee, shall be the
successor of the Trustee hereunder; provided that such corporation shall be
otherwise qualified and eligible under this Article VII and under the Trust
Indenture Act, without the execution or filing of any paper or any further act
on the part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes. In the event
that any Notes shall not have been authenticated by such predecessor Trustee,
any such successor Trustee may authenticate and deliver such Notes, in either
its own name or that of its predecessor Trustee,
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with the full force and effect which this Indenture provides for the certificate
of authentication of the Trustee.
SECTION VII.10. Eligibility; Disqualification. There shall at all times
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be a Trustee hereunder which shall be
(i) a corporation organized and doing business under the laws of the
United States of America, any State or Territory thereof or the District of
Columbia, authorized under such laws to exercise corporate trust powers,
and subject to supervision or examination by Federal, State, Territorial or
District of Columbia authority, or
(ii) a corporation or other Person organized and doing business under
the laws of a foreign government that is permitted to act as Trustee
pursuant to a rule, regulation or order of the Commission, authorized under
such laws to exercise corporate trust powers, and subject to supervision or
examination by authority of such foreign government or a political
subdivision thereof substantially equivalent to supervision or examination
applicable to United States institutional trustees,
in either case having a combined capital and surplus of at least $25,000,000.
If such Person publishes reports of condition at least annually, pursuant
to law or to the requirements of the aforesaid supervising or examining
authority, then for the purposes of this Section 7.10, the combined capital and
surplus of such corporation shall be deemed to be its combined capital and
surplus as set forth in its most recent report of condition so published.
Neither the Company nor any Affiliate of the Company shall serve as Trustee
hereunder. If at any time the Trustee shall cease to be eligible to serve as
Trustee hereunder pursuant to the provisions of this Section 7.10, it shall
resign immediately in the manner and with the effect specified in this Article
VII.
If the Trustee has or shall acquire any "conflicting interest" within the
meaning of Section 310(b) of the Trust Indenture Act, the Trustee and the
Company shall in all respects comply with the provisions of Section 310(b) of
the Trust Indenture Act. Nothing herein shall prevent the Trustee from filing
with the Commission the application referred to in the penultimate paragraph of
Section 310(b) of the Trust Indenture Act.
SECTION VII.11. Preferential Collection of Claims Against Company. The
-------------------------------------------------
Trustee shall comply with Section 311(a) of the Trust Indenture Act, excluding
any creditor relationship listed in Section 311(b) of the Trust Indenture Act.
A Trustee who has resigned or been removed shall be subject to Section 311(a) of
the Trust Indenture Act to the extent indicated therein.
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<PAGE>
ARTICLE VIII.
DEFEASANCE
SECTION VIII.1. Company's Option to Effect Legal Defeasance or Covenant
-------------------------------------------------------
Defeasance. The Company may elect, at its option, at any time, to have Section
- ----------
8.02 or Section 8.03 hereof applied to the outstanding Notes (in whole and not
in part) upon compliance with the conditions set forth below in this Article
VIII. Such election shall be evidenced by a Board Resolution delivered to the
Trustee.
SECTION VIII.2. Legal Defeasance and Discharge. Upon the Company's
------------------------------
exercise of its option to have this Section 8.02 applied to the outstanding
Notes (in whole and not in part), the Company shall be deemed to have been
discharged from its obligations with respect to such Notes as provided in this
Section 8.02 on and after the date the conditions set forth in Section 8.04
hereof are satisfied (hereinafter called "Defeasance"). For this purpose, such
Defeasance means that the Company shall be deemed to have paid and discharged
the entire indebtedness represented by such Notes and to have satisfied all its
other obligations under such Notes and this Indenture insofar as such Notes are
concerned (and the Trustee, at the expense of the Company, shall execute proper
instruments acknowledging the same), subject to the following which shall
survive until otherwise terminated or discharged hereunder:
(a) the rights of Holders of such Notes to receive, solely from the trust
fund described in Section 8.04 hereof and as more fully set forth in such
Section 8.04, payments in respect of the principal of and any premium and
interest on such Notes when such payments are due,
(b) the Company's obligations with respect to such Notes under Sections
2.09, 2.10, 2.12, 4.02 and 4.03 hereof,
(c) the rights, powers, trusts, duties and immunities of the Trustee under
this Indenture,
(d) Article III hereof, and
(e) this Article VIII.
Subject to compliance with this Article VIII, the Company may exercise its
option to have this Section 8.02 applied to the outstanding Notes (in whole and
not in part) notwithstanding the prior exercise of its option to have Section
8.03 hereof applied to such Notes.
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SECTION VIII.3. Covenant Defeasance. Upon the Company's exercise of its
-------------------
option to have this Section 8.03 applied to the outstanding Notes (in whole and
not in part), (i) the Company shall be released from its obligations under
Section 5.01(c) and (d), Sections 4.05 through 4.18, inclusive, and any covenant
added to this Indenture subsequent to the Issue Date pursuant to Section 9.01
hereof, (ii) the occurrence of any event specified in Section 6.01(c) or Section
6.01(d) hereof, with respect to any of Section 5.01(c) and (d), Sections 4.05
through 4.18, inclusive, and any covenant added to this Indenture subsequent to
the Issue Date pursuant to Section 9.01 hereof, shall be deemed not to be or
result in an Event of Default, in each case with respect to such Notes as
provided in this Section 8.03 on and after the date the conditions set forth in
Section 8.04 hereof are satisfied (hereinafter called "Covenant Defeasance").
For this purpose, such Covenant Defeasance means that, with respect to such
Notes, the Company may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such specified
Section (to the extent so specified in the case of Sections 6.01(c) and 6.01(d)
hereof), whether directly or indirectly by reason of any reference elsewhere
herein to any such Section or by reason of any reference in any such Section to
any other provision herein or in any other document; but the remainder of this
Indenture and such Notes shall be unaffected thereby.
SECTION VIII.4. Conditions to Defeasance or Covenant Defeasance. The
-----------------------------------------------
following shall be the conditions to the application of Section 8.02 or Section
8.03 hereof to the outstanding Notes:
(a) The Company shall irrevocably have deposited or caused to be deposited
with the Trustee as trust funds in trust for the purpose of making the following
payments, specifically pledged as security for, and dedicated solely to the
benefits of the Holders of such Notes, (i) money in an amount, or (ii) U.S.
Government Obligations which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will provide, not
later than one day before the due date of any payment, money in an amount, or
(iii) a combination thereof, in each case sufficient, in the opinion of a
nationally recognized firm of independent public accountants expressed in a
written certification thereof delivered to the Trustee, to pay and discharge,
and which shall be applied by the Trustee (or any such other qualifying trustee)
to pay and discharge, the principal of and any installment of interest on such
Notes on the respective Stated Maturities thereof, in accordance with the terms
of this Indenture and such Notes.
(b) In the event of an election to have Section 8.02 hereof apply to the
outstanding Notes, the Company shall have delivered to the Trustee an Opinion of
Counsel reasonably acceptable to the Trustee stating that (i) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (ii) since the date of this Indenture, there has been a change in the
applicable Federal income tax law, in either case (i) or (ii) to the effect
that, and based thereon such opinion shall confirm that, the Holders of such
Notes will not recognize gain or loss for Federal income tax purposes as a
result of the deposit,
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Defeasance and discharge to be effected with respect to such Notes and will be
subject to Federal income tax on the same amount, in the same manner and at the
same times as would be the case if such deposit, Defeasance and discharge were
not to occur.
(c) In the event of an election to have Section 8.03 hereof apply to the
outstanding Notes, the Company shall have delivered to the Trustee an Opinion of
Counsel reasonably acceptable to the Trustee to the effect that the Holders of
such Notes will not recognize gain or loss for Federal income tax purposes as a
result of the deposit and Covenant Defeasance to be effected with respect to
such Notes and will be subject to Federal income tax on the same amount, in the
same manner and at the same times as would be the case if such deposit and
Covenant Defeasance were not to occur.
(d) No Default or Event of Default with respect to the outstanding Notes
shall have occurred and be continuing at the time of such deposit after giving
effect thereto or at any time on or prior to the 91st calendar day after the
date of such deposit (it being understood that this condition shall not be
deemed satisfied until after such 91st calendar day).
(e) Such Defeasance or Covenant Defeasance shall not cause the Trustee to
have a conflicting interest within the meaning of the Trust Indenture Act
(assuming for the purpose of this clause (e) that all Notes are in default
within the meaning of such Act).
(f) Such Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under, any other agreement or instrument
to which the Company is a party or by which it is bound.
(g) Such Defeasance or Covenant Defeasance shall not result in the trust
arising from such deposit constituting an investment company within the meaning
of the Investment Company Act of 1940, as amended, unless such trust shall be
registered under such Act or exempt from registration thereunder.
(h) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent with respect to such Defeasance or Covenant Defeasance have been
complied with.
SECTION VIII.5. Deposited Money and U.S. Government Obligations to be Held
----------------------------------------------------------
in Trust; Miscellaneous Provisions. All money and U.S. Government Obligations
- ----------------------------------
(including the proceeds thereof) deposited with the Trustee pursuant to Section
8.04 hereof in respect of the outstanding Notes shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Notes and this
Indenture, to the payment, either directly or through any such Paying Agent as
the Trustee may determine, to the Holders of such Notes, of all sums due and to
become due thereon in respect of principal and any premium and interest, but
money so held in trust need not be segregated from other funds except to the
extent required by
96
<PAGE>
law. The Company shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the U.S. Government Obligations
deposited pursuant to Section 8.04 hereof or the principal and interest received
in respect thereof other than any such tax, fee or other charge which by law is
for the account of the Holders of outstanding Notes.
Anything in this Article VIII to the contrary notwithstanding, the Trustee
shall deliver or pay to the Company from time to time upon Company Order any
money or U.S. Government Obligations held by it as provided in Section 8.04
hereof which, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, are in excess of the amount thereof that would then be required to be
deposited to effect the Defeasance or Covenant Defeasance, as the case may be,
with respect to the outstanding Notes.
The Trustee and the Paying Agent shall pay to the Company upon written
request any money held by them for the payment of principal, premium, if any, or
interest that remains unclaimed for two years; provided that the Trustee or such
--------
Paying Agent before being required to make any payment may cause to be published
at the expense of the Company once in a newspaper of general circulation in the
City of New York or mail to each Holder entitled to such money at such Holder's
address (as set forth in the Note Register) notice that such money remains
unclaimed and that after a date specified therein (which shall be at least 30
days from the date of such publication or mailing) any unclaimed balance of such
money then remaining will be repaid to the Company. After payment to the
Company, Holders entitled to such money must look to the Company for payment as
general creditors unless an applicable law designates another Person, and all
liability of the Trustee and such Paying Agent with respect to such money shall
cease.
SECTION VIII.6. Reinstatement. If the Trustee or Paying Agent is unable
-------------
to apply any money in accordance with this Article VIII with respect to any
Notes by reason of any order or judgement of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application then the
obligations under this Indenture and such Notes from which the Company has been
discharged or released pursuant to Sections 8.02 or 8.03 hereof shall be revived
and reinstated as though no deposit had occurred pursuant to this Article VIII
with respect to such Notes, until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust pursuant to Section 8.05 hereof with
respect to such Notes in accordance with this Article VIII; provided that if the
Company makes any payment of principal of or any premium or interest on any such
Note following such reinstatement of its obligations, the Company shall be
subrogated to the rights (if any) of the Holders of such Notes to receive such
payment from the money so held in trust.
ARTICLE IX.
AMENDMENTS
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<PAGE>
SECTION IX.1. Without Consent of Holders. The Company and the Trustee
--------------------------
may, at any time, and from time to time, without notice to or consent of any
Holder of Notes, enter into one or more indentures supplemental hereto, in form
satisfactory to the Trustee, for any of the following purposes:
(a) to evidence the succession of another Person to the Company and
the assumption by such successor of the covenants of the Company herein and
contained in the Notes; or
(b) to add to the covenants of the Company, for the benefit of the
Holders of all of the Notes, or to surrender any right or power herein
conferred upon the Company; or
(c) to add any additional Events of Default; or
(d) to provide for uncertificated Notes in addition to or in place of
certificated Notes; or
(e) to evidence and provide for the acceptance of appointment
hereunder of a successor Trustee; or
(f) to secure the Notes; or
(g) to cure any ambiguity herein, or to correct or supplement any
provision hereof which may be inconsistent with any other provision hereof
or to add any other provisions with respect to matters or questions arising
under this Indenture; provided that such actions shall not adversely affect
--------
the interests of the Holders of Notes in any material respect; or
(h) to comply with the requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act.
SECTION IX.2. With Consent of Holders. With the consent of the Holders of
-----------------------
not less than a majority in principal amount of the outstanding Notes, by Act of
said Holders delivered to the Company and the Trustee, the Company and the
Trustee may enter into one or more indentures supplemental hereto for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of modifying in any manner the rights of
the Holders; provided that no such supplemental indenture shall, without the
consent of the Holder of each outstanding Note,
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<PAGE>
(a) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, or alter the redemption provisions
thereof, or reduce the principal amount thereof (or any premium, if any),
or the interest thereon, that would be due and payable upon Maturity
thereof, or change the place of payment where, or the coin or currency in
which, any Note or any premium or interest thereon is payable, or impair
the right to institute suit for the enforcement of any such payment on or
after the Maturity thereof; or
(b) reduce the percentage in principal amount of the outstanding
Notes, the consent of whose Holders is required for any such supplemental
indenture; or
(c) modify any of the provisions of Section 6.04 hereof, except to
increase any percentage set forth therein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby; or
(d) subordinate in right of payment, or otherwise subordinate, the
Notes to any other Indebtedness; or
(e) modify any of the provisions of this Section 9.02, except to
increase any percentage set forth herein or to provide that certain other
provisions of this Indenture cannot be modified or waived without the
consent of the Holder of each outstanding Note affected thereby.
It shall not be necessary for any Act of Holders under this Section 9.02 to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
SECTION IX.3. Effect of Supplemental Indentures. Upon the execution of
---------------------------------
any supplemental indenture under this Article IX, this Indenture shall be
modified in accordance therewith, and such supplemental indenture shall form a
part of this Indenture for all purposes; and every Holder of Notes theretofore
or thereafter authenticated and delivered hereunder shall be bound thereby.
SECTION IX.4. Compliance with Trust Indenture Act. Every amendment or
-----------------------------------
supplement to this Indenture or the Notes shall comply with the Trust Indenture
Act as then in effect.
SECTION IX.5. Revocation and Effect of Consents and Waivers. A consent to
---------------------------------------------
an amendment, supplement or a waiver by a Holder of a Note shall bind the Holder
and every subsequent Holder of such Note or portion of such Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
or waiver is not made on such Note;
99
<PAGE>
provided that any such Holder or subsequent Holder may revoke the consent or
- --------
waiver as to such Holder's Note or portion of such Note if the Trustee receives
the notice of revocation at least one day prior to the date the amendment,
supplement or waiver becomes effective. After an amendment, supplement or waiver
becomes effective pursuant to this Article IX, it shall bind every Holder.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to give their consent or take any
other action described above or required or permitted to be taken pursuant to
this Indenture. If a record date is fixed, then notwithstanding the immediately
preceding paragraph, those Persons who were Holders at such record date (or
their duly designated proxies), and only those Persons, shall be entitled to
give such consent or to revoke any consent previously given or to take any such
action, whether or not such Persons continue to be Holders after such record
date. No such consent shall be valid or effective for more than 120 calendar
days after such record date.
SECTION IX.6. Notation on or Exchange of Notes. If a supplemental
--------------------------------
indenture changes the terms of a Note, the Trustee may require the Holder
thereof to deliver such Note to the Trustee. The Trustee may place an
appropriate notation on such Note regarding the changed terms and return it to
the Holder. Alternatively, if the Company or the Trustee so determines, the
Company in exchange for such Note shall issue and the Trustee shall authenticate
a new Note that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Note shall not affect the validity of such amendment
or supplement.
SECTION IX.7. Trustee to Execute Supplemental Indentures. The Trustee
------------------------------------------
shall execute any supplemental indenture authorized pursuant to this Article IX
if such supplemental indenture does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but shall
not be required to, execute such supplemental indenture. In executing any
supplemental indenture, the Trustee shall be (subject to Section 7.01 hereof)
fully protected in relying upon an Officers' Certificate and an Opinion of
Counsel, which shall not be at the expense of the Trustee, stating that the
execution of such supplemental indenture is authorized or permitted by this
Indenture.
ARTICLE X.
MISCELLANEOUS
SECTION X.1. Trust Indenture Act Controls. If and to the extent that any
----------------------------
provision of this Indenture limits, qualifies or conflicts with the duties
imposed by, or with another provision (an "incorporated provision") included in
this Indenture by operation of, Sections
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<PAGE>
310 to 318, inclusive, of the Trust Indenture Act, such imposed duties or
incorporated provision shall control.
SECTION X.2. Notices. Any notice or communication shall be in writing and
-------
delivered in person or mailed by first class mail, postage prepaid, addressed as
follows: if to the Company: McLeodUSA Incorporated, 6400 C Street, S.W., Cedar
Rapids, Iowa 52406, Attention: Clark E. McLeod; if to the Trustee: United States
Trust Company of New York, 114 West 47th Street, New York, New York 10036,
Attention: Corporate Trust Administration.
