<PAGE>
As filed with the Securities and Exchange Commission on May 12, 1999
Registration No. 333-76501
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
McLeodUSA Incorporated
(Exact name of registrant as specified in its charter)
Delaware 42-1407240
(State or other (I.R.S. Employer
jurisdiction of Identification Number)
incorporation or
organization)
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Clark E. McLeod
Chairman and Chief Executive Officer
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
Copies to:
Joseph G. Connolly, Jr., Esq. James J. Junewicz, Esq.
Hogan & Hartson L.L.P. Mayer, Brown & Platt
555 Thirteenth Street, N.W. 190 South Lasalle Street
Washington, D.C. 20004 Chicago, IL 60603
(202) 637-5600 (312) 782-0600
-----------------
Approximate date of commencement of proposed sale to the public: As soon as
possible after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
Proposed
Proposed maximum
maximum aggregate Amount of
Title of each class of Amount to be offering offering registration
securities to be registered registered(1) price per share(2) price(2) fee
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A common stock,
$.01 par value per share 10,350,000 $51.625 $534,318,750 $148,541(3)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,350,000 shares that may be purchased to cover over-allotments.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Previously paid.
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. These +
+securities may not be sold until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state or jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 12, 1999
P R O S P E C T U S
[McLEODUSA LOGO]
9,000,000 Shares
McLeodUSA Incorporated
Class A Common Stock
--------
Stockholders of McLeodUSA named in this prospectus are selling 9,000,000
shares of McLeodUSA Class A common stock. McLeodUSA will not receive any
proceeds from the sale of the shares by the selling stockholders. The
underwriters named in this prospectus may purchase up to 1,350,000 additional
shares of our Class A common stock from the selling stockholders under
circumstances described in this prospectus.
Our Class A common stock is quoted on The Nasdaq Stock Market under the
symbol "MCLD." The last reported sale price of our Class A common stock on The
Nasdaq Stock Market on May 10, 1999, was $58.187 per share.
--------
Investing in our Class A common stock involves various risks. See "Risk
Factors" beginning on page 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -------
<S> <C> <C>
Public Offering Price................................... $ $
Underwriting Discount................................... $ $
Proceeds to Selling Stockholders (before expenses)...... $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------
Salomon Smith Barney
Credit Suisse First Boston
Merrill Lynch & Co.
, 1999
<PAGE>
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If
anyone provides you with different or inconsistent information, you should not
rely on it. We are not, and the underwriters are not, making an offer to sell
these securities in any jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus is accurate
only as of the date on the front cover of this prospectus. Our business,
financial condition, results of operations and prospects may have changed since
that date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 7
Cautionary Note Regarding Forward-Looking Statements....................... 14
Use of Proceeds............................................................ 15
Dividend Policy............................................................ 15
Market Price of Class A Common Stock ...................................... 15
Capitalization............................................................. 16
Pro Forma Financial Data................................................... 17
Principal and Selling Stockholders......................................... 20
Description of Capital Stock............................................... 24
Underwriting............................................................... 29
Legal Matters.............................................................. 31
Experts.................................................................... 31
Where You Can Find More Information........................................ 31
</TABLE>
<PAGE>
SUMMARY
The following summary highlights selected information from this prospectus.
It does not contain all of the information that is important to you. You should
carefully read this entire prospectus and the other documents to which this
prospectus refers you. In addition, you should carefully consider the factors
set forth under the caption "Risk Factors." Unless otherwise indicated, dollar
amounts over $1 million have been rounded to one decimal place and dollar
amounts less than $1 million have been rounded to the nearest thousand.
Our Company
We provide communications services to business and residential customers in the
Midwestern and Rocky Mountain regions of the United States. We offer local,
long distance, Internet access, data, voice mail and paging services, from a
single company on a single bill. We believe we are the first company in most of
our markets to offer one-stop shopping for communications services tailored to
customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their communications needs. It also allows businesses to
receive customized services, such as competitive long distance pricing and
enhanced calling features, that might not otherwise be directly available on a
cost-effective basis. As of December 31, 1998, we served over 397,600 local
lines in 269 cities and towns.
In addition to our core business of providing competitive local, long distance
and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. special access, private line and data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
mobile radio, paging services and Web site development and hosting
In most of our markets, we compete with the existing local phone company by
leasing its lines and switches. In other markets, primarily in east central
Illinois and southeast South Dakota, we operate our own lines and switches. We
provide long distance services by using our own communications network
facilities and leasing capacity from long distance and local communications
providers. We are constructing fiber optic communications networks in Iowa,
Illinois, Wisconsin, Indiana, Missouri, Minnesota, South Dakota, North Dakota,
Colorado and Wyoming to carry additional communications traffic on our own
network.
Our Strategy
We want to be the leading and most admired provider of communications services
in our markets. To achieve this goal, we are:
. aggressively capturing customer share and generating revenue using leased
communications network capacity
. concurrently building our own communications network
. migrating customers to our communications network to provide enhanced
services and to reduce our operating costs
The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly penetrate
1
<PAGE>
our target markets and build customer loyalty by providing an integrated
product offering to business and residential customers.
Build customer share through branding. We believe we will create and strengthen
brand awareness in our target markets by branding our communications services
with the trade name McLeodUSA in combination with the distinctive black-and-
yellow motif of our telephone directories.
Provide outstanding customer service. Our customer service representatives are
available 24 hours a day, seven days a week, to answer customer calls. Our
customer-focused software and systems allow our representatives immediate
access to our customer and network data, enabling a rapid and effective
response to customer requests.
Emphasize small and medium sized businesses. We primarily target small and
medium sized businesses because we believe we can rapidly capture customer
share by providing face-to-face business sales and strong service support to
these customers.
Expand our fiber optic communications network. We are building a state-of-the-
art fiber optic communications network to deliver multiple services and reduce
operating costs.
Expand our intra-city fiber optic communications network. Within selected
cities, we plan to extend our network directly to our customers' locations.
This will allow us to provide expanded services and reduce the expense of
leasing communications facilities from the existing local telephone company.
Explore acquisitions and strategic alliances. We plan to pursue acquisitions,
joint ventures and strategic alliances that expand or complement our business.
Leverage proven management team. Our executive management team consists of
veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
----------------
As of December 31, 1998, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our planned capital
expenditures and operating expenses. Our estimated aggregate capital
requirements include the projected cost of:
. building our fiber optic communications network, including intra-city fiber
optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating recent acquisitions
. constructing, acquiring, developing or improving telecommunication assets
We expect to use the following to address our capital needs:
. approximately $487.8 million in net proceeds from the sale of $500 million
of senior notes on February 22, 1999
. approximately $591.7 million of cash and investments on hand at December 31,
1998
. projected operating cash flow
. additional issuances of debt or equity securities
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements is subject to risks and uncertainties and may differ
materially from our estimates. Accordingly, we may need additional capital to
continue to expand our markets, operations, facilities, network and services.
See "Risk Factors--Failure to Raise Necessary Capital Could Restrict Our
Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions."
----------------
Our principal executive offices are located at McLeodUSA Technology Park, 6400
C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone number
is (319) 364-0000.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Class A common stock offered by the selling 9,000,000 shares
stockholders............................................
Class A common stock outstanding before and after the
offering................................................ 74,440,894 shares
Use of proceeds.......................................... McLeodUSA will not
receive any proceeds
from the sale of shares
of Class A common stock
by the selling
stockholders.
The Nasdaq Stock Market symbol........................... "MCLD"
</TABLE>
The number of shares of Class A common stock outstanding does not take into
account 15,812,328 shares of Class A common stock subject to outstanding
options and 1,300,688 shares of Class B common stock subject to outstanding
options, both as of March 31, 1999.
Risk Factors
You should consider carefully all of the information contained and
incorporated by reference in this prospectus, including the information set
forth under the caption "Risk Factors," before making an investment in the
shares.
3
<PAGE>
Recent Developments
February 1999 Financing
On February 22, 1999, we completed a private offering of $500 million
aggregate principal amount of our 8 1/8% senior notes in which we received net
proceeds of approximately $487.8 million. Interest on the 8 1/8% senior notes
accrues at the rate of 8 1/8% per annum and is payable in cash semi-annually in
arrears on February 15 and August 15, starting August 15, 1999. The 8 1/8%
senior notes will mature on February 15, 2009.
Acquisition of Ovation Communications, Inc.
On March 31, 1999, we acquired Ovation Communications, Inc. for an aggregate
of 5,596,617 shares of our Class A common stock and $121.3 million in cash. We
paid approximately $105.6 million of the outstanding debt of Ovation at the
time of the transaction.