The Company or the Trustee, by notice to the other, may designate
additional or different addresses for subsequent notices or communications. Any
notice or communication mailed to a Holder shall be sent to the Holder by first
class mail, postage prepaid, at the Holder's address as it appears in the Note
Register and shall be duly given if so sent within the time prescribed. Failure
to mail a notice or communication to a Holder or any defect in it shall not
affect its sufficiency with respect to other Holders. If a notice or
communication is mailed to the Company, the Trustee or a Holder in the manner
provided above, it is duly given, whether or not the addressee receives it. In
case by reason of the suspension of regular mail service or by reason of any
other cause it shall be impracticable to give notice by mail to Holders, then
such notification as shall be made with the approval of the Trustee shall
constitute a sufficient notification for every purpose hereunder.
SECTION X.3. Certificate and Opinion as to Conditions Precedent. Upon any
--------------------------------------------------
request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, the Company shall furnish to the
Trustee: (a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and (b) an Opinion of
Counsel stating that, in the opinion of such counsel, all such conditions
precedent have been complied with.
SECTION X.4. Statements Required in Certificate or Opinion. Each
---------------------------------------------
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture (other than pursuant to Section 4.19 hereof)
shall include: (a) a statement that the individual making such certificate or
opinion has read such covenant or condition; (b) a brief statement as to the
nature and scope of the examination or investigation upon which the statements
or opinions contained in such certificate or opinion are based; (c) a statement
that, in the opinion of such individual, such person has made such examination
or investigation as is necessary to enable such person to express an informed
opinion as to whether or not such covenant or condition has been complied with;
and (d) a statement as to whether or not, in the opinion of such individual,
such covenant or condition has been complied with; provided that, with respect
to matters of fact, an Opinion of Counsel may rely on an Officers' Certificate
or certificates of public officials.
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SECTION X.5. Rules by Trustee, Paying Agent and Note Registrar. The
-------------------------------------------------
Trustee may make reasonable rules for action by or a meeting of Holders, and any
Note Registrar and Paying Agent may make reasonable rules for their functions;
provided that no such rule shall conflict with terms of this Indenture or the
Trust Indenture Act.
SECTION X.6. Payments on Business Days. If a payment hereunder is
-------------------------
scheduled to be made on a date that is not a Business Day, payment shall be made
on the next succeeding day that is a Business Day, and no interest shall accrue
with respect to that payment during the intervening period. If a regular record
date is a date that is not a Business Day, such record date shall not be
affected.
SECTION X.7. Governing Law. THIS INDENTURE AND THE NOTES SHALL BE
-------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SAID STATE.
SECTION X.8. No Recourse Against Others. No controlling Person, director,
--------------------------
officer, employee, incorporator or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Notes or this
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation, solely by reason of its past, present or future
status as a controlling Person, director, officer, employee, incorporator or
stockholder of the Company. By accepting a Note, each Holder waives and releases
all such liability (but only such liability) as part of the consideration for
issuance of such Note to such Holder.
SECTION X.9. Successors. All agreements of the Company in this Indenture
----------
and the Notes shall bind its successors and assigns whether so expressed or not.
All agreements of the Trustee in this Indenture shall bind its successors and
assigns whether so expressed or not.
SECTION X.10. Counterparts. This Indenture may be executed in any number
------------
of counterparts and by the parties thereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
SECTION X.11. Table of Contents; Headings. The table of contents, cross-
---------------------------
reference table and headings of the Articles and Sections of this Indenture have
been inserted for convenience of reference only, are not intended to be
considered a part hereof and shall not modify or restrict any of the terms or
provisions hereof.
SECTION X.12. Severability. In case any provision in this Indenture or in
------------
the Notes shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
102
<PAGE>
SECTION X.13. Further Instruments and Acts. Upon request of the Trustee,
----------------------------
the Company will execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purposes of this Indenture.
103
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed all as of the day and year first above written.
MCLEODUSA INCORPORATED
By /s/ Stephen C. Gray
-----------------------------------
Name: Stephen C. Gray
Title: President
Attest:
/s/ Randall Rings
- -------------------
UNITED STATES TRUST COMPANY OF NEW YORK,
as Trustee
By /s/ James E. Logan
------------------------------------
Name: James E. Logan
Title: Vice President
Attest:
/s/ Cynthia Chaney
- -------------------
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<PAGE>
STATE OF IOWA )
) SS.:
COUNTY OF LINN )
On the 12th day of February, 1999, before me personally came
Stephan C. Gray, to me known, who, being by me duly sworn, did depose and say
that he is President of McLeodUSA Incorporated, one of the corporations
described in and which executed the foregoing instrument and that he signed his
name thereto by authority of the Board of Directors of said corporation.
/s/ Janella D. Klein
-----------------------------------------
Notary Public
State of Iowa
My commission expires 10/7/00
[Seal]
<PAGE>
STATE OF NEW YORK )
) SS.:
COUNTY OF NEW YORK )
On the 11th day of February, 1999, before me personally came
James E. Logan, to me known, who, being by me duly sworn, did depose and say
that he is Vice President of United States Trust Company of New York, one
of the corporations described in and which executed the foregoing instrument and
that he signed his name thereto by authority of the Board of Directors of said
corporation.
/s/ Christine C. Collins
-------------------------------------
Notary Public
State of New York
My commission expires 3/30/00
[Seal]
<PAGE>
ANNEX A - Form of
Regulation S Certificate
REGULATION S CERTIFICATE
(For transfers pursuant to (S) 2.08(b)(i), (iii) and (v)
of the Indenture)
United States Trust Company of New York,
as Trustee
114 West 47th Street
New York, New York 10036
Attention:
Re: 8 1/8% Senior Notes due February 15, 2009
of McLeodUSA Incorporated (the "Notes")
----------------------------------------------
Reference is made to the Indenture, dated as of February 22, 1999 (the
"Indenture"), between McLeodUSA Incorporated (the "Company") and United States
Trust Company of New York, as Trustee. Terms used herein and defined in the
Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933,
as amended (the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $________ principal amount of Notes, which
are evidenced by the following certificate(s) (the "Specified Notes"):
CUSIP No(s). _________________________________
CERTIFICATE No(s). ___________________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Notes or (ii) it is acting on behalf of all the beneficial owners of
the Specified Notes and is duly authorized by them to do so. Such beneficial
owner or owners are referred to herein collectively as the "Owner". If the
Specified Notes are represented by a Global Security, they are held through the
Depositary or an Agent Member in the name of the Undersigned, as or on behalf of
the Owner. If the Specified Notes are not represented by a Global Security,
they are registered in the name of the Undersigned, as or on behalf of the
Owner.
<PAGE>
The Owner has requested that the Specified Notes be transferred to a person
(the "Transferee") who will take delivery in the form of a Regulation S Note.
In connection with such transfer, the Owner hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 904 or Rule 144
under the Securities Act and with all applicable securities laws of the states
of the United States and other jurisdictions. Accordingly, the Owner hereby
further certifies as follows:
(1) Rule 904 Transfers. If the transfer is being effected in
------------------
accordance with Rule 904:
(A) the Owner is not a distributor of the Notes, an affiliate of
the Company or any such distributor or a person acting on behalf of
any of the foregoing;
(B) the offer of the Specified Notes was not made to a person in
the United States;
(C) either:
(i) at the time the buy order was originated, the
Transferee was outside the United States or the Owner and any
person acting on its behalf reasonably believed that the
Transferee was outside the United States, or
(ii) the transaction is being executed in, on or through
the facilities of the Eurobond market, as regulated by the
Association of International Bond Dealers, or another designated
offshore securities market and neither the Owner nor any person
acting on its behalf knows that the transaction has been
prearranged with a buyer in the United States;
(D) no directed selling efforts have been made in the United
States by or on behalf of the Owner or any affiliate thereof;
(E) if the Owner is a dealer in securities or has received a
selling concession, fee or other remuneration in respect of the
Specified Notes, and the transfer is to occur during the Restricted
Period, then the requirements of Rule 904(c)(1) have been satisfied;
and
(F) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act.
<PAGE>
(2) Rule 144 Transfers. If the transfer is being effected pursuant to
------------------
Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the Specified Notes were last acquired from the Company
or from an affiliate of the Company, whichever is later, and is being
effected in accordance with the applicable amount, manner of sale and
notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
two years has elapsed since the Specified Notes were last acquired
from the Company or from an affiliate of the Company, whichever is
later, and the Owner is not, and during the preceding three months has
not been, an affiliate of the Company.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: ______________________________________________
(Print the name of the Undersigned, as such
term is defined in the second paragraph of this
certificate.)
By:____________________________________________
Name:
Title:
(If the Undersigned is a corporation, partnership or
fiduciary, the title of the person signing on behalf of the
Undersigned must be stated.)
<PAGE>
ANNEX B - Form of Restricted
Notes Certificate
RESTRICTED NOTES CERTIFICATE
(For transfers pursuant to (S) 2.08(b)(ii), (iii), (iv) and (v)
of the Indenture)
United States Trust Company of New York,
as Trustee
114 West 47th Street
New York, New York 10036
Attention:
Re: 8 1/8% Senior Notes due February 15, 2009
of McLeodUSA Incorporated (the "Notes")
----------------------------------------------
Reference is made to the Indenture, dated as of February 22, 1999 (the
"Indenture"), between McLeodUSA Incorporated (the "Company") and United States
Trust Company of New York, as Trustee. Terms used herein and defined in the
Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933,
as amended (the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $__________ principal amount of Notes,
which are evidenced by the following certificate(s) (the "Specified Notes"):
CUSIP No(s). _____________________________
CERTIFICATE No(s). _______________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Notes or (ii) it is acting on behalf of all the beneficial owners of
the Specified Notes and is duly authorized by them to do so. Such beneficial
owner or owners are referred to herein collectively as the "Owner". If the
Specified Notes are represented by a Global Security, they are held through the
Depositary or an Agent Member in the name of the Undersigned, as or on behalf of
the Owner. If the Specified Notes are not represented by a Global Security,
they are registered in the name of the Undersigned, as or on behalf of the
Owner.
<PAGE>
The Owner has requested that the Specified Notes be transferred to a person
(the "Transferee") who will take delivery in the form of a Restricted Note. In
connection with such transfer, the Owner hereby certifies that, unless such
transfer is being effected pursuant to an effective registration statement under
the Securities Act, it is being effected in accordance with Rule 144A, Rule 144
or to an Institutional Accredited Investor under Rule 501(a)(1), (2), (3) or (7)
under the Securities Act and in compliance with all applicable securities laws
of the states of the United States and other jurisdictions. Accordingly, the
Owner hereby further certifies as follows:
(1) Rule 144A Transfers. If the transfer is being effected in
-------------------
accordance with Rule 144A:
(A) the Specified Notes are being transferred to a person that
the Owner and any person acting on its behalf reasonably believe is a
"qualified institutional buyer" within the meaning of Rule 144A,
acquiring for its own account or for the account of a qualified
institutional buyer; and
(B) the Owner and any person acting on its behalf have taken
reasonable steps to ensure that the Transferee is aware that the Owner
may be relying on Rule 144A in connection with the transfer; and
(2) Rule 144 Transfers. If the transfer is being effected pursuant
------------------
to Rule 144:
(A) the transfer is occurring after a holding period of at least
one year (computed in accordance with paragraph (d) of Rule 144) has
elapsed since the Specified Notes were last acquired from the Company
or from an affiliate of the Company, whichever is later, and is being
effected in accordance with the applicable amount, manner of sale and
notice requirements of Rule 144; or
(B) the transfer is occurring after a holding period of at least
two years has elapsed since the Specified Notes were last acquired
from the Company or from an affiliate of the Company, whichever is
later, and the Owner is not, and during the preceding three months has
not been, an affiliate of the Company.
(3) Institutional Accredited Investor Transfers. If the transfer is
-------------------------------------------
being effected to an Institutional Accredited Investor as defined under
Rule 501(a)(1), (2), (3) or (7), the Specified Notes are being transferred
to such an Institutional Accredited Investor as therein so defined who is
purchasing for investment purposes and not for distribution.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
<PAGE>
Dated: _________________________________________________________
(Print the name of the Undersigned, as such
term is defined in the second paragraph of this
certificate.)
By:_____________________________________________________
Name:
Title:
(If the Undersigned is a corporation,
partnership or fiduciary, the title of the
person signing on behalf of the Undersigned
must be stated.)
<PAGE>
ANNEX C - Form of Unrestricted
Notes Certificate
UNRESTRICTED NOTES CERTIFICATE
(For removal of Securities Act Legends pursuant to (S) 2.08c)
of the Indenture)
United States Trust Company of New York,
as Trustee
114 West 47th Street
New York, New York 10036
Attention:
Re: 8 1/8% Senior Notes due February 15, 2009
of McLeodUSA Incorporated (the "Notes")
-----------------------------------------------
Reference is made to the Indenture, dated as of February 22, 1999 (the
"Indenture"), between McLeodUSA Incorporated (the "Company") and United States
Trust Company of New York, as Trustee. Terms used herein and defined in the
Indenture or in Regulation S or Rule 144 under the U.S. Securities Act of 1933,
as amended (the "Securities Act") are used herein as so defined.
This certificate relates to U.S. $_________________ principal amount of
Notes, which are evidenced by the following certificate(s) (the "Specified
Notes"):
CUSIP No(s). _________________________________
CERTIFICATE No(s). ___________________________
The person in whose name this certificate is executed below (the "Undersigned")
hereby certifies that either (i) it is the sole beneficial owner of the
Specified Notes or (ii) it is acting on behalf of all the beneficial owners of
the Specified Notes and is duly authorized by them to do so. Such beneficial
owner or owners are referred to herein collectively as the "Owner". If the
Specified Notes are represented by a Global Security, they are held through the
Depositary or an Agent Member in the name of the Undersigned, as or on behalf of
the Owner. If the
<PAGE>
Specified Notes are not represented by a Global Security, they are registered in
the name of the Undersigned, as or on behalf of the Owner.
The Owner has requested that the Specified Notes be exchanged for Notes
bearing no Securities Act Legend pursuant to Section 2.08(c) of the Indenture.
In connection with such exchange, the Owner hereby certifies that the exchange
is occurring after a holding period of at least two years (computed in
accordance with paragraph (d) of Rule 144) has elapsed since the Specified Notes
were last acquired from the Company or from an affiliate of the Company,
whichever is later, and the Owner is not, and during the preceding three months
has not been, an affiliate of the Company. The Owner also acknowledges that any
future transfers of the Specified Notes must comply with all applicable
securities laws of the states of the United States and other jurisdictions.
This certificate and the statements contained herein are made for your
benefit and the benefit of the Company and the Purchasers.
Dated: _________________________________________________________
(Print the name of the Undersigned, as such
term is defined in the second paragraph of this
certificate.)
By:_____________________________________________________
Name:
Title:
(If the Undersigned is a corporation,
partnership or fiduciary, the title of the
person signing on behalf of the Undersigned
must be stated.)
<PAGE>
EXHIBIT 4.24
MCLEODUSA INCORPORATED
8 1/8% Senior Notes Due 2009
REGISTRATION AGREEMENT
New York, New York
February 22, 1999
Salomon Smith Barney Inc.
Bear, Stearns & Co. Inc.
Chase Securities Inc.
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, New York 10048
Dear Sirs:
McLeodUSA Incorporated, a Delaware corporation (the "Company"),
proposes to issue and sell to certain purchasers (the "Purchasers"), upon the
terms set forth in a purchase agreement dated February 11, 1999 (the "Purchase
Agreement"), its 8 1/8% Senior Notes due 2009 (the "Securities") (the "Initial
Placement"). As an inducement to the Purchasers to enter into the Purchase
Agreement and in satisfaction of a condition to your obligations thereunder, the
Company agrees with you, (i) for your benefit and (ii) for the benefit of the
holders from time to time of the Securities (including you and the other
Purchasers) (each of the foregoing a "Holder" and together the "Holders"), as
follows:
1. Definitions. Capitalized terms used herein without definition
-----------
shall have their respective meanings set forth in the Purchase Agreement. As
used in this Registration Agreement (the "Agreement"), the following capitalized
defined terms shall have the following meanings:
"Act" means the Securities Act of 1933, as amended, and the rules and
---
regulations of the Commission promulgated thereunder.
<PAGE>
2
"Affiliate" of any specified person means any other person which,
---------
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control
of a person means the power, direct or indirect, to direct or cause the
direction of the management and policies of such person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Closing Date" has the meaning set forth in the Purchase Agreement.
------------
"Commission" means the Securities and Exchange Commission.
----------
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations of the Commission promulgated thereunder.
"Exchange Offer Registration Period" means the 1 year period following
----------------------------------
the consummation of the Registered Exchange Offer, exclusive of any period
during which any stop order shall be in effect suspending the effectiveness of
the Exchange Offer Registration Statement.
"Exchange Offer Registration Statement" means a registration statement
-------------------------------------
of the Company on an appropriate form under the Act with respect to the
Registered Exchange Offer, all amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material incorporated
by reference therein.
"Exchanging Dealer" means any Holder (which may include the
-----------------
Purchasers) which is a broker-dealer, electing to exchange Securities acquired
for its own account as a result of market-making activities or other trading
activities, for New Securities.
"Final Memorandum" has the meaning set forth in the Purchase
----------------
Agreement.
<PAGE>
3
"Holder" has the meaning set forth in the preamble hereto.
------
"Indenture" means the Indenture relating to the Securities dated as of
---------
February 22, 1999, between the Company and United States Trust Company of New
York as trustee, as the same may be amended from time to time in accordance with
the terms thereof.
"Initial Placement" has the meaning set forth in the preamble hereto.
-----------------
"Majority Holders" means the Holders of a majority of the aggregate
----------------
principal amount of securities registered under a Registration Statement.
"Managing Underwriters" means the investment banker or investment
---------------------
bankers and manager or managers that shall administer an underwritten offering.
"New Securities" means debt securities of the Company identical in all
--------------
material respects to the Securities (except that the interest rate step up
provisions and the transfer restrictions will be modified or eliminated, as
appropriate), to be issued under the Indenture or the New Securities Indenture.
"New Securities Indenture" means an indenture between the Company and
------------------------
the New Securities Trustee, identical in all material respects with the
Indenture (except that the interest rate step up provisions will be modified or
eliminated, as appropriate).
"New Securities Trustee" means a bank or trust company reasonably
----------------------
satisfactory to the Purchaser, as trustee with respect to the New Securities
under the New Securities Indenture.
"Prospectus" means the prospectus included in any Registration
----------
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended or
supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Securities or the New
<PAGE>
4
Securities, covered by such Registration Statement, and all amendments and
supplements to the Prospectus, including post-effective amendments.
"Registered Exchange Offer" means the proposed offer to the Holders to
-------------------------
issue and deliver to such Holders, in exchange for the Securities, a like
principal amount of the New Securities.
"Registration Statement" means any Exchange Offer Registration
----------------------
Statement or Shelf Registration Statement that covers any of the Securities or
the New Securities pursuant to the provisions of this Agreement, amendments and
supplements to such registration statement, including post-effective amendments,
in each case including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein.
"Securities" has the meaning set forth in the preamble hereto.
----------
"Shelf Registration" means a registration effected pursuant to Section
------------------
3 hereof.
"Shelf Registration Period" has the meaning set forth in Section 3(b)
-------------------------
hereof.
"Shelf Registration Statement" means a "shelf" registration statement
----------------------------
of the Company pursuant to the provisions of Section 3 hereof which covers some
or all of the Securities or New Securities, as applicable, on an appropriate
form under Rule 415 under the Act, or any similar rule that may be adopted by
the Commission, amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein.
"Trustee" means the trustee with respect to the Securities under the
-------
Indenture.
"Underwriter" means any underwriter of Securities in connection with
-----------
an offering thereof under a Shelf Registration Statement.
<PAGE>
5
2. Registered Exchange Offer; Resales of New Securities by
-------------------------------------------------------
Exchanging Dealers; Private Exchange. (a) Except as set forth in Section 3(i)
- ------------------------------------
below, the Company shall prepare and, not later than 60 days following the
Closing Date, shall file with the Commission the Exchange Offer Registration
Statement with respect to the Registered Exchange Offer. The Company shall use
its best efforts to cause the Exchange Offer Registration Statement to become
effective under the Act within 150 days of the Closing Date.
(b) Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer, it
being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for New Securities (assuming that such Holder is
not an affiliate of the Company within the meaning of the Act, acquires the New
Securities in the ordinary course of such Holder's business and has no
arrangements with any person to participate in the distribution of the New
Securities) to trade such New Securities from and after their receipt without
any limitations or restrictions under the Act and without material restrictions
under the securities laws of a substantial proportion of the several states of
the United States.
(c) In connection with the Registered Exchange Offer, the Company
shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(ii) keep the Registered Exchange Offer open for not less than 30
days and not more than 45 days after the date notice thereof is mailed to
the Holders (or longer if required by applicable law);
(iii) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of New
York; and
(iv) comply in all material respects with all applicable laws.
<PAGE>
6
(d) As soon as practicable after the close of the
Registered Exchange Offer, the Company shall:
(i) accept for exchange all Securities tendered and not validly
withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver to the Trustee for cancellation all securities so
accepted for exchange; and
(iii) cause the Trustee or the New Securities Trustee, as the case
may be, promptly to authenticate and deliver to each Holder of Securities
New Securities equal in principal amount to the Securities of such Holder
so accepted for exchange.
(e) The Purchasers and the Company acknowledge that, pursuant to
interpretations by the Commission's staff of Section 5 of the Act, and in the
absence of an applicable exemption therefrom, each Exchanging Dealer is required
to deliver a Prospectus in connection with a sale of any New Securities received
by such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange
for Securities acquired for its own account as a result of market-making
activities or other trading activities. Accordingly, the Company shall:
(i) include the information set forth in Annex A hereto on the
cover of the Exchange Offer Registration Statement, in Annex B hereto in
the forepart of the Exchange Offer Registration Statement in a section
setting forth details of the Exchange Offer, and in Annex C hereto in the
underwriting or plan of distribution section of the Prospectus forming a
part of the Exchange Offer Registration Statement, and include the
information set forth in Annex D hereto in the Letter of Transmittal
delivered pursuant to the Registered Exchange Offer; and
(ii) use its best efforts to keep the Exchange Offer Registration
Statement continuously effective under the Act during the Exchange Offer
Registration Period for delivery by Exchanging Dealers in connection with
sales of New Securities received pursuant to the Registered Exchange Offer,
as contemplated by Section 4(h) below.
<PAGE>
7
(f) In the event that any Purchaser determines that it is not
eligible to participate in the Registered Exchange Offer with respect to the
exchange of Securities constituting any portion of an unsold allotment, at the
request of such Purchaser, the Company shall issue and deliver to such Purchaser
or the party purchasing New Securities registered under a Shelf Registration
Statement as contemplated by Section 3 hereof from such Purchaser, in exchange
for such Securities, a like principal amount of New Securities. The Company
shall seek to cause the CUSIP Service Bureau to issue the same CUSIP number for
such New Securities as for New Securities issued pursuant to the Registered
Exchange Offer.
3. Shelf Registration. If, (i) because of any change in law or
------------------
applicable interpretations thereof by the Commission's staff, the Company
determines upon advice of its outside counsel that it is not permitted to effect
the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) for
any other reason the Exchange Offer Registration Statement has not been filed
with the Commission within 60 days of the Closing Date, or (iii) for any other
reason the Registered Exchange Offer is not consummated within 180 days of the
Closing Date, or (iv) any Purchaser so requests with respect to Securities held
by it following consummation of the Registered Exchange Offer, or (v) in the
case of any Purchaser that participates in the Registered Exchange Offer or
acquires New Securities pursuant to Section 2(f) hereof, such Purchaser does not
receive freely tradeable New Securities in exchange for Securities constituting
any portion of an unsold allotment (it being understood that, for purposes of
this Section 3, (x) the requirement that a Purchaser deliver a Prospectus
containing the information required by Items 507 and/or 508 of Regulation S-K
under the Act in connection with sales of New Securities acquired in exchange
for such Securities shall result in such New Securities being not "freely
tradeable" but (y) the requirement that an Exchanging Dealer deliver a
Prospectus in connection with sales of New Securities acquired in the Registered
Exchange Offer in exchange for Securities acquired as a result of market-making
activities or other trading activities shall not result in such New Securities
being not "freely tradeable"), the following provisions shall apply:
<PAGE>
8
(a) The Company shall as promptly as practicable (but in no event
more than 30 days after so required or requested pursuant to this Section 3),
file with the Commission and thereafter shall use its best efforts to cause to
be declared effective under the Act a Shelf Registration Statement relating to
the offer and sale of the Securities or the New Securities, as applicable, by
the Holders from time to time in accordance with the methods of distribution
elected by such Holders and set forth in such Shelf Registration Statement;
provided, that with respect to New Securities received by a Purchaser in
- --------
exchange for Securities constituting any portion of an unsold allotment, the
Company may, if permitted by current interpretations by the Commission's staff,
file a post-effective amendment to the Exchange Offer Registration Statement
containing the information required by Regulation S-K Items 507 and/or 508, as
applicable, in satisfaction of its obligations under this paragraph (a) with
respect thereto, and any such Exchange Offer Registration Statement, as so
amended, shall be referred to herein as, and governed by the provisions herein
applicable to, a Shelf Registration Statement.
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the Prospectus
forming part thereof to be usable by Holders for a period of two years from the
date the Shelf Registration Statement is declared effective by the Commission or
such shorter period that will terminate when all the Securities or New
Securities, as applicable, covered by the Shelf Registration Statement have been
sold pursuant to the Shelf Registration Statement (in any such case, such period
being called the "Shelf Registration Period"). The Company shall be deemed not
to have used its best efforts to keep the Shelf Registration Statement effective
during the requisite period if it voluntarily takes any action that would result
in Holders of securities covered thereby not being able to offer and sell such
securities during that period, unless (i) such action is required by applicable
law, or (ii) such action is taken by the Company in good faith and for valid
business reasons (not including avoidance of the Company's obligations
hereunder), including the acquisition or divestiture of assets, so long as the
Company promptly thereafter complies with the requirements of Section 4(k)
hereof, if applicable.
<PAGE>
9
(c) No Holder of Securities may include any of its Securities in any
Shelf Registration Statement pursuant to this Agreement unless such Holder
furnishes to the Company in writing, within 10 days after receipt of a request
therefor, such information as the Company may reasonably request for use in
connection with any Shelf Registration Statement or Prospectus or preliminary
Prospectus included therein, and each such Holder agrees to furnish promptly to
the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such Holder not materially
misleading.
4. Registration Procedures. In connection with any Shelf
-----------------------
Registration Statement and, to the extent applicable, any Exchange Offer
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to you, prior to the filing thereof
with the Commission, a copy of any Shelf Registration Statement and any
Exchange Offer Registration Statement, and each amendment thereof and each
amendment or supplement, if any, to the Prospectus included therein and
shall use its best efforts to reflect in each such document, when so filed
with the Commission, such comments as you and your counsel reasonably may
propose.
(b) The Company shall ensure that (i) any Registration Statement and
any amendment thereto and any Prospectus forming part thereof and any
amendment or supplement thereto complies in all material respects with the
Act and the rules and regulations thereunder, (ii) any Registration
Statement and any amendment thereto does not, when it becomes effective,
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading and (iii) any Prospectus forming part of any
Registration Statement, and any amendment or supplement to such Prospectus,
does not include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements, in the light of
the circumstances under which they were made, not misleading.
<PAGE>
10
(c) (1) The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities covered thereby, and, if
requested by you or any such Holder, confirm such advice in writing:
(i) when a Registration Statement and any amendment thereto has
been filed with the Commission and when the Registration Statement or
any post-effective amendment thereto has become effective; and
(ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus included
therein or for additional information.
(2) The Company shall, during the Shelf Registration Period or the
Exchange Offer Registration Period, as applicable, advise you and, in the
case of a Shelf Registration Statement, the Holders of securities covered
thereby, and, in the case of an Exchange Offer Registration Statement, any
Exchanging Dealer which has provided in writing to the Company a telephone
or facsimile number and address for notices, and, if requested by you or
any such Holder or Exchanging Dealer, confirm such advice in writing:
(i) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
(ii) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; and
(iii) of the happening of any event that requires the making of
any changes in the Registration Statement or the Prospectus so that,
as of such date, the statements therein are not misleading and do not
omit to state a material fact required to be stated therein or
necessary to make the statements therein (in the case of the
Prospectus, in light of the circumstances
<PAGE>
11
under which they were made) not misleading (which advice shall be
accompanied by an instruction to suspend the use of the Prospectus
until the requisite changes have been made).
(d) The Company shall use its best efforts to obtain the withdrawal
of any order suspending the effectiveness of any Registration Statement at
the earliest possible time.
(e) The Company shall furnish to each Holder of securities included
within the coverage of any Shelf Registration Statement, without charge, at
least one copy of such Shelf Registration Statement and any post-effective
amendment thereto, including financial statements and schedules, and, if
the Holder so requests in writing, all exhibits (including those
incorporated by reference).
(f) The Company shall, during the Shelf Registration Period, deliver
to each Holder of securities included within the coverage of any Shelf
Registration Statement, without charge, as many copies of the Prospectus
(including each preliminary Prospectus) included in such Shelf Registration
Statement and any amendment or supplement thereto as such Holder may
reasonably request; and the Company consents to the use of the Prospectus
or any amendment or supplement thereto by each of the selling Holders of
securities in connection with the offering and sale of the securities
covered by the Prospectus or any amendment or supplement thereto.
(g) The Company shall furnish to each Exchanging Dealer which so
requests, without charge, at least one copy of the Exchange Offer
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, any documents incorporated by reference
therein, and, if the Exchanging Dealer so requests in writing, all exhibits
(including those incorporated by reference).
(h) The Company shall, during the Exchange Offer Registration Period,
promptly deliver to each Exchanging Dealer, without charge, as many copies
of the Prospectus included in such Exchange Offer Registration Statement
and
<PAGE>
12
any amendment or supplement thereto as such Exchanging Dealer may
reasonably request for delivery by such Exchanging Dealer in connection
with a sale of New Securities received by it pursuant to the Registered
Exchange Offer; and the Company consents to the use of the Prospectus or
any amendment or supplement thereto by any such Exchanging Dealer, as
aforesaid.
(i) Prior to the Registered Exchange Offer or any other offering of
securities pursuant to any Registration Statement, the Company shall
register or qualify or cooperate with the Holders of securities included
therein and their respective counsel in connection with the registration or
qualification of such securities for offer and sale under the securities or
blue sky laws of such jurisdictions as any such Holders reasonably request
in writing and do any and all other acts or things necessary or advisable
to enable the offer and sale in such jurisdictions of the securities
covered by such Registration Statement; provided, however, that the Company
-------- -------
will not be required to qualify generally to do business in any
jurisdiction where it is not then so qualified or to take any action which
would subject it to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
(j) The Company shall cooperate with the Holders of Securities to
facilitate the timely preparation and delivery of certificates representing
Securities to be sold pursuant to any Registration Statement free of any
restrictive legends and in such denominations and registered in such names
as Holders may request prior to sales of securities pursuant to such
Registration Statement.
(k) Upon the occurrence of any event contemplated by paragraph
(c)(2)(iii) above, the Company shall promptly prepare a post-effective
amendment to any Registration Statement or an amendment or supplement to
the related Prospectus or file any other required document so that, as
thereafter delivered to purchasers of the securities included therein, the
Prospectus will not include an untrue statement of a material fact or omit
to state any material fact necessary to make the statements therein, in the
light
<PAGE>
13
of the circumstances under which they were made, not misleading.
(l) Not later than the effective date of any such Registration
Statement hereunder, the Company shall provide a CUSIP number for the
Securities or New Securities, as the case may be, registered under such
Registration Statement, and provide the applicable trustee with printed
certificates for such Securities or New Securities, in a form eligible for
deposit with The Depository Trust Company.
(m) The Company shall use its best efforts to comply with all
applicable rules and regulations of the Commission and shall make generally
available to its security holders as soon as practicable after the
effective date of the applicable Registration Statement an earnings
statement satisfying the provisions of Section 11(a) of the Act.
(n) The Company shall cause the Indenture or the New Securities
Indenture, as the case may be, to be qualified under the Trust Indenture
Act in a timely manner.
(o) The Company may require each Holder of securities to be sold
pursuant to any Shelf Registration Statement to furnish to the Company such
information regarding the holder and the distribution of such securities as
the Company may from time to time reasonably require for inclusion in such
Registration Statement.
(p) The Company shall, if requested, promptly incorporate in a
Prospectus supplement or post-effective amendment to a Shelf Registration
Statement, such information as the Managing Underwriters and Majority
Holders reasonably agree should be included therein and shall make all
required filings of such Prospectus supplement or post-effective amendment
as soon as notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment.
(q) In the case of any Shelf Registration Statement, the Company
shall enter into such agreements (including underwriting agreements) and
take all other appropriate actions in order to expedite or facilitate the
registration
<PAGE>
14
or the disposition of the Securities, and in connection therewith, if an
underwriting agreement is entered into, cause the same to contain
indemnification provisions and procedures no less favorable than those set
forth in Section 6 (or such other provisions and procedures acceptable to
the Majority Holders and the Managing Underwriters, if any) with respect to
all parties to be indemnified pursuant to Section 6 from Holders of
Securities to the Company.