Ovation is a diversified communications services company serving business
customers primarily in larger metropolitan areas in Minnesota, Illinois and
Wisconsin (such as Minneapolis/St. Paul, Chicago and Milwaukee) and in small to
mid-sized cities in Michigan. Ovation provides the following services:
. local and network access
. local and long distance telephone
. voice mail, teleconferencing and calling card
. Internet access
As of December 31, 1998, Ovation served approximately 32,650 business local
lines and 12,900 residential local lines to approximately 2,900 business
customers and 11,750 residential customers in 135 cities and towns. Ovation had
1998 revenues of $21.5 million, including revenues received between October 1,
1998 and December 31, 1998 as a result of Ovation's acquisition of BRE
Communications, L.L.C. d/b/a Phone Michigan on October 1, 1998. As of December
31, 1998, Ovation had four switches, approximately 564 route miles of fiber
optic communications network and 384 employees.
Announcement of Data Strategy
On April 14, 1999, we announced plans to offer high-speed digital access and
data services as part of our integrated communications product package using
DSL (Digital Subscriber Line) and other technologies. These services are
expected to include:
. basic dial tone transmitted digitally
. high-speed data communications for Internet and intranet applications
. commercial network connections for local area, metropolitan area and wide
area networks
4
<PAGE>
Summary Consolidated Financial and Operating Data
The information in the following table is based on historical financial
information included in our prior SEC filings, including our annual report on
Form 10-K for the fiscal year ended December 31, 1998. The following summary
financial information should be read in connection with this historical
financial information, including the notes which accompany such financial
information. This historical financial information is considered a part of this
document. See "Where You Can Find More Information." Our audited historical
financial statements as of December 31, 1998 and 1997, and for each of the
three years ended December 31, 1998 were audited by Arthur Andersen LLP,
independent public accountants.
The information in the table on the following page reflects consolidated
financial information for the following companies we have acquired:
<TABLE>
<CAPTION>
Acquired Company Date Acquired
---------------- -------------
<S> <C>
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
Telecom*USA Publishing Group Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
Ovation Communications, Inc. March 31, 1999
</TABLE>
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired.
The balance sheet data in the table include the financial position of these
companies at the end of the periods presented, beginning with the period in
which they were acquired. These acquisitions affect the comparability of the
financial data for the periods presented.
The pro forma information presented in the operations statement data and
other financial data in the table reflects the operations of Ovation as if the
Ovation acquisition had occurred on January 1, 1998 and the pro forma
information in the balance sheet data in the table includes Ovation's financial
position as of December 31, 1998.
The pro forma information presented in the operations statement data and
other financial data in the table includes the effects of the issuance of $300
million principal amount of our 8 3/8% senior notes in March 1998, $300 million
principal amount of our 9 1/2% senior notes in October 1998 and $500 million
principal amount of our 8 1/8% senior notes in February 1999 as if they had
occurred at the beginning of 1998 and the pro forma information presented in
the balance sheet data in the table includes the effects of the issuance of the
8 1/8% senior notes as if it had occurred at the end of 1998.
(table begins on the next page)
5
<PAGE>
Summary Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- ---------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 8,014 $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 625,181
-------- -------- -------- ---------- ---------- -----------
Operating expenses:
Cost of service....... 6,212 19,667 52,624 151,190 323,208 329,527
Selling, general and
administrative....... 12,373 18,054 46,044 148,158 260,931 274,420
Depreciation and
amortization......... 772 1,835 8,485 33,275 89,107 109,720
Other................. -- -- 2,380 4,632 5,575 5,575
-------- -------- -------- ---------- ---------- -----------
Total operating
expenses............. 19,357 39,556 109,533 337,255 678,821 719,242
-------- -------- -------- ---------- ---------- -----------
Operating loss......... (11,343) (10,558) (28,210) (69,369) (74,675) (94,061)
Interest income
(expense), net........ (73) (771) 5,369 (11,967) (52,234) (85,898)
Other non-operating
income................ -- -- 495 1,426 1,997 1,997
Income taxes........... -- -- -- -- -- --
-------- -------- -------- ---------- ---------- -----------
Net loss............... $(11,416) $(11,329) $(22,346) $ (79,910) $ (124,912) $ (177,962)
======== ======== ======== ========== ========== ===========
Loss per common share.. $ (.53) $ (.40) $ (.55) $ (1.45) $ (1.99) $ (2.60)
======== ======== ======== ========== ========== ===========
Weighted average common
shares outstanding.... 21,464 28,004 40,506 54,974 62,807 68,404
======== ======== ======== ========== ========== ===========
<CAPTION>
December 31,
-----------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets......... $ 4,862 $ 8,507 $224,401 $ 517,869 $ 793,192 $ 1,179,442
Working capital
(deficit)............. $ 1,659 $ (1,208) $185,968 $ 378,617 $ 613,236 $ 967,276
Property and equipment,
net................... $ 4,716 $ 16,119 $ 92,123 $ 373,804 $ 629,746 $ 706,406
Total assets........... $ 10,687 $ 28,986 $452,994 $1,345,652 $1,925,197 $ 2,738,031
Long-term debt less
current maturities.... $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170 $ 1,836,876
Stockholders' equity... $ 3,291 $ 14,958 $403,429 $ 559,379 $ 462,806 $ 651,724
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
(unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $ 3,393 $ 14,697 $173,782 $ 601,137 $ 339,660 $ 739,497
EBITDA(1).............. $(10,571) $ (8,723) $(17,345) $ (31,462) $ 20,007 $ 21,234
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996 1997 1998
------ ------ ------- -------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines....................................... 35,800 65,400 282,600 397,600
Cities and towns served........................... 77 120 227 269
Route miles....................................... 218 2,352 4,908 7,120
Employees......................................... 419 2,077 4,941 5,300
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
6
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before investing in our Class A common stock.
You should also consider the additional information set forth in our SEC
reports on Forms 10-K, 10-Q and 8-K and in the other documents considered a
part of this prospectus. See "Where You Can Find More Information."
Fluctuations in the Market Price of Our Class A Common Stock May Make it More
Difficult for Us to Raise Capital.
The market price of our Class A common stock is extremely volatile and has
fluctuated over a wide range. These fluctuations may impair our ability to
raise capital by offering equity securities. The market price may continue to
fluctuate significantly in response to various factors, including:
. market conditions in the industry
. announcements or actions by competitors
. low trading volume
. sales of large amounts of our Class A common stock in the public market
or the perception that such sales could occur
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. regulatory and judicial actions
. general economic conditions
See "Market Price of Class A Common Stock."
We May Not Be Able to Successfully Integrate Acquired Companies into Our
Operations, Which Could Slow Our Growth.
The integration of acquired companies into our operations involves a number
of risks, including:
. difficulty integrating new operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel or customers
. inability to successfully incorporate new assets and rights into our
service offerings
. inability to maintain uniform standards, controls, procedures and
policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with acquisition transactions could slow our growth or lower the
quality of our services, which could reduce customer demand.
Continued Rapid Growth of Our Network, Services and Subscribers Could Be Slowed
if We Cannot Manage this Growth.
We have rapidly expanded and developed our network, services and subscriber
base. For example, we recently announced plans to offer high-speed digital
access and data services. Our expansion and development have placed and will
continue to place significant demands on our management, operational and
financial systems and procedures and controls. We may not be able to manage our
anticipated growth effectively, which would harm our business, results of
operations and financial condition.
Further expansion and development will depend on a number of factors,
including:
. cooperation of the existing local telephone companies
. regulatory, judicial and governmental developments
. changes in the competitive climate in which we operate
. development of customer billing, order processing and network management
systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
7
<PAGE>
We will need to continue to improve our operational and financial systems and
our procedures and controls as we grow. We must also develop, train and manage
our employees.
We Expect to Incur Significant Losses Over the Next Several Years.
If we do not become profitable in the future, the value of our Class A common
stock may fall and we could have difficulty obtaining funds to continue our
operations. We have incurred net losses every year since we began operations.
Since January 1, 1994, our net losses have been as follows:
Net Losses
<TABLE>
<CAPTION>
Period Amount
- ------ --------------
<S> <C>
1994............................................................. $ 11.4 million
1995............................................................. $ 11.3 million
1996............................................................. $ 22.3 million
1997............................................................. $ 79.9 million
1998............................................................. $124.9 million
</TABLE>
We expect to incur net losses during the next several years while we develop
our businesses, expand our fiber optic communications network and develop
wireless services.
Failure to Raise Necessary Capital Could Restrict Our Ability to Develop Our
Network and Services and Engage in Strategic Acquisitions.
We need significant capital to continue to expand our operations, facilities,
network and services. We cannot assure you that our capital resources will
permit us to fund our planned network deployment and operations or achieve
operating profitability. Our failure to generate or raise sufficient funds may
require us to delay or abandon some of our expansion plans or expenditures,
which could harm our business and competitive position.