(r) In the case of any Shelf Registration Statement, the Company
shall (i) make reasonably available for inspection by the Holders of
securities to be registered thereunder, any underwriter participating in
any disposition pursuant to such Registration Statement, and any attorney,
accountant or other agent retained by the Holders or any such underwriter
such financial and other books and records of the Company as shall be
necessary to conduct a reasonable investigation; (ii) cause the Company's
officers, directors and employees to supply all relevant information
reasonably requested by the Holders or any such underwriter, attorney,
accountant or agent in connection with any such Registration Statement as
is customary for similar due diligence examinations; provided, however,
-------- -------
that any information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such information shall be
kept confidential by the Holders or any such underwriter, attorney,
accountant or agent, unless such disclosure is made in connection with a
court proceeding or required by law, or such information becomes available
to the public generally or through a third party without an accompanying
obligation of confidentiality; (iii) make such representations and
warranties to the Holders of securities registered thereunder and the
underwriters, if any, in form, substance and scope as are customarily made
by issuers to underwriters in primary underwritten offerings and covering
matters including, but not limited to, those set forth in the Purchase
Agreement; (iv) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the Managing Underwriters, if any) addressed to
each selling Holder and the underwriters, if any, covering such matters as
are customarily covered in opinions
<PAGE>
15
requested in underwritten offerings and such other matters as may be
reasonably requested by such Holders and underwriters; (v) obtain "cold
comfort" letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the Company or of any
business acquired by the Company for which financial statements and
financial data are, or are required to be, included in the Registration
Statement), addressed to each selling Holder of securities registered
thereunder and the underwriters, if any, in customary form and covering
matters of the type customarily covered in "cold comfort" letters in
connection with primary underwritten offerings; and (vi) deliver such
documents and certificates as may be reasonably requested by the Majority
Holders and the Managing Underwriters, if any, including those to evidence
compliance with Section 4(k) and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company.
The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of
this Section 4(r) shall be performed at (A) the effectiveness of such
Registration Statement and each post-effective amendment thereto and (B)
each closing under any underwriting or similar agreement as and to the
extent required thereunder.
(s) In the case of any Exchange Offer Registration Statement, the
Company shall (i) make reasonably available for inspection by such
Purchaser, and any attorney, accountant or other agent retained by such
Purchaser, such financial and other information and books and records of
the Company as shall be necessary to conduct a reasonable investigation;
(ii) cause the Company's officers, directors and employees to supply all
relevant information reasonably requested by such Purchaser or any such
attorney, accountant or agent in connection with any such Registration
Statement as is customary for similar due diligence examinations; provided,
--------
however, that any information that is designated in writing by the Company,
-------
in good faith, as confidential at the time of delivery of such information
shall be kept confidential by such Purchaser or any such attorney,
accountant or agent, unless such disclosure is made in connection with a
court proceeding or required by law, or
<PAGE>
16
such information becomes available to the public generally or through a
third party without an accompanying obligation of confidentiality; (iii)
make such representations and warranties to such Purchaser, in form,
substance and scope as are customarily made by issuers to underwriters in
primary underwritten offerings and covering matters including, but not
limited to, those set forth in the Purchase Agreement; (iv) obtain opinions
of counsel to the Company and updates thereof (which counsel and opinions
(in form, scope and substance) shall be reasonably satisfactory to such
Purchaser and its counsel, addressed to such Purchaser, covering such
matters as are customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
Purchaser or its counsel; (v) obtain "cold comfort" letters and updates
thereof from the independent certified public accountants of the Company
(and, if necessary, any other independent certified public accountants of
any subsidiary of the Company or of any business acquired by the Company
for which financial statements and financial data are, or are required to
be, included in the Registration Statement), addressed to such Purchaser,
in customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with primary underwritten offerings,
or if requested by such Purchaser or its counsel in lieu of a "cold
comfort" letter, an agreed-upon procedures letter under Statement on
Auditing Standards No. 35, covering matters requested by such Purchaser or
its counsel; and (vi) deliver such documents and certificates as may be
reasonably requested by such Purchaser or its counsel, including those to
evidence compliance with Section 4(k) and with conditions customarily
contained in underwriting agreements. The foregoing actions set forth in
clauses (iii), (iv), (v), and (vi) of this Section 4(s) shall be performed
at the close of the Registered Exchange Offer and the effective date of any
post-effective amendment to the Exchange Offer Registration Statement.
5. Registration Expenses. The Company shall bear all expenses
---------------------
incurred in connection with the performance of its obligations under Sections 2,
3 and 4 hereof and, in the event of any Shelf Registration Statement, will
reimburse the Holders for the reasonable fees and disbursements of one firm or
counsel
<PAGE>
17
designated by the Majority Holders to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Purchasers for the reasonable fees and
disbursements of counsel acting in connection therewith. Notwithstanding the
foregoing, the Holders of any Securities or New Securities being registered on
the Shelf Registration Statement shall pay all agency or brokerage fees and
commissions and underwriting discounts and commissions attributable to the sale
of such Securities or New Securities and the fees and disbursements of any
counsel retained by such Holders other that counsel referred to above.
6. Indemnification and Contribution.
--------------------------------
(a) In connection with any Registration Statement, the Company agrees
to indemnify and hold harmless each Holder of securities covered thereby
(including each Purchaser and, with respect to any Prospectus delivery as
contemplated in Section 4(h) hereof, each Exchanging Dealer), the
directors, officers, employees and agents of each such Holder and each
person who controls any such Holder within the meaning of either the Act or
the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory
law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of
or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement as originally filed
or in any amendment thereof, or in any preliminary Prospectus or
Prospectus, or in any amendment thereof or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the
-------- -------
Company will not be liable in any case to the extent that any such loss,
claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue
<PAGE>
18
statement or omission or alleged omission made therein in reliance upon and
in conformity with written information furnished to the Company by or on
behalf of any such Holder specifically for inclusion therein. This
indemnity agreement will be in addition to any liability which the Company
may otherwise have.
The Company also agrees to indemnify or contribute to Losses of, as
provided in Section 6(d), any underwriters of Securities registered under a
Shelf Registration Statement, their officers and directors and each person
who controls such underwriters on substantially the same basis as that of
the indemnification of the Purchaser and the selling Holders provided in
this Section 6(a) and shall, if requested by any Holder, enter into an
underwriting agreement reflecting such agreement, as provided in Section
4(q) hereof.
(b) Each Holder of securities covered by a Registration Statement
(including each Purchaser and, with respect to any Prospectus delivery as
contemplated in Section 4(h) hereof, each Exchanging Dealer) severally
agrees to indemnify and hold harmless (i) the Company, (ii) each of its
directors, (iii) each of its officers who signs such Registration Statement
and (iv) each person who controls the Company within the meaning of either
the Act or the Exchange Act to the same extent as the foregoing indemnity
from the Company to each such Holder, but only with reference to written
information relating to such Holder furnished to the Company by or on
behalf of such Holder specifically for inclusion in the documents referred
to in the foregoing indemnity. This indemnity agreement will be in
addition to any liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 or notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party
(i) will not relieve it from liability under paragraph (a) or (b) above
unless and to the extent it did not otherwise learn of such action and such
failure results in the forfeiture by the indemnifying party of
<PAGE>
19
substantial rights and defenses and (ii) will not, in any event, relieve
the indemnifying party from any obligations to any indemnified party other
than the indemnification obligation provided in paragraph (a) or (b) above.
The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to
represent the indemnified party in any action for which indemnification is
sought (in which case the indemnifying party shall not thereafter be
responsible for the fees and expenses of any separate counsel retained by
the indemnified party or parties except as set forth below); provided,
--------
however, that such counsel shall be satisfactory to the indemnified party.
-------
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall
have the right to employ separate counsel (including local counsel), and
the indemnifying party shall bear the reasonable fees, costs and expenses
of such separate counsel (and local counsel) if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party would
present such counsel with a conflict of interest, (ii) the actual or
potential defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal defenses available
to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable
time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party
will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect
to any pending or threatened claim, action, suit or proceeding in respect
of which indemnification or contribution may be sought hereunder (whether
or not the indemnified parties are actual or potential parties to such
claim or action) unless such settlement, compromise or consent includes an
unconditional release of each
<PAGE>
20
indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 6 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, then each applicable indemnifying party,
in lieu of indemnifying such indemnified party, shall have a joint and
several obligation to contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses") to
which such indemnified party may be subject in such proportion as is
appropriate to reflect the relative benefits received by such indemnifying
party, on the one hand, and such indemnified party, on the other hand, from
the Initial Placement and the Registration Statement which resulted in such
Losses; provided, however, that in no case shall any Purchaser or any
-------- -------
subsequent Holder of any Security or New Security be responsible, in the
aggregate, for any amount in excess of the purchase discount or commission
applicable to such Security, or in the case of a New Security, applicable
to the Security which was exchangeable into such New Security, as set forth
on the cover page of the Final Memorandum, nor shall any underwriter be
responsible for any amount in excess of the underwriting discount or
commission applicable to the securities purchased by such underwriter under
the Registration Statement which resulted in such Losses. If the
allocation provided by the immediately preceding sentence is unavailable
for any reason, the indemnifying party and the indemnified party shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of such indemnifying party,
on the one hand, and such indemnified party, on the other hand, in
connection with the statements or omissions which resulted in such Losses
as well as any other relevant equitable considerations. Benefits received
by the Company shall be deemed to be equal to the sum of (x) the total net
proceeds from the Initial Placement (before deducting expenses) as set
forth on the cover page of the Final Memorandum and (y) the total amount of
additional interest which the Company was not required to pay as a result
of registering the
<PAGE>
21
securities covered by the Registration Statement which resulted in such
Losses. Benefits received by the Purchasers shall be deemed to be equal to
the total purchase discounts and commissions as set forth on the cover page
of the Final Memorandum, and benefits received by any other Holders shall
be deemed to be equal to the value of receiving Securities or New
Securities, as applicable, registered under the Act. Benefits received by
any underwriter shall be deemed to be equal to the total underwriting
discounts and commissions, as set forth on the cover page of the Prospectus
forming a part of the Registration Statement which resulted in such Losses.
Relative fault shall be determined by reference to whether any alleged
untrue statement or omission relates to information provided by the
indemnifying party, on the one hand, or by the indemnified party, on the
other hand. The parties agree that it would not be just and equitable if
contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (d), no
person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 6, each person who controls a Holder within the meaning of
either the Act or the Exchange Act and each director, officer, employee and
agent of such Holder shall have the same rights to contribution as such
Holder, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall
have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each
case to the applicable terms and conditions of this paragraph (d).
(e) The provisions of this Section 6 will remain in full force and
effect, regardless of any investigation made by or on behalf of any Holder
or the Company or any of the officers, directors or controlling persons
referred to in Section 6 hereof, and will survive the sale by a Holder of
securities covered by a Registration Statement.
<PAGE>
22
7. Underwritten Offerings. No Holder may participate in any
----------------------
underwritten Shelf Registration Statement hereunder unless such Holder (i)
agrees to sell such Holder's Securities on the basis provided in any
underwriting arrangements entered into in connection therewith and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
8. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, entered into, nor shall it, on or after the date hereof, enter
into, any agreement with respect to its securities that is inconsistent
with the rights granted to the Holders herein or otherwise conflicts with
the provisions hereof.
(b) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the
written consent of the Holders of at least a majority of the then
outstanding aggregate principal amount of Securities (or, after the
consummation of any Exchange Offer in accordance with Section 2 hereof, of
Securities and New Securities); provided that, with respect to any matter
--------
that directly or indirectly affects the rights of any Purchaser hereunder,
the Company shall obtain the written consent of each such Purchaser against
which such amendment, qualification, supplement, waiver or consent is to be
effective. Notwithstanding the foregoing (except the foregoing proviso), a
waiver or consent to departure from the provisions hereof with respect to a
matter that relates exclusively to the rights of Holders whose securities
are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect the rights of other Holders may be given by
the Majority Holders, determined on the basis of securities being sold
rather than registered under such Registration Statement.
<PAGE>
23
(c) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class
mail, telex, telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address given by such
holder to the Company in accordance with the provisions of this
Section 7(c), which address initially is, with respect to each Holder,
the address of such Holder maintained by the Registrar under the
Indenture, with a copy in like manner to Salomon Smith Barney Inc.;
(2) if to you, initially at the respective addresses set forth in
the Purchase Agreement; and
(3) if to the Company, initially at its address set forth in the
Purchase Agreement.
All such notices and communications shall be deemed to have been duly
given at the time delivered by hand, if personally delivered, five business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt acknowledged, if telecopied; and on
the next business day, if timely delivered to an air courier guaranteeing
overnight delivery.
The Purchasers or the Company by notice to the other may designate
additional or different addresses for subsequent notices or communications.
(d) Successors and Assigns. This Agreement shall inure to the benefit
----------------------
of and be binding upon the successors and assigns of each of the parties,
including, without the need for an express assignment or any consent by the
Company thereto, subsequent Holders of Securities and/or New Securities.
The Company hereby agrees to extend the benefits of this Agreement to any
Holder of Securities and/or New Securities and any such Holder may
specifically enforce the provisions of this Agreement as if an original
party hereto.
<PAGE>
24
(e) Counterparts. This agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(f) Headings. The headings in this agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. This agreement shall be governed by and construed
-------------
in accordance with the laws of the State of New York applicable to
agreements made and to be performed in said State.
(h) Severability. In the event that any one or more of the provisions
------------
contained herein, or the application thereof in any circumstances, is held
invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way
impaired or affected thereby, it being intended that all of the rights and
privileges of the parties shall be enforceable to the fullest extent
permitted by law.
(i) Securities Held by the Company, etc. Whenever the consent or
-----------------------------------
approval of Holders of a specified percentage of principal amount of
Securities or New Securities is required hereunder, Securities or New
Securities, as applicable, held by the Company or its Affiliates (other
than subsequent Holders of Securities or New Securities if such subsequent
Holders are deemed to be Affiliates solely by reason of their holdings of
such Securities or New Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
MCLEODUSA INCORPORATED
By: /s/ Randall Rings
-----------------------
Name: Randall Rings
Title: Vice President and Secretary
Accepted in New York, New York
February 22, 1999
SALOMON SMITH BARNEY INC.
By: /s/ W. Brennan Smith
------------------------
Name: W. Brennan Smith
Title: Vice President
BEAR, STEARNS & CO. INC.
By: /s/ James Diao
---------------------------
Name: James Diao
Title: Senior Managing Director
CHASE SECURITIES INC.
By: /s/ David Fass
---------------------------
Name: David Fass
Title: Managing Director
<PAGE>
[FORM OF OFFERING MEMORANDUM DESCRIPTION OF
REGISTRATION AGREEMENT]
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company and the Initial Purchasers will enter into the
Registration Agreement on or prior to the Closing Date. The Company will agree,
pursuant to the Registration Agreement with the Initial Purchasers, for the
benefit of the holders, that the Company will, at its cost, (i) no later than 60
days after the Closing Date file the Exchange Offer Registration Statement with
the Commission relating to the Registered Exchange Offer to exchange the Notes
for Exchange Notes having terms substantially identical in all material respects
to the Notes (except that the Exchange Notes will not contain terms with respect
to transfer restrictions) and (ii) use its best efforts to cause the Exchange
Offer Registration Statement to be declared effective under the Securities Act
not later than 150 days after the Closing Date. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer the Exchange Notes
in exchange for surrender of the Notes. The Company will keep the Registered
Exchange Offer open for not less than 30 days and not more than 45 days (or
longer if required by applicable law) after the date notice of the Registered
Exchange Offer is mailed to the holders. For each Note surrendered to the
Company pursuant to the Registered Exchange Offer, the holder of such Note will
receive an Exchange Note having a principal amount equal to that of the
surrendered Note. Interest on each Exchange Note will accrue from the last
Interest Payment Date on which interest was paid on the Note surrendered in
exchange therefor, or, if no interest has been paid on such Note, from the date
of its original issue. Under existing Commission interpretations, the Exchange
Notes would be freely transferable by holders other than affiliates of the
Company after the Registered Exchange Offer without further registration under
the Securities Act if the holder of the Exchange Notes represents that it is
acquiring the Exchange Notes
<PAGE>
2
in the ordinary course of its business, that it has no arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes and that it is not an affiliate of the Company, as such terms are
interpreted by the Commission; provided that broker-dealers ("Participating
Broker-Dealers") receiving Exchange Notes in the Registered Exchange Offer will
have a prospectus delivery requirement with respect to resales of such Exchange
Notes. The Commission has taken the position that Participating Broker-Dealers
may fulfill their prospectus delivery requirements with respect to Exchange
Notes (other than a resale of an unsold allotment from the original sale of the
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Agreement, the Company is required to allow
Participating Broker-Dealers and other persons, if any, with similar prospectus
delivery requirements to use the prospectus contained in the Exchange Offer
Registration Statement in connection with the resale of such Exchange Notes.
A holder of Notes (other than certain specified holders) who wishes to
exchange such Notes for Exchange Notes in the Registered Exchange Offer will be
required to represent that any Exchange Notes to be received by it will be
acquired in the ordinary course of its business, and that at the time of the
commencement of the Registered Exchange Offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes and that it is not an
"affiliate" of the Company, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
In the event that applicable interpretations of the staff of the
Commission do not permit the Company to effect such a Registered Exchange Offer,
or if for any other reason the Registered Exchange Offer is not consummated
within 180 days after the Closing Date, or if the Initial Purchasers so request
with respect to Notes not eligible to be exchanged for Exchange Notes in the
Registered Exchange Offer, or if any holder of Notes does not receive freely
tradeable Exchange Notes in the Registered Exchange Offer, the Company will, at
its cost, (a) as promptly as practicable, file a Shelf Registration Statement
<PAGE>
3
covering resales of the Notes or the Exchange Notes, as the case may be, (b) use
its best efforts to cause the Shelf Registration Statement to be declared
effective under the Securities Act and (c) keep the Shelf Registration Statement
effective until two years after its effective date or such shorter period ending
when all resales of Notes or Exchange Notes covered by such Shelf Registration
Statement have been made. The Company will, in the event a Shelf Registration
Statement is filed, among other things, provide to each holder for whom such
Shelf Registration Statement was filed copies of the prospectus which is a part
of the Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes or the Exchange Notes,
as the case may be. A holder selling such Notes or Exchange Notes pursuant to
the Shelf Registration Statement generally would be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Agreement which are applicable to such holder
(including certain indemnification obligations).
If (i) within 60 days after the Closing Date, neither the Exchange
Offer Registration Statement nor the Shelf Registration Statement has been filed
with the Commission; (ii) within 150 days after the Closing Date the Exchange
Offer Registration Statement has not been declared effective; (iii) within 180
days after the Closing Date, neither the Registered Exchange Offer has been
consummated nor the Shelf Registration Statement has been declared effective; or
(iv) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective, such Registration Statement
thereafter ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Notes or Exchange Notes in accordance with and during
the periods specified in the Registration Agreement, Special Interest will
accrue and be payable semi-annually on the Notes and the Exchange Notes (in
addition to the stated interest on the Notes and the Exchange Notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured. Special
Interest will accrue and be payable semi-annually at a rate of
<PAGE>
4
0.50% per annum during the 90-day period immediately following the occurrence of
any Registration Default and shall increase by 0.25% per annum at the end of
each subsequent 90-day period, but in no event shall such rate exceed 2.00% per
annum in the aggregate regardless of the number of Registration Defaults.
The summary herein of certain provisions of the Registration Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Agreement, a
copy of which is available upon request to the Company.
<PAGE>
ANNEX A
Each broker-dealer that receives New Securities for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Securities. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of New
Securities received in exchange for Securities where such New Securities were
acquired by such broker-dealer as a result of market-making activities or other
trading activities. The Company has agreed that, starting on the Expiration
Date (as defined herein) and ending on the close of business on the first
anniversary of the Expiration Date, it will make this Prospectus available to
any broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
<PAGE>
ANNEX B
Each broker-dealer that receives New Securities for its own account in exchange
for Securities, where such Securities were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Securities. See "Plan of Distribution."
<PAGE>
ANNEX C
PLAN OF DISTRIBUTION
--------------------
Each broker-dealer that receives New Securities for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Securities. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on the
first anniversary of the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of New
Securities by broker-dealers. New Securities received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Securities or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Securities. Any broker-dealer that resells New Securities that were received by
it for its own account pursuant to the Exchange Offer and any broker or dealer
that participates in a distribution of such New Securities may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Securities and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
<PAGE>
For a period of 1 year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the holders of the Securities (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
[If applicable, add information required by Regulation S-K Items 507
and/or 508.]
<PAGE>
ANNEX D
Rider A
-------
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
SUPPLEMENTS THERETO.
Name:________________________________
Address:_____________________________
_____________________________
Rider B
-------
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of New
Securities. If the undersigned is a broker-dealer that will receive New
Securities for its own account in exchange for Securities, it represents that
the Securities to be exchanged for New Securities were acquired by it as a
result of market-making activities or other trading activities and acknowledges
that it will deliver a prospectus in connection with any resale of such New
Securities; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
<PAGE>
Exhibit 10.51
DSC MARKETING SERVICES, INC.
SUPPLY AGREEMENT
COMMUNICATIONS EQUIPMENT
<PAGE>
INDEX
Page
ARTICLE 1. SCOPE......................................................... 1
ARTICLE 2. ORDERING PROCEDURES........................................... 1
ARTICLE 3. CONTRACT PRICE................................................ 2
ARTICLE 4. PAYMENT TERMS................................................. 2
ARTICLE 5. DELIVERY, TITLE AND RISK OF LOSS.............................. 3
ARTICLE 6. TERMINATION................................................... 3
ARTICLE 7. SUBCONTRACTING................................................ 3
ARTICLE 8. WARRANTY...................................................... 3
ARTICLE 9. WARRANTY ON REPAIRED MATERIALS................................ 4
ARTICLE 10. LIMITATION OF LIABILITY....................................... 4
ARTICLE 11. TECHNICAL SUPPORT............................................. 4
ARTICLE 12. SOFTWARE LICENSE.............................................. 5
ARTICLE 13. TRAINING...................................................... 5
ARTICLE 14. DOCUMENTATION................................................. 5
ARTICLE 15. PROPRIETARY RIGHTS/NON-DIVULGENCE............................. 6
ARTICLE 16. EXCUSABLE DELAY............................................... 6
ARTICLE 17. GENERAL INDEMNITY............................................. 6
ARTICLE 18. REMEDIES...................................................... 7
ARTICLE 19. PURCHASER'S RESPONSIBILITIES.................................. 8
ARTICLE 20. HARDWARE AND SOFTWARE VERIFICATION............................ 8
ARTICLE 21. NOTICES....................................................... 8
ARTICLE 21. ENTIRETY OF AGREEMENT......................................... 8
ATTACHMENT A
- ------------
PRICE LIST
-i-
<PAGE>
SUPPLY AGREEMENT
This supply agreement (the "Agreement" is made and entered into on February 26,
1990, by and between DSC Marketing Services, Inc. ("DSC"), a Delaware
corporation, with its principal place of business at 1000 Colt Road, Plano,
Texas, and Consolidated Network Corp. ("Purchaser"), a ________ corporation,
with its principal place of business at 11701 Bormon Drive, St. Louis, MO 63146.
ARTICLE 1. SCOPE
1.1 The term of the Agreement shall run from the date first mentioned above
through March 30, 1990.
1.2 During the term of this Agreement in accordance with each purchase order
issued by Purchaser and accepted by DSC, DSC shall:
a. Engineer, sell and deliver that equipment so specified in the order
("Equipment" being defined as the hardware component of each product
being offered under the terms and conditions of the Agreement);
b. Grant to Purchaser a nonexclusive, paid-up license to use the software
("Software" is defined as set forth in Article 12) during the useful
life of the associated Equipment on the terms and conditions set forth
in the Software License, Article 12; and
c. Test and install the Equipment and/or Software (hereinafter
"Installation Services"), if Purchaser elects to purchase such
services or such services are included in the price of the Equipment
or Software.
ARTICLE 2. ORDERING PROCEDURES
2.1 The following procedures shall be followed with respect to each purchase
order issued by Purchaser and accepted by DSC:
a. During the term of this Agreement, Purchaser will inform DSC of its
intent to purchase or license Equipment, Software, Installation
Services, or Systems ("System" or "Systems" being defined as those
products composed of a combination of both hardware and software) by
sending to DSC a written order. This written order, hereinafter
referred to as the "Purchase Order", will state the type of Equipment,
Software, System, or Installation Services that Purchaser wants to
purchase or license, the price of the ordered items (hereinafter
referred to as the "Contract Price"), as set forth in Attachment A,
"Price List", which is hereby incorporated by reference, and the
proposed delivery dates and installation dates, if applicable.
b. Each Purchase Order shall specifically incorporate by reference the
terms and conditions of this Agreement. In the event of a conflict
between the terms and conditions of this Agreement and of any Purchase
Order issued hereunder or if the Purchase Order does not reference the
terms and conditions of this Agreement, the terms and conditions of
the Purchase Order shall control.
<PAGE>
ARTICLE 3. CONTRACT PRICE
3.1 The Contract Price for each item of Equipment, Software, Installation
Services, or Systems is as specified in Attachment A and shall be paid to
DSC in United States dollars. The Contract Price includes:
a. The price of the Equipment;
b. The fee for the licensing of the Software;
c. If Installation Services are ordered, the charges for installing and
testing each unit of Equipment, Software or System;
d. The charges for the warranty of the Equipment and Software in
accordance with Article 8;
3.2 The Price, as listed in Attachment A, shall not include:
a. Taxes assessed against or payable by DSC in connection with the
installation or the sale of the Equipment and the licensing of the
Software. Unless prohibited by law, Purchaser shall pay to DSC the
amount of any Federal, State, City or other tax which DSC may be
required to pay on account of (a) the installation of the Equipment
and Software; (b) the transportation, sale or use of the Equipment;
(c) the transportation, licensing or use of the Software; and (d) any
other aspect of DSC's performance under this Agreement except for any
tax assessed upon DSC's net income;
b. Charges for the shipment of the Equipment or any part thereof from its
point of manufacture, DSC agrees to prepay for the Purchaser the cost
of any such shipment from the point of manufacture to the destination
designated by Purchaser, and Purchaser shall promptly pay the amount
of said shipping costs to DSC upon receipt of the Invoice therefor,
which payment shall be in addition to the Contract Price; and
c. All utility charges including, but not limited to, charges for Central
Office Trunks, Tie Lines, and supporting interconnecting devices, if
required, from the utility.
ARTICLE 4. PAYMENT TERMS
4.1 DSC will issue an invoice ("Invoice") to Purchaser upon shipment. The
Invoice shall state the Equipment, Software, or Systems so ordered and the
Contract Price of such items. Installation Services shall be invoiced
separately upon completion of the such Installation Services. The Invoice
shall also state the total due to DSC from Purchaser ("Invoice Total")
which shall include the Contract Price, and any applicable taxes and/or
delivery fees.
4.2 Payment of the Invoice Total shall be rendered within thirty (30) days
after the date of the Invoice. All invoices not paid within thirty (30)
days as stated herein shall be subject to a late payment charge of one
percent (1%) per month on the unpaid balance.
4.3 Unless otherwise agreed to in writing by DSC, until the Invoice Total is
paid in full, DSC shall retain a security interest in the Equipment.
Purchaser agrees to execute and furnish to DSC any and all documentation
necessary for the perfection of such security interest. Purchaser shall
not sell or lease the Equipment, allow any liens or encumbrances to attach
to the Equipment (other than DSC's security interest), or remove the
Equipment from the installation site without DSC's written consent prior to
payment in full of the Invoice Total.
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<PAGE>
ARTICLE 5. DELIVERY, TITLE AND RISK OF LOSS
5.1 Shipment of the Equipment and Software shall be F.O.B. DSC's manufacturing
site.
5.2 Risk of loss or damage to the Equipment shall pass to Purchaser upon
delivery to the Purchaser.
5.3 Title to the Equipment shall pass to Purchaser upon Purchaser's payment of
the Invoice Total.
ARTICLE 6. TERMINATION
Purchaser may at any time prior to shipment terminate any Purchase Order(s)
placed by it hereunder. Purchaser shall notify DSC as soon as Purchaser knows
of the need to terminate any Purchase Order. In such event, Purchaser's
liability to DSC with respect to such terminated Purchase Order(s) shall be as
follows:
<TABLE>
<CAPTION>
Number of Days Written Termination Charge
Notice Given Prior to (As a Percentage (%)
Scheduled Shipment Date of the Invoice Total)
----------------------- -----------------------
<S> <C>
Over 60 days 0
45 to 60 days 15
30 to 45 days 30
15 to 30 days 45
</TABLE>
ARTICLE 7. SUBCONTRACTING
7.1 DSC reserves the right to subcontract such portions of the (a) Equipment
manufacture and/or Software, and/or (b) Installation to subcontractors of
DSC's choice as DSC deems appropriate.
ARTICLE 8. WARRANTY
8.1 THE WARRANTIES SET FORTH IN ARTICLE 8 AND ARTICLE 9 ARE IN LIEU OF ALL
OTHER WARRANTIES WHETHER EXPRESSED OR IMPLIED, INCLUDING THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR INTENDED OR PARTICULAR PURPOSE.
8.2 DSC warrants that the Equipment sold to Purchaser or the Software licensed
to Purchaser under this Agreement shall, under normal use and service, be
free from defects in materials and faulty workmanship. If Installation
Services are ordered, the warranty period shall be twelve (12) months from
the earlier of the following dates: (1) Completion of Installation (as
defined in Article 20); or (2) thirty (30) days after shipment to
Purchaser's site. If Installation Services are not ordered, the warranty
period shall be (12) months from shipment to Purchaser. (Hereinafter these
periods of time shall be collectively referred to as the "Initial Warranty
Period").
8.3 DSC's obligation and Purchaser's sole remedy under this article are limited
to the repair or replacement, at DSC's option, of the defective Equipment
or Software. DSC shall have no obligation to remedy any such defect if it
can be shown: (a) that the Equipment or Software was altered, repaired, or
reworked by any party other than DSC without DSC's written consent; (b)
that such defects were the result of Purchaser's improper storage,
mishandling, abuse, or misuse of the Equipment or Software; (c) that such
defects were the result of
-3-
<PAGE>
Purchaser's use of the Equipment or Software in conjunction with equipment
electronically or mechanically incompatible or of an inferior quality; or
(d) that the defect was the result of damage by fire, explosion, power
failure, or any act of nature.
8.4 In no event shall DSC be obligated to provide on-site maintenance. Subject
to the provisions of this Warranty clause, defective parts or components
will be returned by Purchaser to DSC's point of manufacture facility,
freight prepaid, and said defective parts will be repaired or replaced by
DSC at no charge to Purchaser.
8.5 Some of the parts, components and subassemblies that make up the Equipment
are not manufactured by DSC. In the event that such part, component or
subassembly is noted as "Vendor Equipment" in Attachment A, DSC agrees in
lieu of its warranty obligation described above, to pass through to
Purchaser, to the maximum extent possible, the warranty provided by the
manufacturer of the part, component or subassembly.
ARTICLE 9. WARRANTY ON REPAIRED MATERIALS
DSC warrants that the Equipment or Software returned to DSC for repair shall be
warranted from defective materials and workmanship for ninety (90) days from
date of shipment from DSC to Purchaser or until the end of the Initial Warranty
period, whichever is longer. Risk of loss or damage to Equipment or Software
returned to DSC for repair or replacement shall be borne by Purchaser until
delivery to DSC. Upon delivery of such Equipment or Software, DSC shall assume
the risk of loss or damage until that time that the Equipment or Software being
repaired or replaced is returned and delivered to Purchaser. Purchaser will pay
all transportation costs for Equipment or Software shipped to DSC for repair or
replacement. DSC shall pay all transportation costs associated with returning
repaired or replaced Equipment or Software to Purchaser.
ARTICLE 10. LIMITATION OF LIABILITY
IN NO EVENT SHALL DSC HAVE ANY LIABILITY TO PURCHASER FOR INCIDENTAL,
CONSEQUENTIAL, OR INDIRECT DAMAGES, OR FOR LOSS, DAMAGE OR EXPENSE DIRECTLY OR
INDIRECTLY ARISING FROM THE USE OF THE EQUIPMENT OR THE SOFTWARE, OR THE
INABILITY TO USE THEM EITHER SEPARATELY OR IN COMBINATION WITH OTHER EQUIPMENT
OR SOFTWARE, OR FROM ANY OTHER CAUSE.
ARTICLE 11. TECHNICAL SUPPORT
11.1 DSC shall provide the following remote technical support at no charge
during the Initial Warranty Period. This service includes the following:
a. Consultation and telephone assistance, 24 hours, seven days per week,
for problem isolation and correction for hardware purchased and
software licensed under this Agreement;
b. Modem access support assistance when applicable;
11.2 On-site call-out maintenance service is available at rates in effect at
the time of request.
-4-
<PAGE>
ARTICLE 12. SOFTWARE LICENSE
12.1 Purchaser is hereby granted a nonexclusive, nontransferable, paid-up
license to use the Software only in connection with Purchaser's use of the
Equipment purchased under this Agreement.
12.2 Software licensed under this Agreement is defined as computer programs
contained on a magnetic tape, disc, semiconductor device or other memory
device or system memory consisting of: (a) hardwired logic instructions
which manipulate data in the central processor and which control input-
output operations, error diagnostics and recovery routines; and (b)
instruction sequences in machine-readable code that control call
processing, peripheral equipment, administration and maintenance functions
as well as associated documentation used to describe, maintain and use the
programs.
12.3 Purchaser agrees that the Software to be provided by DSC under the
Agreement or any enhancement, modification, extension or expansion thereof,
or an implementation of any of the foregoing shall, as between the parties
hereto, be treated as the exclusive property of DSC and as proprietary to
and a trade secret of DSC. All rights, title and interest in the Software
are and shall remain with DSC subject, however, to a license to Purchaser
to use the software solely in conjunction with the Equipment during the
useful life of the Equipment. Purchaser shall: (a) not modify the
Software without the prior written consent of DSC; (b) not reproduce or
copy the software in whole or in part; (c) not provide, disclose or make
the Software or any portions or aspects thereof available to any person
except to its employees on a "need-to-know" basis without prior written
consent of DSC; (d) hold the Software and any portions or aspects thereof
including related documentation in confidence for the benefit of DSC; (e)
forthwith return to DSC any and all magnetic tape, disc, semiconductor
device or other memory device or system and/or documentation of other
material which has been replaced, modified, or updated; (f) utilize the
Software or any portions or aspects thereof (including any methods or
concepts utilized therein) solely in conjunction with the Equipment; (g)
issue adequate instructions to all appropriate persons, and take all
actions reasonably necessary to satisfy Purchaser's obligations under this
license.
12.4 The obligations of the Purchaser hereunder shall not extend to any
information or data relating to the Software which is now available to the
general public or becomes available by reason of acts or failures to act
not attributable to Purchaser.
12.5 The obligations of Purchaser under this Article 12 shall survive the
termination of this Agreement for any reason and shall continued even if
the Software is no longer utilized with the Equipment.