As of December 31, 1998, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our capital expenditures and
operating expenses. Our estimated aggregate capital requirements include the
projected costs of:
. building our fiber optic communications network, including intra-city
fiber optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating recent acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements may differ substantially from our estimate due to factors
such as:
. strategic acquisition costs and effects of acquisitions on our business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological or competitive developments
. new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities.
We may meet any additional capital needs by issuing additional debt or equity
securities or borrowing funds from one or more lenders. We cannot assure you
that we will have timely access to additional financing sources on acceptable
terms. If we do not have such access, we may not be able to expand our markets,
operations, facilities, network and services through acquisitions as we intend.
8
<PAGE>
Our High Level of Debt Could Limit Our Flexibility in Responding to Business
Developments and Put Us at a Competitive Disadvantage.
We have substantial debt, which could adversely affect us in a number of
ways, including:
. limiting our ability to obtain necessary financing in the future
. limiting our flexibility to plan for, or react to, changes in our
business
. requiring us to use a substantial portion of our cash flow from
operations to pay our debt obligations rather than for other purposes,
such as working capital or capital expenditures
. making us more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage
. making us more vulnerable to a downturn in our business
As of December 31, 1998, we had $1.2 billion of long-term debt and $462.8
million of stockholders' equity. We incurred an additional $500 million of
long-term debt on February 22, 1999. As a result, we expect our fixed charges
to exceed our earnings for the foreseeable future.
Covenants in Debt Instruments Restrict Our Capacity to Borrow and Invest, Which
Could Impair Our Ability to Expand or Finance Our Operations.
The indentures governing the terms of our long-term debt impose operating and
financial restrictions that limit our discretion on some business matters,
which could make it more difficult for us to expand, finance our operations or
engage in other business activities that may be in our interest. These
restrictions limit or prohibit our ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge or mortgage assets
. enter into transactions with related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt could
become immediately due and payable.
We Are Prohibited from Paying Dividends.
We have never paid any cash dividends. We do not anticipate paying any cash
dividends for the foreseeable future. The indentures governing our debt
prohibit us from paying cash dividends. You should therefore not expect to
receive cash dividends on shares of our Class A common stock you purchase in
this offering.
Our Dependence on Regional Bell Operating Companies to Provide Most of Our
Communications Services Could Make it Harder for Us to Offer Our Services at a
Profit.
We depend on the regional Bell operating companies to provide most of our
core local and some of our long distance services. Today, without using the
communications facilities of these companies, we could not provide bundled
local and long distance services to most of our customers. Because of this
dependence, our communications services are highly susceptible to changes in
the conditions for access to these facilities and we may therefore have
difficulty offering our services at profitable and competitive rates.
U S WEST Communications, Inc., Ameritech Corporation and Southwestern Bell
Telephone Company are our primary suppliers of local lines to our customers and
communications services that allow us to transfer and connect calls. Their
communications facilities allow us to provide (1) local service, (2) long
distance service and (3) private lines dedicated to our customers'
9
<PAGE>
use. If these or other companies deny or limit our access to their
communications network elements or wholesale services, we may not be able to
offer profitable communications services.
Our plans to provide local service using our own communications network
equipment also depend on the regional Bell operating companies. In order to
interconnect our network equipment and other communications facilities to
network elements controlled by the regional Bell operating companies, we must
first negotiate and enter into interconnection agreements with them.
Interconnection obligations imposed on the regional Bell operating companies by
the Telecommunications Act of 1996 have been and continue to be subject to a
variety of legal proceedings, which could affect our ability to obtain
interconnection agreements on acceptable terms. We cannot assure you that we
will succeed in obtaining
interconnection agreements on terms that would permit us to offer local
services using our own communications network facilities at profitable and
competitive rates.
Actions by U S WEST May Make it More Difficult for Us to Offer Our
Communications Services.
U S WEST has introduced several measures that may make it more difficult for
us to offer our communications services. For example, in February 1996, U S
WEST filed tariffs and other notices with the public utility commissions in its
fourteen-state service region to limit future Centrex access to its switches.
Centrex access allows us to aggregate lines, have control over several
characteristics of those lines and provide a set of standard features on those
lines. We use U S WEST's Centrex services to provide most of our local
communications services in U S WEST's service territories.
In January 1997, U S WEST also proposed interconnection surcharges in several
of the states in its service region, which would increase our costs of
providing communications services in those states.
We have challenged or are challenging these actions by U S WEST before the
FCC or applicable state public utility commissions. We cannot assure you we
will succeed in our challenges to these or other actions by U S WEST that would
prevent or deter us from using U S WEST's Centrex service or communications
network elements. If U S WEST successfully withdraws or limits our access to
Centrex services in any jurisdiction, we may not be able to offer
communications services in that jurisdiction, which could harm our business.
We anticipate that U S WEST will also pursue legislation in states within our
target market area to reduce state regulatory oversight over its rates and
operations. If adopted, these initiatives could make it more difficult for us
to challenge U S WEST's actions in the future.
Competition in the Communications Services Industry Could Cause Us to Lose
Customers and Revenue and Could Make it More Difficult for Us to Enter New
Markets.
We face intense competition in all of our markets. This competition could
result in loss of customers and lower revenue for us. It could also make it
more difficult for us to enter new markets. Existing local telephone companies,
including U S WEST, Ameritech, Southwestern Bell and GTE, currently dominate
their local telecommunications markets. Three major competitors, AT&T, MCI
WorldCom and Sprint, dominate the long distance market. Hundreds of other
companies also compete in the long distance marketplace. AT&T, MCI WorldCom and
Sprint also offer local telecommunications services in many locations.
Our local and long distance services also compete with the services of other
communications services companies competing with the existing local telephone
companies in some markets.
Other competitors may include cable television companies, providers of
communications network facilities dedicated to particular customers, providers
of digital access and data services, microwave and satellite
10
<PAGE>
carriers, wireless telecommunications providers, private networks owned by
large end-users, and telecommunications management companies.
These and other firms may enter the markets where we focus our sales efforts.
Many of our existing and potential competitors have financial and other
resources far greater than our own. In addition, the trend toward mergers and
strategic alliances in the communications industry may strengthen some of our
competitors and could put us at a significant competitive disadvantage.
We May Not Succeed in Developing or Making a Profit from Wireless Services.
Our proposal to offer wireless services involves a high degree of risk and
will impose significant demands on our management and financial resources.
Developing wireless services may require us to, among other things, spend
substantial time and money to acquire, build and test a wireless infrastructure
and enter into roaming arrangements with wireless operators in other markets.
We may not succeed in developing wireless services. Even if we spend
substantial amounts to develop wireless services, we may not make a profit from
wireless operations.
Our ability to successfully offer wireless services will also depend on a
number of factors beyond our control, including:
. changes in communications service rates charged by other companies
. changes in the supply and demand for wireless services due to competition
with other wireline and wireless operators in the same geographic area
. changes in the federal, state or local regulatory requirements affecting
the operation of wireless systems
. changes in wireless technologies that could render obsolete the
technology and equipment we choose for our wireless services
Competition in the Wireless Telecommunications Industry Could Make it Harder
for Us to Successfully Offer Wireless Services.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it harder for
us to gain a share of the wireless communications market. We expect up to eight
wireless competitors in each of our target wireless markets. We could face
additional competition from mobile satellite services.
Many of our potential wireless competitors have financial and other resources
far greater than our own and have more experience testing new or improved
products and services. In addition, several wireless competitors operate or
plan to operate, wireless telecommunications systems that encompass most of the
United States, which could give them a significant competitive advantage,
particularly if we only offer regional wireless services.
The Success of Our Communications Services Will Depend on Our Ability to Keep
Pace with Rapid Technological Changes in Our Industry.
Communications technology is changing rapidly. These changes influence the
demand for our services. We need to be able to anticipate these changes and to
develop new and enhanced products and services quickly enough for the changing
market. This will determine whether we can continue to increase our revenues
and number of subscribers and be competitive.
The Loss of Key Personnel Could Weaken Our Technical and Operational Expertise,
Delay Our Introduction of New Services or Entry into New Markets and Lower the
Quality of Our Service.
We may not be able to attract, develop, motivate and retain experienced and
innovative
11
<PAGE>
personnel. There is intense competition for qualified personnel in our
business. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could cause us to make less successful
strategic decisions, which could hinder the introduction of new services or the
entry into new markets. We could also be less prepared for technological or
marketing problems, which could reduce our ability to serve our customers and
lower the quality of our services. As a result, our financial condition could
worsen.
Our future success depends on the continued employment of our senior
management team, particularly Clark E. McLeod, our Chairman and Chief Executive
Officer, and Stephen C. Gray, our President and Chief Operating Officer. We do
not have term employment agreements with these employees.
Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay
Installation of Our Networks and Interfere with Our Operations.
To obtain access to rights-of-way needed to install our fiber optic cable, we
must reach agreements with state highway authorities, local governments,
transit authorities, local telephone companies, other utilities, railroads,
long distance carriers and other parties. The failure to obtain or maintain any
rights-of-way could delay our planned network expansion, interfere with our
operations and harm our business. For example, if we lose access to a right-of-
way, we may need to spend significant sums to remove and relocate our
facilities.
Government Regulation May Increase Our Cost of Providing Services, Slow Our
Expansion into New Markets and Subject Our Services to Additional Competitive
Pressures.
Our facilities and services are subject to federal, state and local
regulation. The time and expense of complying with these regulations could slow
down our expansion into new markets, increase our costs of providing services
and subject them to additional competitive pressures. One of the primary
purposes of the Telecommunications Act of 1996 was to open the local telephone
services market to competition. While this has presented us with opportunities
to enter local telephone markets, it also provides important benefits to the
existing local telephone companies, such as the ability, under specified
conditions, to provide out-of-region long distance service to customers in
their respective regions. In addition, we need to obtain and maintain licenses,
permits and other regulatory approvals in connection with some of our services.
Any of the following could harm our business:
. failure to maintain proper federal and state tariffs
. failure to maintain proper state certifications
. failure to comply with federal, state or local laws and regulations
. failure to obtain and maintain required licenses and permits
. burdensome license or permit requirements to operate in public rights-of-
way
. burdensome or adverse regulatory requirements
Our Management and Principal Stockholders Can Control McLeodUSA and May Have
Different Interests Than Those of Other Stockholders.
As of March 31, 1999, Interstate Energy Corporation, MHC Investment Company,
M/C Investors L.L.C., Media/Communications Partners III Limited Partnership,
Richard A. Lumpkin and various trusts for the benefit of his family, Clark and
Mary McLeod, and our directors and executive officers beneficially owned
approximately 54% of our outstanding Class A common stock. These stockholders
can collectively control management policy and all corporate actions requiring
a stockholder vote, including election of the board of directors. Conflicts of
interest may arise between the
12
<PAGE>
interests of these stockholders and our other stockholders. For example, the
fact that these stockholders hold so much Class A common stock could make it
more difficult for a third party to acquire us. You should expect these
stockholders to resolve any conflicts in their favor.
Computer Systems May Malfunction and Interrupt Our Services if We and Our
Suppliers Do Not Attain Year 2000 Readiness.
We and our major suppliers of communications services and network elements
rely greatly on computer systems and other technological devices. These may not
be capable of recognizing January 1, 2000 or subsequent dates. This problem
could cause any or all of our systems or services to malfunction or fail.
We are reviewing our computer systems and programs and other technological
devices to determine which are not capable of recognizing the Year 2000 and to
verify system readiness for the millennium date. The review covers all of our
operations and is centrally managed. This review may not be sufficient,
however, to prevent interruptions to our systems and services.
Some of our critical operations and services depend on other companies. For
example, we depend on the existing local telephone companies, primarily the
regional Bell operating companies, to provide most of our local and some of our
long distance services. To the extent U S WEST, Ameritech or Southwestern Bell
fail to address Year 2000 issues which might interfere with their ability to
fulfill their obligations to us, it could interfere with our operations. If we,
our major vendors, our material service providers or our customers fail to
address Year 2000 issues in a timely manner, our business, results of
operations and financial condition could be significantly harmed.
Future Sales of Our Class A Common Stock in the Public Market Could Adversely
Affect Our Stock Price and Our Ability to Raise Funds in New Stock Offerings.
Future sales of substantial amounts of our Class A common stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices of our Class A common stock and could impair our
ability to raise capital through future offerings of equity securities. Several
of our principal stockholders hold a significant portion of our Class A common
stock, and a decision by one or more of these stockholders to sell their
shares, or the perception that such sales could occur, could adversely affect
the market price of our Class A common stock.
There were 74.4 million shares of our Class A common stock outstanding as of
March 31, 1999. There were also options to purchase 15.8 million shares of
Class A common stock outstanding as of March 31, 1999. Including the shares
offered by this prospectus, Interstate Energy, MHC Investment, M/C Investors,
Media/Communications Partners III, Richard A. Lumpkin and various trusts for
the benefit of his family, Clark and Mary McLeod, and our directors and
executive officers owned approximately 40.2 million shares as of March 31,
1999, all of which were eligible for sale in the public market either in
accordance with Rule 144 under the Securities Act of 1933 or otherwise. If all
the shares offered by this prospectus are sold in the offering the ownership by
these stockholders will be reduced to 31.2 million shares. In addition, we are
required to file in May 1999 a registration statement to register for resale by
two other stockholders up to approximately 940,000 shares of our Class A common
stock.
13
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
We intend the forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements in these sections. All statements
regarding our expected financial position and operating results, our business
strategy, our financing plans, our future capital requirements, forecasted
demographic and economic trends relating to our industry, our ability to
complete acquisitions, to realize anticipated cost savings and other benefits
from acquisitions and to recover acquisition-related costs, and similar matters
are forward-looking statements. These statements are subject to known and
unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these statements by our use of
forward-looking words such as "may," "will," "should," "anticipate,"
"estimate," "expect," "plan," "believe," "predict," "potential" or "intend."
You should be aware that these statements only reflect our predictions. Actual
events or results may differ substantially. Important factors that could cause
our actual results to be materially different from our expectations include
those discussed in this prospectus under the caption "Risk Factors." We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
14
<PAGE>
USE OF PROCEEDS
The selling stockholders will sell all of the shares offered by this
prospectus. We will not receive any of the proceeds from the sale of these
shares. We estimate that we will pay approximately $500,000 of the expenses
relating to the offering.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying dividends in the foreseeable future. Restrictions
contained in the indentures that govern the terms of our debt prohibit us from
paying cash dividends. Future dividends, if any, will be at the discretion of
our board of directors and will depend upon, among other things, our
operations, capital requirements and surplus, general financial condition,
contractual restrictions in financing agreements and such other factors as our
board of directors may deem relevant.
MARKET PRICE OF CLASS A COMMON STOCK
We completed the initial public offering of our Class A common stock on June
10, 1996 at a price per share of $20.00. Since that date, our Class A common
stock has been quoted on The Nasdaq Stock Market under the symbol "MCLD." The
following table sets forth for the periods indicated the high and low sales
price per share of our Class A common stock as reported by The Nasdaq Stock
Market.
<TABLE>
<CAPTION>
1996 High Low
---- ------- -------
<S> <C> <C>
Second Quarter (from June 10, 1996)...................... $26.750 $22.250
Third Quarter............................................ 39.500 23.500
Fourth Quarter........................................... 34.500 25.000
<CAPTION>
1997
----
<S> <C> <C>
First Quarter............................................ 28.750 17.375
Second Quarter .......................................... 34.250 16.375
Third Quarter............................................ 40.000 28.625
Fourth Quarter........................................... 41.750 32.000
<CAPTION>
1998
----
<S> <C> <C>
First Quarter............................................ 46.375 30.500
Second Quarter .......................................... 48.312 38.000
Third Quarter............................................ 40.125 21.375
Fourth Quarter........................................... 38.500 15.250
<CAPTION>
1999
----
<S> <C> <C>
First Quarter............................................ 44.250 30.375
Second Quarter (through May 10, 1999).................... 61.875 42.375
</TABLE>
On May 10, 1999, the last reported sale price of our Class A common stock on
The Nasdaq Stock Market was $58.187 per share.
15
<PAGE>
CAPITALIZATION
The following table shows our actual capitalization as of December 31, 1998,
and our capitalization on that date as adjusted to reflect the application of
the net proceeds of approximately $487.8 million from our issuance of our 8
1/8% senior notes in February 1999 and the Ovation acquisition in March 1999.