ARTICLE 13. TRAINING
DSC shall provide, at no additional charge during the Initial Warranty Period,
the training specified in Attachment A. The training will take place at DSC's
facility, unless otherwise agreed to by the parties, and will consist of
materials developed and controlled by DSC. All travel and living expenses for
the training sessions shall be borne by Purchaser. Training after the Initial
Warranty Period shall be at the then current DSC rates.
ARTICLE 14. DOCUMENTATION
DSC shall furnish that documentation specified in Attachment A to Purchaser to
be used for the operation and ongoing maintenance of the Equipment and Software.
All such documentation is to be
-5-
<PAGE>
treated in accordance with the terms of Article 15. Updates to documentation
shall be at no charge during the Initial Warranty Period.
ARTICLE 15. PROPRIETARY RIGHTS/NON DIVULGENCE
15.1 All technical information, documentation, and Software supplied by DSC to
Purchaser under this Agreement, except for that which may be in the public
domain, shall, as between the parties hereto, be treated as the
confidential and proprietary information of DSC. Purchaser, except as
specifically authorized in writing by DSC, shall: (a) treat and protect
all technical information, documentation, and Software received from DSC or
its suppliers as confidential or proprietary information; (b) not reproduce
any technical information, documentation, or Software received from DSC or
its suppliers, in whole or in part; (c) use any technical information,
documentation, or Software received by DSC or its suppliers only for study,
operation, or maintenance purposes in connection with the Equipment; (d)
indemnify DSC for any loss or damages resulting from a breach of this
Article 15; and (e) not disclose any technical information, documentation,
or Software received from DSC to any third parties.
15.2 If this Agreement is terminated or cancelled, or if Purchaser is found to
have breached any of the provisions of Article 12 or 15, Purchaser agrees
to immediately return all technical information, documentation, and
Software to DSC. In any event, the obligations of Article 12 and 15 will
survive termination of this Agreement.
ARTICLE 16. EXCUSABLE DELAY
Neither DSC nor Purchaser shall suffer any liability for nonperformance,
defective performance or late performance of the work due to causes beyond its
control and without its fault or negligence such as, but not limited to, acts of
God, war (including civil war), civil unrest, acts of government, fire, floods,
explosions, the elements, epidemics, quarantine, restrictions, strikes, lock-
outs, plant shutdown, material shortages, or delays in transportation or delays
of its suppliers or subcontractors for like cause. In the event of an excusable
delay as defined in the preceding sentence, then the party affected, upon giving
prompt written notice to the other party, shall be excused from such performance
on a day-to-day basis to the extent of such prevention, restriction, or
interference (and the other party shall likewise be excused from performance of
its obligations on a day-to-day basis to the extent such party's obligations
relate to the performance so prevented, restricted or interfered with), provided
that the party so affected shall use its best efforts to avoid or remove such
causes of nonperformance and both parties shall proceed to perform with dispatch
whenever such causes are removed or cease to exist. DSC reserves the right to
cancel or otherwise terminate this Agreement if Purchaser's performance is
delayed for a period of more than thirty (30) days.
ARTICLE 17. GENERAL INDEMNITY
17.1 DSC agrees to indemnify and hold Purchaser harmless with respect to any
suit, claim or proceeding brought against Purchaser by a third party
alleging that Purchaser's use of the Equipment or the Software, separately
or in combination, as a whole or in part, constitutes an infringement of
any United States patent or copyright or misuse of proprietary or trade
secret information. DSC agrees to defend Purchaser against any such claim
and to pay all litigation costs, reasonable attorney's fees, settlement
payments and any damages awarded or resulting from any such claim.
17.2 Purchaser shall promptly advise DSC of any such suit, claim, or proceeding
and shall cooperate with DSC in the defense or settlement thereof. DSC
shall have sole control of the defense of any action involving such a claim
and of all negotiations for its settlement or compromise.
-6-
<PAGE>
17.3 In the event that an injunction is obtained against Purchaser's use of the
Equipment and/or the Software, in whole or in part, as a result of any such
claim, DSC shall use its best efforts to either: (a) procure for Purchaser
the right to continue using the portions of the Equipment or the Software
enjoined from use; or (b) replace or modify the same with functionally
equivalent or better Equipment and/or Software so that Purchaser's use is
not subject to any such injunction. In the event that DSC cannot perform
the remedies set forth in 17.3(a) or 17.3(b), then the Purchaser shall have
the right to return such Equipment and the Software to DSC. In the event
of such return, DSC shall refund the depreciated value of the Equipment and
the license to use the Software within thirty (30) days of the receipt by
DSC of the Equipment and the Software.
17.4 This indemnity shall not apply to claims arising in respect to the use of
the Equipment or Software supplied by DSC or manufactured by its suppliers
in accordance with any design or any special instruction furnished by the
Purchaser, or which is used by the Purchaser in a manner or for a purpose
not contemplated by this Agreement.
17.5 The provisions of this Article 17 set forth the entire obligation of DSC
with respect to any claim of patent infringement, copyright infringement or
misuse of proprietary or trade secret information.
ARTICLE 18. REMEDIES
18.1 DSC shall have the right, prior to full payment of the Invoice Total, to
suspend its performance under this Agreement by written notice to the
Purchaser and forthwith remove and take possession of any Equipment and
Software that have been delivered if the Purchaser shall: (a) file a
voluntary petition under any bankruptcy or insolvency law, or file a
voluntary petition under the reorganization or arrangement provisions of
any law of any jurisdiction, or have proceedings under any such laws
instituted against it which are not terminated within thirty (30) days of
such commencement; (b) become insolvent, bankrupt, or admit in writing of
its inability to pay all debts as they mature or make a general assignment
for the benefit of or enter into any composition or arrangement with
creditors; (c) authorize, apply for, or consent to the appointment of a
receiver, trustee, or liquidator of all or a substantial part of its
assets, or have proceedings seeking such appointment commenced against it
which are not terminated within thirty (30) days of such commencement; or
(d) if Purchaser attempts to resell the Equipment or System without the
consent of DSC.
18.2 In the event of any material breach of this Agreement by either party
which shall continue for thirty (30) or more days after written notice of
such breach (including a reasonably detailed statement of the nature of
such breach) shall have been given to the breaching party by the aggrieved
party, the aggrieved party shall be entitled at its option: (a) if the
aggrieved party is the Purchaser, to suspend its performance under Article
4 of the Agreement for as long as the breach continues uncorrected; or (b)
if the aggrieved party is DSC, to suspend performance of all of its
obligations under the Agreement for as long as the breach continues
uncorrected; or (c) to avail itself of any and all remedies available at
law or equity whether or not it elects to suspend its performance under
Article 18.2a or 18.2b as applicable.
18.3 In the event (a) either party fails to timely discharge its obligations
under this Agreement and (b) the aggrieved party employs an attorney in
order to collect any amount due and unpaid, or to enforce any right or
remedy hereunder, then the defaulting party agrees that, in addition to all
amounts due hereunder, it shall pay all costs of collection or enforcement,
including court costs and reasonable attorney's fees.
-8-
<PAGE>
ARTICLE 19. PURCHASER'S RESPONSIBILITIES
19.1 The Purchaser shall insure all DSC-designated personnel access to the
Purchaser's premises and the Equipment during the times necessary to
install, maintain and service the Equipment. DSC's personnel shall comply
with site and security regulations as specified by Purchaser.
19.2 The Purchaser shall provide reasonable working space and facilities
including heat, light, ventilation, electric current and outlets for use by
DSC's designated personnel. Adequate storage space for equipment and
materials shall be made available by the Purchaser as required. All such
facilities shall be provided at no charge to DSC.
19.3 Any information DSC reasonably requests from the Purchaser and which is
required for DSC to properly install or maintain the Equipment shall be
provided by the Purchaser in a timely fashion and form reasonably specified
by DSC.
19.4 The Purchaser shall not perform, or attempt to perform, or cause to be
performed any maintenance or repair to the Equipment during the term of
this Agreement, other than pursuant to this Agreement, without prior
written consent of DSC.
ARTICLE 20. HARDWARE AND SOFTWARE VERIFICATION
20.1 If installation services are ordered, DSC shall, upon completion of the
installation, test the Equipment. Purchaser may witness the installation
and test performance.
20.2 When the Equipment and Software have satisfactorily completed all of DSC's
tests, DSC shall provide Purchaser with a "Hardware and Software
Verification" certificate. Provision of the Hardware and Software
Verification certificate to the Purchaser will be deemed, for purposes of
this Agreement, as "Completion of Installation."
ARTICLE 21. NOTICES
Any notice hereunder by one party to the other party shall be given in writing
by cable, telex, facsimile transmission, personal delivery or posted by
certified air mail with proper postage, return receipt requested, and such
notice shall be effective upon receipt to the parties at the following
addresses:
If to DSC: If to Purchaser:
DSC Marketing Services, Inc. CNI
1000 Coit Road 11701 Borman Drive
Plano, Texas 75075 St. Louis, MO 63146
Attn: Contract Manager Attn: James K. Ratchford
ARTICLE 21. ENTIRETY OF AGREEMENT
21.1 Purchaser may not assign or transfer this Agreement or any rights
hereunder without the prior written consent of DSC. Such consent shall not
be unreasonably withheld.
21.2 This Agreement together with all attachments constitutes the entire
agreement between DSC and the Purchaser with respect to the subject matter
hereof and supersedes all previous negotiations, proposals, commitments,
representations, writings, advertisements, publications and understandings
of any nature whatsoever. In the event of any conflict
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<PAGE>
between this Agreement and any Attachment, the provisions of this Agreement
shall prevail provided, however, that to the extent possible this Agreement
and the Attachments shall be construed so as to minimize conflict.
22.3 Any changes to this Agreement requested either by the Purchaser or DSC may
only be effected if mutually agreed upon in writing by duly authorized
representatives of the parties hereto. This Agreement shall not be
modified, supplemented, or any rights of a party to it waived except by
such a writing.
22.4 Failure by either party at any time to require performance by the other
party or to claim a breach of any provision of this Agreement shall not be
construed as affecting any subsequent breach of the right to require
performance with respect thereto, or to claim a breach with respect
thereto.
22.5 The rights and obligations of the parties and all interpretations and
performance of this Agreement shall be governed in all respects by the laws
of the State of Texas.
21.6 If any one or more of the provisions contained in this Agreement shall,
for any reason, be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect
any other provision hereof, and this Agreement shall be construed as if
such invalid, illegal or unenforceable provision had never been contained
herein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the date first above written, such parties acting by their
officers, being thereunto duly authorized.
DSC MARKETING SERVICES, INC. PURCHASER:
By: /s/ David M. Holland By: /s/ Wendell C. Moore
--------------------------- --------------------------
Title: Senior Vice President Title: Vice President, Finance
------------------------ -----------------------
Date: March 23, 1990 Date: March 2, 1990
------------------------- ------------------------
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<PAGE>
ATTACHMENT "A"
PRICE LIST
----------
To be agreed upon at the time of the order.
<PAGE>
AMENDMENT NUMBER 4
This Amendment Number 4 ("Amendment"), effective the date of last signature
below, is made to that certain Supply Agreement entered into and effective as of
February 26, 1990 (the "Agreement") by and between Alcatel USA Marketing, Inc.
(formerly DSC Marketing Services, Inc.), a Delaware corporation, with its
principal place of business located at 1000 Coit Road, Plano, Texas 75075
("ALCATEL") and McLeodUSA Incorporated, a Delaware corporation, with principal
offices at 6400 C Street SW, Post Office Box 3177, Cedar Rapids, Iowa 52406-3177
("McLeodUSA").
WHEREAS, the parties agree that this Amendment shall supercede the need to
negotiate a new Supply Agreement as contemplated in Amendment Number 2; and
WHEREAS, ALCATEL and McLeodUSA desire to modify certain terms and conditions of
the Agreement and establish the special terms and conditions in Addendum A which
will apply solely to McLeodUSA's acquisition of ALCATEL's
Litespan(R)/Starspan(R) products.
NOW THEREFORE, the Agreement is hereby amended as follows:
THE FOLLOWING PROVISIONS ARE APPLICABLE TO ALL PURCHASES UNDER THE AGREEMENT.
THE SPECIAL TERMS AND CONDITIONS WHICH APPLY SOLELY TO THE PROCUREMENT OF
LITESPAN(R)/STARSPAN(R) PRODUCTS ARE ATTACHED HERETO AS ADDENDUM A,
LITESPAN(R)/STARSPAN(R) PRODUCTS ACQUISITION PROVISIONS.
PREAMBLE
Effective on or about September 11, 1998 DSC Marketing Services, Inc. changed
its name to Alcatel USA Marketing, Inc.
ARTICLE 1. SCOPE
-----
Sub-article 1.2 is hereby replaced in its entirety with the following:
1.2 This Agreement provides for the acquisition of: (a) equipment,
components, assemblies, accessories, line cards, boards, and similar items
provided by ALCATEL ("Equipment"); (b) machine readable computer programs,
instruction sequences, procedures, data, logic, and/or rules that are
provided by ALCATEL, exclusive of source code, in or by any form or media
("Software"); and (c) installation and testing of the Equipment and/or
Software ("Installation Services") all as offered and authorized for use by
ALCATEL or its affiliated companies. Equipment and/or Software may
hereinafter be referred to as "Product(s)". The term "System" as used herein
describes an arrangement of Equipment which, when interfaced with Software,
is operable to perform predetermined functions.
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ARTICLE 2. ORDERING PROCEDURE
------------------
This article is hereby replaced in its entirety with the following:
2.1 Purchaser may purchase or license Equipment, Software, Systems, or
Installation Services by sending a written order ("Purchase Order") to
ALCATEL. The Purchase Order will constitute a firm offer and will identify,
by quantity, part number and description, the Equipment, Software, System, or
Installation Services that Purchaser desires to purchase or license, the
price ("Contract Price" as defined in Article 3) of the ordered items, and
the requested delivery dates and installation dates, as applicable. The
terms and conditions of this Agreement shall control over any conflicting
terms and conditions stated on any Purchase Order. All Purchase Orders are
subject to review and acceptance by ALCATEL.
2.2 Upon acceptance of a Purchase Order, ALCATEL shall furnish the requested
Products to Purchaser for delivery on a mutually agreed upon date.
2.3 Purchaser may, subject to mutual written agreement on the impact on the
Contract Price and time of performance, make modifications to a Purchase
Order any time prior to the scheduled shipment date.
2.4 ALCATEL will provide Purchaser with a reasonable opportunity, upon at
least three (3) days prior written request by Purchaser, to inspect all
Equipment purchased and the operation of any Software licensed pursuant to
this Agreement for conformance with ALCATEL's specifications therefor
provided such inspection occurs not less than five (5) working days prior to
shipment. Neither such opportunity to inspect, nor any inspection made by
Purchaser prior to shipment, nor any statement or indication by Purchaser
prior to Purchaser's receipt of such Equipment or Software shall in any way
be deemed to constitute acceptance of such Equipment or Software by
Purchaser. Unless otherwise mutually agreed, in writing, payment for
Equipment or Software before inspection shall not constitute acceptance
thereof and is without prejudice to claims Purchaser may have against ALCATEL
with respect thereto. Equipment and Software shipped to Purchaser may be
inspected by Purchaser for conformance to ALCATEL's specifications therefor
within fifteen (15) days after the date of shipment and shall be deemed
accepted on the fifteenth (15) day unless Purchaser advises ALCATEL, in
writing, of the reason for rejection within twenty (20) days after the date
of shipment. Any Product rejected by Purchaser shall be repaired or replaced
in accordance with the WARRANTY provisions of this Agreement.
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ARTICLE 3. CONTRACT PRICE
--------------
Sub-article 3.1 is hereby modified by replacing the first sentence with the
following:
The Contract Price for each item of Equipment, Software, Installation
Services, or System shall, as applicable, be specified in (i) Attachment A to
this Agreement, (ii) the product pricing attachment of an amendment to this
Agreement, or (iii) a valid written quotation presented to Purchaser by
ALCATEL for a specific sales transaction, and shall be paid to ALCATEL in
United States Dollars.
Sub-article 3.2 is hereby modified by replacing the introductory phrase of the
first sentence with the following:
The Price, as listed in the applicable document described in 3.1 above, shall
not include:
ARTICLE 7. SUBCONTRACTING is hereby modified in its entirety to read as follows:
--------------
ALCATEL reserves the right to subcontract such portions of the (a) Equipment
manufacture and/or Software development, and/or Installation Services to
subcontractors of ALCATEL's choice as ALCATEL deems appropriate. In the
event Purchaser deems the conduct of any on-site subcontractor to be
objectionable Purchaser shall so advise ALCATEL and if, after a reasonable
time, the conduct of the subcontractor has not become acceptable, Purchaser
may request ALCATEL remove such subcontractor, provided, however, Purchaser
shall be liable to ALCATEL for any increase in the Contract Price due to an
increase in the cost or time to perform the work, by a substitute
subcontractor, which is or would be performed by the subcontractor in
question.
ARTICLE 8. WARRANTY and ARTICLE 9. WARRANTY ON REPAIRED MATERIALS
-------- ------------------------------
Both of the aforementioned articles are replaced in their entirety by the
following:
ARTICLE 8. WARRANTY
--------
8.1 ALCATEL warrants, for the applicable period stated below, that the
Equipment and Software media shall, under normal use and service, be free
from defects in material and faulty workmanship. ALCATEL further warrants
that the Equipment and Software shall materially conform to ALCATEL's
specifications therefor in effect on the date of shipment. However, ALCATEL
does not warrant that Software will operate uninterrupted or error free. The
initial warranty period ("Initial Warranty Period") for any Product shall be:
(a) thirteen (13) months from the date of shipment for Product installed by
ALCATEL or a ALCATEL subcontractor; or (b) twelve (12) months from the date
of shipment of Product not installed by ALCATEL or a ALCATEL subcontractor.
Notwithstanding the above described Initial Warranty Period, the Initial
Warranty Period for ALCATEL's Litespan(R)/Starspan(R) Products
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shall be five (5) years under both options (a) and (b) above in lieu of the
thirteen (13) and twelve (12) month periods respectively referenced therein.
8.2 ALCATEL warrants that no later than December 31, 1998, all Product will
have the following functionality: (a) no value for current date will cause
any interruption in operation; (b) date-based functionality will behave
consistently for dates prior to, during, and after the year 2000; (c) in all
interfaces and data storage, the century in any date will be specified either
explicitly or by unambiguous algorithms or inferencing rules; and (d) the
year 2000 will be recognized as a leap year. The forgoing warranty shall
apply only if Purchaser has implemented ALCATEL's or applicable third party's
(for whom ALCATEL is the sublicensor) hardware or software patches, updates,
or enhancements containing modifications to the Product, all provided at no
charge, to make it meet this warranty.
8.3 Subject to the provisions of this article, defective Product will be (a)
returned by Purchaser to ALCATEL's designated facility, at Purchaser's
expense, (b) repaired or replaced by ALCATEL at no charge to Purchaser, and
(c) returned to Purchaser's point of shipment at ALCATEL's expense. Purchaser
shall assume risk of loss or damage to Product returned to ALCATEL for repair
or replacement until delivery to ALCATEL. Upon receipt, and until its
delivery to Purchaser, ALCATEL shall assume the risk of loss or damage to the
Product being repaired or replaced. Corrections to Software shall be
provided electronically or on suitable media chosen by ALCATEL.
8.4 ALCATEL's sole obligation, and Purchaser's sole remedy, under this
article is limited to the repair or replacement, at ALCATEL's option, of the
defective Equipment or correction of erroneous Software. In the event of a
warranty claim regarding Equipment, Purchaser shall obtain a Material Return
Authorization ("MRA") from ALCATEL prior to the return of any defective
Equipment or part thereof. Upon receipt of the defective Equipment and the
MRA or confirmation of a Software error, ALCATEL shall repair or replace the
returned Equipment or correct the Software unless: (a) the Product was
altered, repaired, or reworked by a party other than ALCATEL without
ALCATEL's prior written consent; or (b) such defects or errors were the
result of (i) Purchaser's improper storage, mishandling, abuse, or misuse of
the Product; (ii) Purchaser's use of the Product in conjunction with another
product which is electronically or mechanically incompatible, or of an
inferior quality; or (iii) damage by fire, explosion, power failure, or any
act of nature. ALCATEL shall warrant any Product corrected, repaired, or
replaced for ninety (90) days from the date of correction or shipment, as
applicable, or until the end of the Initial Warranty Period, whichever is
longer.
8.5 THE FOREGOING WARRANTIES ARE NON-TRANSFERABLE AND ARE PROVIDED IN LIEU
OF, AND ALCATEL AND ITS SUPPLIERS AND LICENSORS DISCLAIM ALL OTHER
WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR INTENDED OR PARTICULAR PURPOSE.
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ARTICLE 10 LIMITATION OF LIABILITY
-----------------------
This article is replaced in its entirety with the following:
EXCEPT WITH RESPECT TO A BREACH BY PURCHASER OF THE SOFTWARE LICENSE OR
CONFIDENTIAL INFORMATION PROVISIONS OF THIS AGREEMENT IN NO EVENT SHALL EITHER
PARTY HAVE ANY LIABILITY TO THE OTHER FOR INCIDENTAL, CONSEQUENTIAL, SPECIAL, OR
INDIRECT DAMAGES INCLUDING, BUT NOT LIMITED TO, LOSS OF REVENUE OR PROFITS.
ARTICLE 12. SOFTWARE LICENSE
----------------
This Article is hereby amended in its entirety to read as follows:
12.1 ALCATEL hereby grants Purchaser, and Purchaser hereby accepts, a
nonexclusive, nontransferable license to use Software, and those features of
the Software for which activation has been authorized by ALCATEL, solely on a
single System, or unit of Equipment, as may be applicable. Use of the
Software on multiple Systems or with any equipment furnished by a party other
than ALCATEL or its authorized resellers is not licensed hereunder in the
absence of a separate written agreement between the parties hereto.
12.2 Software is proprietary to ALCATEL, and Purchaser agrees to treat such
Software as "Confidential Information" (as the term is defined in this
Agreement). Purchaser agrees to use such Software or any portions or aspects
thereof (including any methods or concepts utilized therein) solely on the
Equipment. Purchaser agrees, within thirty (30) days after the occurrence of
either of the following events, to return, or certify to ALCATEL in writing
the destruction of, all Software, memory media, documentation and/or other
material (a) that has been modified, updated, or replaced; and/or (b) upon
Purchaser's discontinued use of the Equipment. Purchaser agrees that it
shall not at any time modify, disassemble, or decompile such Software, or
transfer or reverse engineer any portion of the Software or functioning of
any Equipment, or permit others to do so, without ALCATEL's prior written
consent. Purchaser agrees it will not attempt to transfer Confidential
Information, including any Software or System, without the prior written
consent of ALCATEL. Purchaser further agrees that it shall not reproduce or
copy such Software in whole or in part except for backup and archival
purposes. Certain network management Software is provided by third parties
and may be subject to additional license restrictions.
12.3 In the event of a Purchaser breach regarding Confidential Information,
ALCATEL reserves the right, upon notice to Purchaser, to (a) require the
immediate return of all Confidential Information, including all applicable
Software and copies thereof, wherever
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such Confidential Information and copies thereof shall reside, including any
and all associated documentation for which Purchaser is in breach of license
rights, or has not paid the applicable fee, and (b) terminate the license for
such Software and associated documentation granted to Purchaser. Upon receipt
of such notice, Purchaser agrees to immediately discontinue use and enjoyment
of such Software and associated documentation.
12.4 The rights and obligations of Purchaser under Articles 12 and 15 will
survive expiration or termination of this Agreement for any reason, and shall
continue even if the Software is no longer used with the Equipment.
ARTICLE 15. PROPRIETARY RIGHTS/NON DIVULGENCE
---------------------------------
This Article, including its title, is hereby amended in its entirety to read as
follows:
ARTICLE 15. CONFIDENTIAL INFORMATION
------------------------
All technical information, documentation, Software, other information or data
that ALCATEL supplies to Purchaser which is marked or otherwise identified as
confidential and proprietary information of ALCATEL shall hereinafter be
collectively referred to as "Confidential Information". Purchaser agrees
that it shall: (a) not disclose any Confidential Information to any person,
except to its employees having a need to know in connection with the
operation and maintenance of the Products, and where applicable its
contractors who also have agreed to keep it confidential; (b) not copy any
Confidential Information, except as provided herein; (c) not reverse engineer
or decompile any Product or Confidential Information; and (d) compensate
ALCATEL for any loss or damages resulting from a breach of this Article.
ARTICLE 21. NOTICES
-------
This Article is hereby replaced in its entirety with the following:
Any notice to be given by one party to the other shall be in writing and
transmitted by overnight courier, facsimile, cable, telex, personal delivery
or posted by certified mail with proper postage, return receipt requested,
and such notice shall be effective the date of transmittal if sent by
facsimile, cable, or telex, or upon receipt if transmitted by personal
delivery, overnight courier, or certified mail. The notice addresses of the
respective parties shall be as follows:
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Notice to ALCATEL Notice to Purchaser
Alcatel USA Marketing, Inc. McLeodUSA Incorporated
1000 Coit Road 6400 C Street SW
Plano, Texas 75075 Post Office Box 3177
Attn: Corporate Contracts Cedar Rapids, Iowa 52406-3177
Attn: General Counsel
The original ARTICLE 22. ENTIRETY OF AGREEMENT is hereby renumbered as ARTICLE
---------------------
23.
Add the following as a new ARTICLE 22:
ARTICLE 22. EXPORT CONTROLS AND LEGAL COMPLIANCE
------------------------------------
22.1 Each party shall comply with all laws and regulations applicable to it
and/or its officers, directors, and employees in connection with this
Agreement and any Equipment, Software or services, including, without
limitation, the export control laws and regulations of the United States of
America. Each party shall indemnify, defend, and hold the other harmless
from and against any claims, suits, actions, damages, expenses, liability,
and costs arising from its failure to comply with any such law or regulation,
provided that the other party promptly advises it of the claim, suit or
action. The indemnifying party shall have sole control over the defense and
settlement of the claim, suit, or action.
22.2 Purchaser specifically acknowledges that goods, software, or technology
supplied by ALCATEL or its affiliates and subsidiaries under this Agreement
are considered high-technology products subject to U.S. trade sanctions and
export control laws and regulations including, but not limited to, the
various Foreign Assets Control Regulations, the Export Administration
Regulations, and the International Traffic in Arms Regulations. Purchaser
specifically acknowledges that such goods, software, or technology obtained
from ALCATEL or its affiliates and subsidiaries pursuant to this Agreement
shall not be exported, reexported, transshipped, disclosed, diverted, or
transferred, directly or indirectly, contrary to U.S. laws, orders, or
regulations. The provisions of this Article shall survive any termination of
this Agreement.
ARTICLE 23. ENTIRETY OF AGREEMENT
---------------------
Sub-article 23.1 is hereby revised in its entirety to read as follows:
Purchaser may not assign or transfer this Agreement or any rights hereunder
without the prior written consent of ALCATEL, which consent shall not be
unreasonably withheld. Notwithstanding the foregoing, Purchaser shall have
the right, upon reasonable prior written notice to ALCATEL, to assign, convey
or otherwise transfer its rights and obligations under
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this Agreement to any entity controlled by, controlling, or under common
control with Purchaser, or any entity into which Purchaser may be merged or
consolidated or which purchases all or substantially all of the assets of
Purchaser.
Sub-article 23.7 is hereby added to read as follows:
23.7 Neither party shall disclose the existence of this Agreement (other
than as may be required for regulatory filings), nor its terms and
conditions, nor use the name of the other party in any news release, public
announcement, advertisement, or other form of publicity without the prior
written consent of the other party. Notwithstanding the above, in the event
Purchaser receives a request, from a government entity, to disclose any terms
and conditions of this Agreement Purchaser shall first advise ALCATEL, in
writing, of the extent of such proposed disclosure, within reasonable time
before the date such disclosure is required, to allow ALCATEL the opportunity
to protest or challenge such disclosure.
Sub-article 23.8 is hereby added to read as follows:
23.8 It is agreed between the parties that the means for resolution of any
dispute, controversy or claim between the parties arising out of, or in
connection with, this Agreement, or the breach, termination or validity
thereof, except with regard to the ownership of intellectual property, will
be resolved by mutual agreement of the parties. If such dispute,
controversy, or claim cannot be settled by mutual agreement of the parties
such dispute, controversy, or claim will be settled by arbitration in
accordance with the Rules of Arbitration of the American Arbitration
Association as in force on the date one party notifies the other, in writing,
of its right to seek such arbitration. The arbitration shall be conducted by
a single arbitrator selected in accordance with the aforementioned rules.
The arbitration shall be conducted at a mutually agreed upon site. The
parties agree that the arbitration award shall not be in excess of any
limitations set forth in this Agreement, shall not include punitive or
exemplary damages, shall be in writing, and shall be final and binding upon
the parties and not subject to appeal. The costs of preparation and
presentation of the arbitration case will be borne by the parties in such
proportion and manner as may be provided in the arbitration award.
Notwithstanding anything to the contrary contained in this Agreement, either
party may have recourse to the laws and administrative, regular, or
extraordinary courts or tribunals in the jurisdiction of its choice in order
to apply for emergency, special or pre-judgment relief with regard to its
intellectual property rights or rights to receive or make payment hereunder,
and the parties agree not to contest such jurisdiction. Judgement upon the
award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
///
Except as herein amended all other terms and conditions of the Agreement remain
in full force and effect.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment to be
executed by their duly authorized representatives, effective the date of last
signature below.
ALCATEL USA MARKETING, INC. McLEODUSA INCORPORATED
Signature: /s/ Doug Jacobs Signature: Stephen C. Gray
-------------------------- --------------------------
Name: Doug Jacobs Name: Stephen C. Gray
------------------------------- -------------------------------
Title: Senior Vice President Title: President & COO
------------------------------ ------------------------------
Date: 1/4/99 Date: 10/30/98
------------------------------- -------------------------------
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AMENDMENT NUMBER 4
ADDENDUM A
LITESPAN(R)/STARSPAN(R) PRODUCT ACQUISITION PROVISIONS
The following additional terms and conditions are applicable solely to the
procurement of Litespan(R)/Starspan(R) products.
VOLUME
- ------
McLeodUSA commits to the purchase/license and acceptance of delivery of ALCATEL
Litespan(R)/Starspan(R) Equipment, Software and the option for services (for
installation) totaling a minimum of Two Hundred Million Dollars
($200,000,000.00) over a six year period commencing as of March 31, 1998, based
on the product deployment plan described in Attachment 1 of this Addendum A. In
Attachment 2 of this Addendum A, ALCATEL has provided McLeodUSA with part
numbers and pricing for all Litespan(R)/Starspan(R) components, predicated on
the volume of purchases shown in Attachment 1. Each Litespan(R)/Starspan(R)
configuration includes an agreed upon set of assumptions and ALCATEL furnished
Equipment and Software. Three Litespan(R) configurations, exclusive of AMS
applicable hardware and software, have been identified and listed below and
additional configuration models can be added.
Collocation Model (DS-1 FED) for the furnishing of ALCATEL Litespan(R)
Equipment with a required fill ratio of 70% (1,352 lines) as shown in the
Package Breakouts of Attachment 2 and further identified as ALCATEL part
numbers 798.1012.610 through 798.1012.614.
Collocation Model (Optical FED) for the furnishing of ALCATEL Litespan(R)
Equipment with a required fill ratio of 70% (1,408 lines) as shown in the
Package Breakouts of Attachment 2 and further identified as ALCATEL part
number 798.1012.605 through 798.1012.609.
Network Build Model (COT/RT/ONU) for the furnishing of ALCATEL
Litespan(R)/Starspan(R) Equipment with a fill ratio of 100% as shown in
Attachment 2.
In the event McLeodUSA does not meet the committed Litespan(R) purchases, per
Attachment 1, on a cumulative basis (as measured annually, beginning on the
first anniversary date of the effective date of this Amendment 4) ALCATEL
retains the right to re-negotiate the applicable prices. In the event that
McLeodUSA exceeds the committed purchases on a cumulative basis (as measured
annually, beginning on the first anniversary date of the effective date of this
Amendment 4) McLeodUSA retains the right to re-negotiate the applicable prices.
McLeodUSA retains the right to verify the industry competitiveness of the
pricing and technology on an annual basis through a Request For Proposal (RFP)
process. ALCATEL will receive a first right of refusal to match reasonable and
legitimate offers for
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comparable products and services based on the same criteria used for submittal
and evaluation of third party proposals for the then-subject RFP.
ALCATEL agrees to make commercially reasonable effort to ship generally
available products included on each McLeodUSA purchase order within eight (8)
business weeks (excluding ALCATEL observed holidays) after ALCATEL's acceptance
of each order provided McLeodUSA continuously provides ALCATEL with a monthly
rolling forecast, in printed or electronic format commencing on the date this
Amendment Number 4 becomes effective, of anticipated product purchases. The
above time frame shall not be applicable to (product) purchase orders for which
ALCATEL has advised McLeodUSA of a longer shipment or lead time requirement.
If, with respect to fifty percent (50%) or more of all orders to which the above
stated time frame applies, ALCATEL has not shipped such orders within ten (10)
weeks after ALCATEL's acceptance of such orders McLeodUSA shall have the right
to re-negotiate the total commitment under this Addendum A. ALCATEL further
agrees to provide McLeodUSA with product availability intervals (i.e. lead times
order is required before shipment) on an annual basis.
SUPPORT
- -------
ALCATEL agrees to provide a total of five (5) man-years of Operational Engineer
(OE) support during the term of this Agreement with no more than two (2) OE's
committed in the first year and a maximum of three (3) OE's supporting McLeodUSA
simultaneously at any point in time. These OE's will be located at McLeodUSA
offices and McLeodUSA will provide all necessary office space and facilities for
the OE's. McLeodUSA may request changes in OE support, by notifying ALCATEL, in
writing, no less than ninety (90) days before any changes in support are to be
effective. ALCATEL will pay all customary employee expenses associated with
initially locating an OE to the office designated by McLeodUSA however,
McLeodUSA will reimburse ALCATEL for any travel, subsistence, and/or other
reasonable expenses incurred by the OE's when travel is requested or required by
McLeodUSA and any expenses associated with permanently (for this project
assignment) relocating any OE to another McLeodUSA office (which requires a
relocation of the OE's residence) if so requested by McLeodUSA.