You should read this table together with our consolidated financial statements
and related notes and the other financial data appearing elsewhere, or
incorporated by reference, in this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------
Actual As Adjusted
---------- -----------
(audited) (unaudited)
(in thousands)
<S> <C> <C>
Cash and cash equivalents.............................. $ 455,067 $ 822,917
Investments in available-for-sale securities........... 136,585 136,585
---------- ----------
Total cash, cash equivalents and investments in
available-for-sale securities..................... 591,652 959,502
========== ==========
Short-term debt........................................ 8,236 30,390
Long-term debt......................................... 1,245,170 1,836,876
---------- ----------
Stockholders' equity:
Class A common stock, $.01 par value, 250,000,000
shares authorized; 63,679,175 shares issued and
outstanding, actual; 69,275,792 shares issued and
outstanding, as adjusted............................ 637 693
Class B common stock, convertible, $.01 par value,
22,000,000 shares authorized; none issued or
outstanding......................................... -- --
Additional paid-in capital........................... 716,475 905,337
Accumulated deficit.................................. (252,647) (252,647)
Accumulated other comprehensive income............... (1,659) (1,659)
---------- ----------
Total stockholders' equity......................... 462,806 651,724
---------- ----------
Total capitalization............................... $1,716,212 $2,518,990
========== ==========
</TABLE>
16
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to:
. the issuance of $300 million aggregate principal amount of our 8 3/8%
senior notes in March 1998
. the issuance of $300 million aggregate principal amount of our 9 1/2%
senior notes in October 1998
. the issuance of $500 million aggregate principal amount of our 8 1/8%
senior notes in February 1999
. the Ovation acquisition in March 1999
The Unaudited Pro Forma Condensed Consolidated Balance Sheet assumes that the
Ovation acquisition and the issuance of the 8 1/8% senior notes were
consummated on December 31, 1998. The Unaudited Pro Forma Condensed
Consolidated Statements of Operations reflects the Ovation acquisition using
the purchase method of accounting, and assumes that the Ovation acquisition and
the issuance of the 8 3/8% senior notes, the 9 1/2% senior notes and the 8 1/8%
senior notes were consummated at the beginning of 1998. The unaudited pro forma
financial information is derived from and should be read in conjunction with
our consolidated financial statements, Ovation's consolidated financial
statements and the related notes thereto incorporated by reference in this
prospectus. The pro forma adjustments are based upon available information and
assumptions that management believes to be reasonable. Depreciation and
amortization were adjusted to include amortization of intangibles acquired in
the Ovation acquisition. The acquired intangibles will be amortized over
periods ranging from 3 to 30 years. For purposes of this pro forma
presentation, the issuance of the 8 3/8% senior notes, the 9 1/2% senior notes
and the 8 1/8% senior notes are collectively referred to as the "Notes
Offerings."
The adjustments for the Ovation acquisition reflect the preliminary
allocation of the net purchase price of Ovation to the assets of Ovation,
including intangible assets, and record the payment of $121.3 million in cash
and the issuance of 5,596,617 shares of our Class A common stock valued at
$33.76 per share. The value of $33.76 per share represents the average closing
price of our Class A common stock on The Nasdaq Stock Market for the eleven
trading days beginning five days prior to the date the agreement was announced,
January 7, 1999, and ending five days after such announcement. The adjustments
include the elimination of the Ovation equity components, including common
stock, treasury stock, other capital and retained deficit.
We have provided this unaudited pro forma financial data for informational
purposes only. This data does not necessarily indicate the operating results
that would have occurred had the Ovation acquisition been consummated at the
beginning of 1998, nor does it necessarily indicate future operating results or
financial position.
17
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheets
(In thousands)
As of December 31, 1998
<TABLE>
<CAPTION>
Pro Adjustments Pro Forma
Adjustments Forma for the 8 for the 8
for the for the 1/8% Senior 1/8% Senior
Ovation Ovation Notes Notes
McLeodUSA Ovation Acquisition Acquisition Offering Offering
---------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents........... $ 455,067 $ 1,310 $(121,260) $ 335,117 $487,800 $ 822,917
Investment in
available-for-sale
securities............ 136,585 -- -- 136,585 -- 136,585
Other current assets... 201,540 18,400 -- 219,940 -- 219,940
---------- -------- --------- ---------- -------- ----------
Total current assets.. 793,192 19,710 (121,260) 691,642 487,800 1,179,442
Property and equipment,
net................... 629,746 76,660 -- 706,406 -- 706,406
Intangible assets...... 402,018 58,881 277,939 738,838 -- 738,838
Other assets........... 100,241 904 -- 101,145 12,200 113,345
---------- -------- --------- ---------- -------- ----------
Total assets.......... $1,925,197 $156,155 $ 156,679 $2,238,031 $500,000 $2,738,031
========== ======== ========= ========== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities.... $ 179,956 $ 22,210 $ 10,000 $ 212,166 $ -- $ 212,166
Long-term debt, less
current maturities.... 1,245,170 91,706 -- 1,336,876 500,000 1,836,876
Other long-term
liabilities........... 37,265 -- -- 37,265 -- 37,265
---------- -------- --------- ---------- -------- ----------
Total liabilities..... 1,462,391 113,916 10,000 1,586,307 500,000 2,086,307
---------- -------- --------- ---------- -------- ----------
Stockholders' equity:
Preferred stock........ -- 2 (2) -- -- --
Common stock........... 637 240 (184) 693 -- 693
Additional paid-in
capital............... 716,475 49,487 139,375 905,337 -- 905,337
Deferred compensation.. -- (425) 425 -- -- --
Retained earnings
(deficit)............. (252,647) (7,065) 7,065 (252,647) -- (252,647)
Accumulated other
comprehensive income.. (1,659) -- -- (1,659) -- (1,659)
---------- -------- --------- ---------- -------- ----------
Total stockholders'
equity............... 462,806 42,239 146,679 651,724 -- 651,724
---------- -------- --------- ---------- -------- ----------
Total liabilities and
stockholders'
equity............... $1,925,197 $156,155 $ 156,679 $2,238,031 $500,000 $2,738,031
========== ======== ========= ========== ======== ==========
</TABLE>
18
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed
Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------
Adjustments Pro Forma Adjustments
for the for the for the
Notes Notes Ovation
McLeodUSA Offerings Offerings Ovation Acquisition Total
--------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 604,146 $ -- $ 604,146 $21,035 $ -- $ 625,181
--------- -------- --------- ------- -------- ---------
Operating expenses:
Cost of service........ 323,208 -- 323,208 6,319 -- 329,527
Selling, general and
administrative........ 260,931 -- 260,931 13,489 -- 274,420
Depreciation and
amortization.......... 89,107 -- 89,107 5,383 15,230 109,720
Other.................. 5,575 -- 5,575 -- -- 5,575
--------- -------- --------- ------- -------- ---------
Total operating
expenses............. 678,821 -- 678,821 25,191 15,230 719,242
--------- -------- --------- ------- -------- ---------
Operating loss......... (74,675) -- (74,675) ( 4,156) (15,230) (94,061)
Interest expense, net.. (52,234) (32,056) (84,290) ( 1,608) -- (85,898)
Other non-operating
income................ 1,997 -- 1,997 -- -- 1,997
Income taxes........... -- -- -- -- -- --
--------- -------- --------- ------- -------- ---------
Net loss............... $(124,912) $(32,056) $(156,968) $(5,764) $(15,230) $(177,962)
========= ======== ========= ======= ======== =========
Loss per common share.. $ (1.99) $ (2.50) $ (2.60)
========= ========= =========
Weighted average common
shares outstanding.... 62,807 62,807 68,404
========= ========= =========
Other Financial Data:
EBITDA(1).............. $ 20,007 $ -- $ 20,007 $ 1,227 $ -- $ 21,234
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
19
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following beneficial ownership table shows beneficial ownership of our
Class A common stock as of March 31, 1999 by:
. our directors and executive officers
. each person believed by management to be the beneficial owner of more
than five percent of our outstanding Class A common stock
. each selling stockholder
Under the Securities Exchange Act, a person will be deemed to be a
"beneficial owner" of shares of our Class A common stock if he or she has or
shares the power to vote or direct the voting of such shares or the power to
dispose or direct the disposition of such shares. A person will also be deemed
to be a beneficial owner of shares of our Class A common stock over which that
person has the right to acquire beneficial ownership within 60 days. More than
one person may be deemed to be a beneficial owner of the same shares of our
Class A common stock. The percentage ownership of each stockholder is
calculated based on the total number of outstanding shares of our Class A
common stock as of March 31, 1999 plus those shares of Class A common stock
that such stockholder has the right to acquire within 60 days. Consequently,
the denominator for calculating such percentage may be different for each
stockholder.
The table on the following page is based on information supplied by our
directors, executive officers and stockholders or contained in the most recent
reports on Schedule 13D or Schedule 13G filed by them. Unless otherwise
indicated in the footnotes to the table, each of the stockholders listed has
sole voting and dispositive power with respect to the shares of our Class A
common stock shown as beneficially owned.
The number of option shares includes shares of our Class A common stock that
the individuals named on the following page have the right to acquire within 60
days from March 31, 1999 upon exercise of options.
20
<PAGE>
<TABLE>
<CAPTION>
Beneficial
Beneficial Ownership Ownership
Prior to Offering After Offering
---------------------------- -----------------
Number of Number of
Shares Shares
Number of Including Number of Including
Option Option Shares Option
Name of Beneficial Owner Shares Shares Percent Offered(11) Shares Percent
- ------------------------ --------- ---------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interstate Energy
Corporation(1)(2)................. 1,300,688 10,323,288 13.6% 939,692 9,383,596 12.6%
Clark E. McLeod(1)(3).............. 235,623 9,570,285 12.8 -- 9,570,285 12.8
MHC Investment Company(1)(4)....... 64,624 6,769,240 9.1 6,741,116 28,124 *
Mary E. McLeod(1)(3)............... -- 4,746,471 6.4 -- 4,746,471 6.4
Richard A. Lumpkin(1)(5)........... 11,250 5,067,778 6.8 -- 4,128,086 5.5
Fidelity Management & Research
Company(6)........................ -- 5,106,800 6.9 -- 5,106,800 6.9
Putnam Investments, Inc.(7)........ -- 7,646,357 10.3 -- 7,646,357 10.3
Media/Communications Partners III
Limited Partnership(1)(8)......... -- 3,728,608 5.0 -- 3,728,608 5.0
Stephen C. Gray(9)................. 529,072 737,032 1.0 123,000 614,032 *
Blake O. Fisher, Jr................ 189,562 222,133 * 30,000 192,133 *
J. Lyle Patrick.................... 18,250 18,841 * -- 18,841 *
Arthur L. Christoffersen........... 61,467 61,467 * -- 61,467 *
Timothy T. Devine.................. -- 581,950 * -- 581,950 *
Kirk E. Kaalberg................... 117,438 232,831 * 40,000 192,831 *
Stephen K. Brandenburg............. 150,171 151,913 * 5,000 146,913 *
David M. Boatner................... 185,750 187,653 * 20,000 167,653 *
Albert P. Ruffalo.................. 22,223 64,916 * 10,000 54,916 *
Dennis L. Erickson................. 13,250 13,835 * 7,500 6,335 *
Steven J. Shirar................... 11,375 11,764 * -- 11,764 *
Michael J. Brown................... 99,171 165,231 * 50,000 115,231 *
Randall Rings...................... 5,125 5,408 * -- 5,408 *
Thomas M. Collins.................. 77,344 269,618 * 50,000 219,618 *
Robert J. Currey................... 37,500 37,500 * 10,000 27,500 *
Lee Liu............................ 27,344 39,544 * 20,000 19,544 *
Paul D. Rhines..................... 77,344 114,920 * 7,000 107,920 *
Rhines Family Limited Partnership.. -- 80,000 * 7,000 73,000 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Joseph John Keon III (10)... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Katherine S. Keon (10)...... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Lisa Anne Keon (10)......... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Margaret Lynley Keon (10)... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Pamela Keon Vitale (10)..... -- 75,037 * 58,631 16,406 *
M.L. Keon 1990 Personal Inc. Trust
f/b/o Susan Tamara Keon DeWyngaert
(10).............................. -- 75,037 * 58,631 16,406 *
R.A. Lumpkin 1990 Personal Inc.
Trust f/b/o Benjamin Iverson
Lumpkin (10) ..................... -- 724,601 * 137,037 587,564 *
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Beneficial
Beneficial Ownership Ownership
Prior to Offering After Offering
--------------------------- -----------------
Number of Number of
Shares Shares
Number of Including Number of Including
Option Option Shares Option
Name of Beneficial Owner Shares Shares Percent Offered(11) Shares Percent
- ------------------------ --------- --------- ------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
R.A. Lumpkin 1990
Personal Inc. Trust
f/b/o Elizabeth
Arabella Lumpkin (10) ...... -- 724,601 * 137,037 587,564 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o Anne Romayne
Sparks (10) ................ -- 150,224 * 78,308 71,916 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o Barbara Lee
Sparks (10) ................ -- 150,224 * 78,308 71,916 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o Christina L.
Sparks (10) ................ -- 150,224 * 78,308 71,916 *
M.L. Sparks 1990
Personal Inc. Trust
f/b/o John W. Sparks (10) .. -- 150,224 * 78,308 71,916 *
M.L. Keon 1978 Trust (12) ... -- 506,461 * 600 505,861 *
---------
9,000,000(11)
=========
</TABLE>
- --------
* Less than one percent.
(1) Richard Anthony Lumpkin, Gail G. Lumpkin, Margaret L. Keon, Mary Lee
Sparks and all of their children, along with Steven L. Grissom, David R.
Hodgman and BankOne, Texas, N.A., individually, or as trustees or settlors
for trusts for the benefit of members of the family of Richard Adamson
Lumpkin, MHC Investment Company, Interstate Energy Corporation,
Media/Communications Partners III Limited Partnership, M/C Investors
L.L.C., Clark E. McLeod and Mary E. McLeod are parties to one or more
stockholders' agreements and, accordingly, may constitute a group within
the meaning of Section 13(d)(3) of the Securities Exchange Act. As of
March 31, 1999, these stockholders beneficially owned an aggregate of
37,798,143 shares of our Class A common stock, including 1,300,688 shares
that Interstate Energy Corporation has the right to acquire upon exercise
of options, and 235,623 and 11,250 shares that Messrs. McLeod and Lumpkin,
respectively, have the right to purchase upon exercise of options, within
60 days from March 31, 1999, representing an ownership interest of 50.8%.
See "Description of Capital Stock--Stockholders' Agreements."
(2) Includes 1,300,688 shares of Class A common stock that Alliant Energy
Investments, Inc., a wholly owned subsidiary of Interstate Energy
Corporation, has the right to acquire upon exercise of options; 8,037,908
shares of Class A common stock of which Alliant Energy Investments is the
holder of record; 639,692 shares of Class A common stock held of record
by Heartland Properties, Inc., a wholly owned subsidiary of Interstate
Energy; and 300,000 shares of Class A common stock held of record by the
Alliant Energy Charitable Foundation. Interstate Power Company, a wholly
owned subsidiary of Interstate Energy Corporation, is the record holder
of an additional 45,000 shares of Class A common stock. The address of
Interstate Energy Corporation is 222 West Washington Avenue, P.O.
Box 192, Madison, WI 53701
(3) Includes 4,746,471 shares of Class A common stock held of record by Mary
E. McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared voting
power and 200,000 shares of Class A common stock held by the McLeod
Charitable Foundation for which Mr. McLeod is a director and over which
Mr. McLeod has shared voting and dispositive power. Also includes 125,000
shares of Class A common stock held by the Clark E. McLeod Unitary Trust
and 125,000 shares of Class A common stock held by the Mary E. McLeod
Unitary Trust for which Mr. McLeod is a trustee and over which Mr. McLeod
has shared voting and investment power. Mr. McLeod's address is c/o
McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O.
Box 3177, Cedar Rapids, IA 52406-3177.
(4) MHC Investment Company is a wholly owned indirect subsidiary of
MidAmerican Energy Holdings Company. The address of MHC Investment is c/o
MidAmerican Energy Holdings Company, 666 Grand Ave., Des Moines, IA
50309. Includes 42,188 shares of Class A common stock held of record by
each of Ronald W.
22
<PAGE>
Stepien and Russell E. Christiansen, an officer and a retired officer,
respectively, of MidAmerican Energy Company and former directors of
McLeodUSA. Includes 32,812 shares of Class A common stock that Mr. Stepien
and 32,812 shares of Class A common stock that Mr. Christiansen have the
right to purchase within 60 days from March 31, 1999 upon exercise of
options. MHC Investment Company has the power to direct the disposition of
such shares.
(5) Includes 311,127 shares of Class A common stock held of record by Gail
G. Lumpkin, Mr. Lumpkin's wife, over which Mr. Lumpkin has shared voting
power. Includes 2,245,081 shares of Class A common stock held by various
trusts for the benefit of the family of Richard Adamson Lumpkin over
which Mr. Lumpkin has shared voting and investment power. Includes
2,500,320 shares of Class A common stock held by various trusts for the
benefit of the family of Richard Adamson Lumpkin over which Mr. Lumpkin
has shared investment power. Includes 11,250 shares of Class A common
stock that Mr. Lumpkin has the right to acquire upon exercise of
options. Mr. Lumpkin's address is c/o McLeodUSA Incorporated, McLeodUSA
Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, IA
52406-3177. The shares to be sold are held in (i) twelve 1990 Personal
Income Trusts established by Margaret L. Keon, Mary Lee Sparks and
Richard A. Lumpkin, each dated April 20, 1990, as described further in
footnote 10 below and (ii) a trust for the benefit of M. L. Keon, dated
May 13, 1978, as described further in footnote 12 below.