TRAINING
- --------
ALCATEL agrees to provide on-site training classes at the rate of one (1) per
quarter in years 1 and 2 of the project, and one (1) class semi-annually in
years 3-6. During the first two (2) years of the project a class may be
requested at any time during the year (even in advance of accrual) provided,
however, no more than two (2) classes will be taught consecutively at any time.
Training classes will be taught at times mutually agreed between the parties.
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SUBCONTRACTORS
- --------------
ALCATEL agrees to provide McLeodUSA with a list of ALCATEL approved installation
subcontractors for Litespan(R) products.
PROVISIONING TEMPLATES
- ----------------------
ALCATEL agrees, once the Litespan(R) product templates are developed for
McLeodUSA, to establish a method of pre-loading, at ALCATEL facilities, required
Litespan(R)/Starspan(R) operating software, software keys, and pre-provisioning
Litespan systems, as applicable, prior to shipment to McLeodUSA. This will be
based on the predefined configuration models, as applicable.
PROBLEM ESCALATION
- ------------------
ALCATEL agrees to provide McLeodUSA with implementation/outage notice and
escalation documentation and procedures for all ALCATEL manufactured systems.
INDUSTRY STANDARDS COMPLIANCE
- -----------------------------
ALCATEL certifies that the RPOTS channel unit will meet the Industry Standard
Carrier Serving Area (CSA) guidelines as specified by industry standards and if,
during the period of Litespan(R) product deployment, the RPOTS channel unit does
not meet the published CSA guidelines, ALCATEL will provide the appropriate
channel unit to meet McLeodUSA service requirements.
ENHANCED COMMUNICATIONS
- -----------------------
The parties agree to work together to establish a mutually acceptable electronic
interface for order processing, trouble reporting, management reporting,
forecasting, and any other procedures which can be electronically linked and
automated, if possible.
BELLCORE LABS INDICES
- ---------------------
Bellcore Labs document TR-418, issue 2, describes a quality and reliability
index in terms of "returned and failed modules" over a given volume of product.
ALCATEL agrees that if, anytime after deployment of a reasonable number of
Litespan(R) products, the rate of "returned and failed modules" for all
Litespan(R) products deployed exceeds the Bellcore Labs applicable quality and
reliability index (per TR-418, issue 2, or the then current Bellcore Labs
standard) McLeodUSA has the right to temporarily or permanently cease further
placement of Litespan(R) Products. However, McLeodUSA agrees that prior to
taking any such action it will give ALCATEL a reasonable time to rectify any
breach of the above referenced Bellcore Labs index.
Example: Assume the Bellcore reliability index states that the "returned and
failed module" rate per 1000 units deployed is 20, then McLeodUSA could
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require ALCATEL to take remedial action if ALCATEL's "returned and failed
module" rate equals or exceeds 20.
OVERNIGHT RESPONSE
- ------------------
ALCATEL agrees that if McLeodUSA encounters a shortage of certain Litespan(R)
components in its "Rotating Pool", upon receipt of appropriate purchase order
documentation from McLeodUSA, ALCATEL will use all commercially reasonable
efforts to "overnight" ship such components to McLeodUSA.
LITECRAFT(R) LICENSES
- ---------------------
ALCATEL agrees to provide up to forty (40) licenses, upon McLeodUSA's request,
of the then current applicable version of LITECRAFT(R) software at no additional
charge, thereafter each license of LITECRAFT(R) software shall cost $2,222.00.
EXTENDING THE WARRANTY
- ----------------------
ALCATEL will provide a five (5) year warranty on Litespan(R) products. The
charge for extending the warranty to seven (7) years is an additional $2.10 per
line for both copper and fiber based collocation models, payable as Litespan(R)
product is ordered by McLeodUSA. The charge for extending the warranty to seven
(7) years for network build Litespan(R) products will be three percent (3%) of
the purchase price of such products (excluding shipping and taxes). The
additional charge for extending the warranty is to be included on each McLeodUSA
purchase order.
CTAC SUPPORT
- ------------
ALCATEL will provide Customer Technical Assistance Center (CTAC) support, as
defined in this Agreement, for either the six (6) year deployment period or the
warranty period, whichever is longer, at no additional charge. Access to CTAC
support by McLeodUSA personnel shall be controlled by authorization code(s) as
mutually agreed by ALCATEL and McLeodUSA.
SEED STOCK
- ----------
McLeodUSA agrees, that by December 31, 1998, it will purchase two (2) fully
functional "100% line-card filled" Litespan(R) HDT's as "seed stock" for
deployment as may be deemed necessary by McLeodUSA, and to establish and
maintain a complete "Rotating Pool" of spare Litespan(R) products.
SOFTWARE MAINTENANCE FEE
- ------------------------
ALCATEL agrees to provide annual updates, releases, and upgrades to maintain the
purchased features of Litespan(R) operating software, LITECRAFT(R) software, and
AMS software for: (i) a prepaid maintenance fee of $3.00 per line as lines are
shipped (1,076,400 X $3.00 for a total of $3,229,200.00 over the ALCATEL
Litespan(R) product deployment
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plans); or (ii) a one-time lump-sum prepaid software maintenance fee of
$2,700,000.00 (based on Attachment 1), to cover such updates, releases and
upgrades through the year 2003, payable in full no later than October 30, 1998.
The above charges are based on McLeodUSA performing all Litespan(R) product
software upgrades and do not include any required hardware. These prepaid
software maintenance fees do not include any future software features beyond the
proposed GR-303, copper fed Litespan(R), Starspan(R), Integrated P-Phone, VT
UPSR and current features of Litespan(R) operating software as of the effective
date of this Amendment. In the event McLeodUSA elects to enhance Litespan(R)
operating characteristics (for example, Broadband features), ALCATEL agrees to
negotiate, in good faith, pricing for the enhanced features offered at that
time.
LUMP SUM OFFER
- --------------
If McLeodUSA purchases the prepaid, lump-sum software maintenance for
$2,700,000.00 (see Software Maintenance Fee above), and purchases the extended
------------------------
Litespan(R) products warranty for two (2) additional years pursuant to the
paragraph above entitled Extending the Warranty, ALCATEL will provide two (2)
----------------------
fully equipped Litespan(R) systems, configured per the defined Collocation Model
configuration, at no charge for use as "seed stock" to support any immediate
demand for ALCATEL Litespan(R) product. These two (2) "seed stock" systems will
be shipped to a McLeodUSA designated facility upon ALCATEL's receipt of the
software maintenance fee prepayment, in full, and receipt of written
acknowledgment from McLeodUSA of acceptance of the extended warranty offer.
P-PHONE
- -------
ALCATEL agrees, as a future feature, to provide integrated GR-303 capability for
Electronic Business Sets or P-Phone capability for current Litespan(R) products
with trials beginning December 18, 1998. Until the integrated P-Phone card is
available ALCATEL will provide an interim solution, using other cards, for up to
2000 lines. This interim solution will be priced at $700.00 per "P-Phone
equivalent" card. When the P-Phone capability is available, ALCATEL agrees to
provide applicable Litespan(R) operating software and any common equipment
support modules, required to support integrated P-Phone, at no additional
charge. The integrated P-Phone card will be priced at $700.00 per card. When
the integrated P-Phone card is available, that card can be substituted for the
interim solution. If ALCATEL does not meet the P-Phone availability by December
31, 1998, McLeodUSA reserves the right to request an increase in the number of
interim solution lines. It is understood that if the integrated P-Phone card is
not available by June 30, 1999, McLeodUSA shall have the right to negotiate the
applicable prices.
Product Credit
- --------------
If McLeodUSA acquires Seventeen Million One Hundred Seventy Five Thousand Eight
Hundred Ninety Two Dollars ($17,175,892.00), or more, of the total
Litespan(R)/Starspan(R) product commitment during the first 24 months of the
project plan, ALCATEL will grant McLeodUSA a Litespan(R) product credit of Three
Hundred Sixty-Five Thousand Dollars ($365,000.00) for the FTTC trial products
already delivered to McLeodUSA ATS Division in Cedar Rapids, IA. If McLeodUSA
fails to achieve the Litespan(R) product purchase
Page 5
PROPRIETARY AND CONFIDENTIAL
to McLeodUSA Incorporated and Alcatel USA Marketing, Inc.
<PAGE>
commitment in the first 24 months of the project plan, the amount of Litespan(R)
product credit will be pro-rated to the same level of actual product purchases
(i.e. if 80% of purchase commitment is made, product credit would equal 80% of
the product purchases for the FTTC trial). Any amount payable to ALCATEL from
McLeodUSA would be due on the 25th month after execution of this Amendment.
LAB SYSTEM
- ----------
ALCATEL agrees to provide McLeodUSA a Litespan(R)/Starspan(R) lab system at no
charge consisting of: a COT, 1 RT, and a rack mounted ONU-24, ONU-48, and ONU-
96/LS 200. As ALCATEL develops new products and enhancements, McLeodUSA may
elect to add these capabilities to the McLeodUSA lab for the purpose of product
evaluation and network integration testing. If any new ALCATEL
Litespan(R)/Starspan(R) enhancement is accepted and deployed in McLeodUSA's
network, the new enhancement will remain in McLeodUSA's lab at no charge, and
any item (i.e. enhancement) which is not accepted and deployed within six (6)
months of delivery will be returned to ALCATEL's designated facility.
REGULATORY CHANGES
- ------------------
ALCATEL understands that McLeodUSA's business plans have been developed under
the Telecommunications Act of 1996 and in the event that said Act's intent is
modified or repealed by a governmental authority with appropriate jurisdiction
to the extent that it substantially prevents McLeodUSA from continuing to
implement the plans contemplated in this Amendment, ALCATEL agrees that should
such regulatory conditions occur, McLeodUSA shall have the option to request re-
negotiation of unit prices based on revised quantities or to re-negotiate unit
prices based on the quantities purchased to date and cease any further purchases
of Litespan(R)/Starspan(R) product.
LINE COST REDUCTION
- -------------------
Line cost reduction can be facilitated via a multi-year discounted prepayment
schedule (see table below) against the purchase price of the total number of ONU
protect optics needed for McLeodUSA's network build plan. ALCATEL's
calculations, assuming 90% of the anticipated Two Hundred Million Dollar
($200,000,000.00) of product purchased is for network-build applications, of the
total purchase price for protection for the optical path between the HDT and the
remote ONU's or BRXs is valued at Thirty-Five Million Four Hundred Thousand
Dollars ($35,400,000.00) or approximately Forty-Three Dollars ($43.00) per line.
ALCATEL offers McLeodUSA a discount of Five Million Four Hundred Thousand Dollar
($5,400,000.00) which would result in a net price of Thirty Million Dollars
($30,000,000.00), payable as follows:
Page 6
PROPRIETARY AND CONFIDENTIAL
to McLeodUSA Incorporated and Alcatel USA Marketing, Inc.
<PAGE>
Line Cost Reduction Discounted Prepayment Schedule
- --------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Year 1 Fifteen Million Dollars ($15,000,000.00) invoice date 10/30/1998 Due 11/30/98
Year 2 Three Million Dollars ($3,000,000.00) invoice date 10/30/1999 Due 11/30/99
Year 3 Three Million Dollars ($3,000,000.00) invoice date 10/30/2000 Due 11/30/2000
*Year 4 Three Million Dollars ($3,000,000.00) invoice date 10/30/2001 Due 11/30/2001
*Year 5 Three Million Dollars ($3,000,000.00) invoice date 10/30/2002 Due 11/30/2002
*Year 6 Three Million Dollars ($3,000,000.00) invoice date 10/30/2003 Due 11/30/2003
</TABLE>
* If the dollar volume of equipment delivered equals or exceeds Two Hundred
Million Dollars ($200,000,000.00) in this year all remaining payments against
the Thirty Million Dollars ($30,000,000.00) primary protection for the optical
path become due and payable thirty (30) days after the Two Hundred Million
Dollar ($200,000,000.00) volume level of equipment delivered is equaled or
exceeded.
RPOTS CHANNEL UNIT PRICE DECREASE
- ---------------------------------
An additional discount of Twelve percent (12%) is offered on the RPOTS channel
unit, decreasing the price from $250 to $221 per unit.
NOTE: The package pricing for the Collocation systems at 100% fill remains
unchanged.
CONTINUOUS RPOTS PRICE DECREASES
- --------------------------------
In addition, as long as McLeodUSA meets or exceeds the cumulative purchase
volume shown in Attachment 1 a continuous improvement discount will be offered
on the RPOTS channel unit. This discount will be cumulative and applicable at
the beginning of each calendar year for new purchases to be made during that
year, as follows:
Cumulative
Year Discount Discount
---- ----------- ---------
1 0% 0%
2 2% 2%
3 2% 4%
4 3% 7%
5 3% 10%
6 3% 13%
The cumulative discounts stated above are applicable to the revised ($221/unit)
RPOTS channel unit price only.
NOTE: The package pricing for the Collocation systems at 100% fill remains
unchanged.
Page 7
PROPRIETARY AND CONFIDENTIAL
to McLeodUSA Incorporated and Alcatel USA Marketing, Inc.
<PAGE>
EXHIBIT 11.1
McLEODUSA INCORPORATED
COMPUTATION OF LOSS PER COMMON AND COMMON EQUIVALENT SHARE
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Computation of weighted average number of common
shares outstanding and common equivalent shares:
Common shares, Class A, outstanding at the
beginning of the period 16,387 36,173 61,799
Common shares, Class B, outstanding at the
beginning of the period (A) 15,626 15,626 --
Weighted average number of shares issued during
the period 8,493 3,175 1,008
Weighted average number of shares reissued from the
treasury during the period
---------- ---------- ----------
Weighted average number of common shares and
common equivalent shares 40,506 54,974 62,807
========== ========== ==========
Net loss $ (22,346) $ (79,910) $ (124,912)
========== ========== ==========
Loss per common share $ (0.55) $ (1.45) $ (1.99)
========== ========== ==========
</TABLE>
(A) The Class B common stock, $.01 par value per share is convertible on a one-
for-one basis at any time at the option of the holder into Class A common
stock. As of June 30, 1997, all shares of Class B common stock had been
converted into shares of Class A common stock.
Page 1
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF McLEODUSA INCORPORATED
State of
Name Incorporation
- ---- -------------
McLeodUSA Telecommunications Services, Inc. Iowa
Consolidated Communication Inc. Delaware
McLeodUSA Media Group, Inc. Iowa
Dakota Telecommunications Group, Inc. Delaware
Info America Phone Books, Inc. Michigan
Talking Directories, Inc. Michigan
McLeodUSA Diversified, Inc. Iowa
McLeodUSA Publishing Company Iowa
McLeodUSA ATS, Inc. Iowa
McLeodUSA ACS, Inc. Iowa
MWR Towers, Inc. Iowa
Ruffalo, Cody & Associates, Inc. Iowa
McLeodUSA Network Services, Inc. Iowa
McLeodUSA Integrated Business Systems, Inc. Iowa
NewCom Companies, Inc. Iowa
QST Communications Inc. Iowa
Frontier Directory Company of Nebraska, Inc. Nebraska
Campus-Call, Inc. Iowa
<PAGE>
ESI Cabling Services Incorporated Minnesota
DTG Community Telephone, Inc. South Dakota
Dakota Telecom, Inc. South Dakota
DTG Internet, Inc. South Dakota
DTG Communications, Inc. South Dakota
DTG DataNet, Inc. South Dakota
Dakota Telecommunications Systems, Inc. South Dakota
Dakota Wireless Systems, Inc. South Dakota
Consolidated Communications Operator Services Inc. Illinois
Consolidated Communications Public Services Inc. Illinois
Consolidated Communications Directories Inc. Illinois
Greene County Partners, Inc. Illinois
Consolidated Market Response Inc. Illinois
Illinois Consolidated Telephone Company Illinois
Consolidated Communications Systems & Services Inc. Illinois
-2-
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statements File Nos.333-07809, 333-44025, 333-
45027, 333-52793 and 333-69621.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF MCLEODUSA INCORPORATED AND SUBSIDIARIES FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 455,067
<SECURITIES> 136,585
<RECEIVABLES> 131,937
<ALLOWANCES> 15,568
<INVENTORY> 12,824
<CURRENT-ASSETS> 793,192
<PP&E> 704,056
<DEPRECIATION> 74,310
<TOTAL-ASSETS> 1,925,197
<CURRENT-LIABILITIES> 179,956
<BONDS> 1,245,170
0
0
<COMMON> 637
<OTHER-SE> 462,169
<TOTAL-LIABILITY-AND-EQUITY> 1,925,197
<SALES> 604,146
<TOTAL-REVENUES> 604,146
<CGS> 323,208
<TOTAL-COSTS> 323,208
<OTHER-EXPENSES> 335,993
<LOSS-PROVISION> 19,620
<INTEREST-EXPENSE> 78,234
<INCOME-PRETAX> (124,912)
<INCOME-TAX> 0
<INCOME-CONTINUING> (124,912)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (124,912)
<EPS-PRIMARY> (1.99)
<EPS-DILUTED> (1.99)
</TABLE>