(6) Fidelity Management & Research Company is a wholly owned subsidiary of
FMR Corp. The address of FMR Corp. is 82 Devonshire Street, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by FMR Corp. on February 12, 1999.
(7) The address of Putnam Investment, Inc. is One Post Office Square, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by Putnam Investment, Inc. on April 9, 1999.
(8) Excludes shares owned by M/C Investors L.L.C. M/C III L.L.C. is the
general partner of Media/Communications Partners III Limited Partnership
and controls the voting and dispositive power of the shares of Class A
common stock held by it. Pursuant to the limited liability company
agreement of M/C III L.L.C., David D. Croll, James F. Wade, Stephen
Gormley, John Hayes and Christopher Gaffney together share the voting and
dispositive power of the shares of Class A common stock held by
Media/Communications Partners III Limited Partnership. The address of
Media/Communications Partners III Limited Partnership, M/C III L.L.C. and
each of Messrs. Croll, Wade, Gormley, Hayes and Gaffney is 75 State
Street, Boston, MA 02109.
(9) Includes 3,750 shares of Class A common stock held of record by the
Stephen Samuel Gray Irrevocable Trust, and 3,750 shares of Class A
common stock held of record by the Elizabeth Mary Fletcher Gray
Education Trust, of which Mr. Gray is the trustee. Includes 26,250
shares of Class A common stock held of record by Morgan Stanley Dean
Witter & Co. for the benefit of Mr. Gray.
(10) David R. Hodgman and Steven L. Grissom are the trustees for each of these
trusts. Mr. Lumpkin also shares investment power over each of these
trusts.
(11) If the over-allotment option is exercised in full by the underwriters,
the following selling stockholders will sell an aggregate of 900,000
additional shares of Class A common stock in the stated amounts: MHC
Investment Company (28,124), Media/Communications Partners III Limited
Partners (544,514), M/C Investors L.L.C. (27,054), Stephen C. Gray
(17,000), Blake O. Fisher (20,000), J. Lyle Patrick (10,000), Arthur L.
Christoffersen (35,000), Kirk E. Kaalberg (20,000), David M. Boatner
(15,000), Michael J. Brown (20,000), Thomas M. Collins (50,000), Rhines
Family Limited Partnership (3,000), M. L. Keon 1990 Personal Inc. Trust
f/b/o Joseph John Keon III (16,406), M. L. Keon 1990 Personal Inc. Trust
f/b/o Katherine S. Keon (16,406), M. L. Keon 1990 Personal Inc. Trust
f/b/o Lisa Anne Keon (16,406), M. L. Keon 1990 Personal Inc. Trust f/b/o
Margaret Lynley Keon (16,406), M. L. Keon 1990 Personal Inc. Trust f/b/o
Pamela Keon Vitale (16,406), M. L. Keon 1990 Personal Inc. Trust f/b/o
Susan Tamara Keon DeWyngaert (16,406), R. A. Lumpkin 1990 Personal Inc.
Trust f/b/o Benjamin Iverson Lumpkin (81,713), R. A. Lumpkin 1990
Personal Inc. Trust f/b/o Elizabeth Arabella Lumpkin (81,713), M. L.
Sparks 1990 Personal Inc. Trust f/b/o Anne Romayne Sparks (46,692), M.
L. Sparks 1990 Personal Inc. Trust f/b/o Barbara Lee Sparks (46,692), M.
L. Sparks 1990 Personal Inc. Trust f/b/o Christina Louise Sparks
(46,692), M. L. Sparks 1990 Personal Inc. Trust f/b/o John W. Sparks
(46,692) and M.L. Keon 1978 Trust (111,678).
(12) Margaret L. Keon is the trustee for this trust.
23
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary description of our capital stock is based on the
provisions of our certificate of incorporation and bylaws and the applicable
provisions of the Delaware General Corporation Law. For information on how to
obtain copies of our certificate of incorporation and bylaws, see "Where You
Can Find More Information."
Authorized and Outstanding Capital Stock
Under our certificate of incorporation, we have authority to issue
274,000,000 shares of capital stock, consisting of 250,000,000 shares of Class
A common stock, 22,000,000 shares of Class B common stock and 2,000,000 shares
of preferred stock, par value $.01 per share. As of March 31, 1999, 74,440,894
shares of our Class A common stock, no shares of our Class B common stock and
no shares of our preferred stock were issued and outstanding.
The rights of the holders of our Class A common stock and our Class B common
stock discussed below are subject to such rights as our board of directors may
from time to time confer on holders of our preferred stock that may be issued
in the future. Such rights may adversely affect the rights of holders of our
Class A common stock or our Class B common stock, or both.
Class A Common Stock
Voting Rights. Each holder of our Class A common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of shares of our Class B common stock and the holders of all other
classes of stock entitled to attend and vote at such meetings, to vote upon any
matter, including, without limitation, the election of directors, properly
considered and acted upon by our stockholders. Holders of our Class A common
stock are entitled to one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class A
common stock, the holders of our Class B common stock and holders of any class
or series of stock entitled to participate with our Class A and Class B common
stock, will become entitled to participate in the distribution of any of our
assets remaining after we have paid, or provided for payment of, all of our
debts and liabilities and after we have paid, or set aside for payment, to the
holders of any class of stock having preference over our Class A common stock
in the event of dissolution, liquidation or winding up the full preferential
amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on our Class A common stock, our Class B
common stock and on any class or series of stock entitled to participate with
our Class A and Class B common stock when and as declared by our board of
directors.
No Preemptive or Conversion Rights. The holders of our Class A common stock
have no preemptive or subscription rights to purchase additional securities
issued by us nor any rights to convert their Class A common stock into other of
our securities or to have their shares redeemed by us.
Class B Common Stock
Voting Rights. Each holder of our Class B common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of shares of our Class A common stock and the holders of all other
classes of stock entitled to attend and vote at such meetings, to vote upon any
matter or thing, including, without limitation, the election of directors,
properly considered and acted upon by our stockholders. Holders of our Class B
common stock are entitled to .40 vote per share.
24
<PAGE>
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class B
common stock, the holders of our Class A common stock and the holders of any
class or series of stock entitled to participate with our Class B and Class A
common stock, will become entitled to participate in the distribution of any of
our assets remaining after we have paid, or provided for payment of, all of our
debts and liabilities and after we have paid, or set aside for payment, to the
holders of any class of stock having preference over our Class B common stock
in the event of dissolution, liquidation or winding up the full preferential
amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on our Class B common stock, our Class A
common stock and on any class or series of stock entitled to participate with
our Class B and Class A common stock when and as declared by our board of
directors.
Conversion into Our Class A Common Stock; No Other Preemptive or Conversion
Rights. The shares of our Class B common stock may be converted at any time at
the option of the holder into fully paid and nonassessable shares of our Class
A common stock at the rate of one share of our Class A common stock for each
share of Class B common stock, as adjusted for any stock split. Except for this
conversion right, the holders of our Class B common stock have no preemptive or
subscription rights to purchase additional securities issued by us nor any
rights to convert their Class B common stock into other of our securities or to
have their shares redeemed by us.
Preferred Stock
Our certificate of incorporation authorizes our board of directors, from time
to time and without further stockholder action, to provide for the issuance of
up to 2,000,000 shares of our preferred stock, in one or more series, and to
fix the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date hereof, our board of directors has not provided for
the issuance of any series of such preferred stock and there are no agreements
or understandings for the issuance of any such preferred stock. Because of its
broad discretion with respect to the creation and issuance of preferred stock
without stockholder approval, our board of directors could adversely affect the
voting power of the holders of our Class A common stock and, by issuing shares
of our preferred stock with preferential voting, conversion and/or redemption
rights, could discourage any attempt to obtain control of us.
Certain Charter and Statutory Provisions
Classified Board. Our certificate of incorporation provides for the division
of our board of directors into three classes of directors, serving staggered
three-year terms. Our certificate of incorporation further provides that the
approval of the holders of at least two-thirds of the shares entitled to vote
thereon and the approval of a majority of our entire board of directors are
necessary for the alteration, amendment or repeal of certain sections of our
certificate of incorporation relating to the election and classification of our
board of directors, limitation of director liability, indemnification and the
vote requirements for such amendments to our certificate of incorporation.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of us.
Certain Statutory Provisions. We are subject to the provisions of Section 203
of the Delaware General Corporation Law. In general, this statute prohibits a
publicly held Delaware corporation like us from engaging in a business
combination with an interested stockholder for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless
. prior to such date, the corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
25
<PAGE>
. upon consummation of the transaction that resulted in such person
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, shares owned by certain directors or
certain employee stock plans, or
. on or after the date the stockholder became an interested stockholder,
the business combination is approved by the corporation's board of
directors and authorized by the affirmative vote, and not by written
consent, of at least two-thirds of the outstanding voting stock of the
corporation excluding that stock owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person, other than the corporation and any direct or indirect
wholly owned subsidiary of the corporation, who together with affiliates and
associates, owns or, as an affiliate or associate, within three years prior,
did own 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the Delaware General Corporation Law, our original
certificate of incorporation provided that it would not be governed by Section
203. Several of our stockholders, including Clark E. and Mary E. McLeod,
Interstate Energy and MHC Investment, became interested stockholders within the
meaning of Section 203 while that certificate of incorporation was in effect.
Accordingly, future transactions between us and any of these stockholders will
not be subject to the requirements of Section 203.
Our certificate of incorporation empowers our board of directors to redeem
any of our outstanding capital stock at a price determined by our board of
directors, which price will be at least equal to the lesser of
. fair market value, as determined in accordance with our certificate of
incorporation, or
. in the case of a "Disqualified Holder," such holder's purchase price, if
the stock was purchased within one year of such redemption,
to the extent necessary to prevent the loss or secure the reinstatement of any
license, operating authority or franchise from any governmental agency. A
"Disqualified Holder" is any holder of shares of our capital stock whose
holding of such stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
us or any of our subsidiaries to conduct any portion of our business or the
business of any of our subsidiaries. Under the Telecommunications Act of 1996,
non-U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the FCC determines
that the public interest would be served by prohibiting such ownership.
Additionally, the FCC's rules may under some conditions limit the size of
investments by foreign telecommunications carriers in U.S. international
carriers.
Limitation of Liability and Indemnification
Limitations of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. Although Section
102(b)(7) does not change directors' duty of care, it enables corporations to
limit available relief to equitable remedies such as injunction or rescission.
Our certificate of incorporation limits the liability of our directors to us or
our stockholders to the full extent permitted by Section 102(b)(7).
Specifically, our directors are not personally liable for monetary damages to
us or our stockholders for breach of the director's fiduciary duty as a
director, except for liability for:
26
<PAGE>
. any breach of the director's duty of loyalty to us or our stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law
. any transaction from which the director derived an improper personal
benefit
Indemnification. To the maximum extent permitted by law, our bylaws provide
for mandatory indemnification of our directors and officers against any
expense, liability or loss to which they may become subject, or which they may
incur as a result of being or having been a director or officer of McLeodUSA.
In addition, we must advance or reimburse directors and officers for expenses
incurred by them in connection with indemnifiable claims. We also maintain
directors' and officers' liability insurance.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is Norwest Bank
Minnesota, N.A.
Stockholders' Agreements
On November 18, 1998, we entered into a stockholders' agreement (the
"Stockholders' Agreement") with several of our significant stockholders
consisting of IES Investments Inc. (a subsidiary of Interstate Energy), Clark
E. and Mary E. McLeod, and Richard A. and Gail G. Lumpkin and several other
parties related to the Lumpkins.
The Stockholders' Agreement provides, among other things, that:
. until December 31, 2001, the parties will not sell any of our equity
securities without receiving the prior written consent of our board of
directors, except for transfers specifically permitted by the
Stockholders' Agreement
. our board of directors will determine on a quarterly basis starting with
the quarter ending December 31, 1998 and ending on December 31, 2001, the
aggregate number, if any, of shares of our Class A common stock, not to
exceed in the aggregate 150,000 shares per quarter, that the parties may
sell during designated trading periods following the release of our
quarterly or annual financial results
. to the extent our board of directors grants registration rights to a
party to the agreement in connection with a sale of our securities by
such party, it will grant similar registration rights to the other
parties
. our board of directors will determine on an annual basis commencing with
the year ending December 31, 1999 and ending on December 31, 2001 (each
such year, an "Annual Period"), the aggregate number, if any, of shares
of our Class A common stock, not to exceed in the aggregate on an annual
basis a number of shares equal to 15% of the total number of shares of
Class A common stock beneficially owned by the parties as of December 31,
1998 (the "Registrable Amount"), to be registered by us under the
Securities Act for sale by the parties
. in any underwritten offering of shares of Class A common stock by us,
other than an offering on a registration statement on Form S-4 or Form S-
8 or any other form which would not permit the inclusion of shares of our
Class A common stock owned by the parties, we will undertake to register
the shares of our Class A common stock of such parties up to the
Registrable Amount, if any, as determined by our board of directors
. we may subsequently determine not to register any shares of the parties
under the Securities Act and may either not file a registration statement
or otherwise withdraw or abandon a registration statement previously
filed
27
<PAGE>
The Stockholders' Agreement terminates on December 31, 2001. If during any
Annual Period we have not provided a party a reasonable opportunity to sell an
aggregate number of shares of Class A common stock equal to not less than 15%
of the total number of shares of Class A common stock beneficially owned by
such party as of December 31, 1998, then such party may terminate the
Stockholders' Agreement as it applies to such party.
Under the Stockholders' Agreement, each party also agreed, until such party
owns less than 4 million shares of Class A common stock or until December 31,
2001, whichever occurs first, to vote such party's shares and take all action
within its power to:
. establish the size of our board of directors at up to 11 directors
. cause to be elected to our board of directors one director designated by
Interstate Energy for so long as IES Investments owns at least 4 million
shares of Class A common stock
. cause to be elected to our board of directors three directors who are
executive officers of McLeodUSA designated by Clark McLeod for so long as
Clark and Mary McLeod collectively own at least 4 million shares of Class
A common stock
. cause Richard Lumpkin to be elected to our board of directors for so long
as the former stockholders of Consolidated Communications, Inc. who are a
party to the agreement collectively own at least 4 million shares of
Class A common stock
. cause to be elected to our board of directors up to six non-employee
directors nominated by our board
On January 7, 1999, in connection with the Ovation acquisition, M/C Investors
L.L.C. and Media/Communications Partners III Limited Partnership (collectively,
"M/C") entered into a separate stockholders' agreement (the "Ovation
Stockholders' Agreement") with the parties to the Stockholders' Agreement.
The Ovation Stockholders' Agreement provides that, until December 31, 2001,
M/C will not sell any of our equity securities without receiving the prior
written consent of our board of directors. The Ovation Stockholders' Agreement
also contains various provisions intended to insure that M/C is treated on a
basis similar to the parties to the Stockholders' Agreement in connection with
permitted sales of our securities under the Stockholders' Agreement generally
starting December 31, 1999. In addition, for so long as M/C owns at least 2.5
million shares of our Class A common stock, M/C has agreed to vote its shares
in accordance with the voting agreement contained in the Stockholders'
Agreement and the other partries have agreed to vote their shares to cause to
be elected to our board of directors one director designated by M/C.
The Ovation Stockholders' Agreement terminates on December 31, 2001. In
addition, if (1) during each of the years ending December 31, 2000 and December
31, 2001, we have not provided M/C a reasonable opportunity to register under
the Securities Act for sale an aggregate number of shares of our Class A common
stock equal to not less than 15% of the total number of shares of Class A
common stock beneficially owned by M/C as of March 31, 1999, or (2) after
January 1, 2000, the Stockholders' Agreement has been terminated by all parties
to such agreement, then M/C may terminate the Ovation Stockholders' Agreement.
The Ovation Stockholders' Agreement will be terminated with respect to all
parties other than M/C and us at such time as the Stockholders' Agreement is
terminated.
28
<PAGE>
UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter has severally agreed to purchase from
the selling stockholders, and the selling stockholders have agreed to sell to
the underwriters, the number of shares of Class A common stock shown opposite
its name below. The obligations of the several underwriters to purchase these
shares are subject to terms and conditions contained in the underwriting
agreement.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Salomon Smith Barney Inc. ......................................
Credit Suisse First Boston Corporation .........................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
---------
Total ........................................................ 9,000,000
=========
</TABLE>
In the underwriting agreement, the underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Class A common stock offered hereby (other than those subject to the
over-allotment option described below), if any such shares are purchased. In
the event of a default by any underwriter, the underwriting agreement provides
that, in certain circumstances, the purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are
acting as representatives, propose initially to offer the shares of Class A
common stock to the public at the public offering price set forth on the cover
page of this prospectus, and to some dealers at such price less a concession
not in excess of $ per share. The underwriters may allow, and such dealers
may reallow, a concession not in excess of $ per share to other dealers.
After the public offering, the public offering price and such concessions may
be changed.
The selling stockholders have granted the underwriters an option, exercisable
within 30 days of the date of this prospectus, to purchase up to 1,350,000
additional shares of our Class A common stock to cover over-allotments, if any,
at the public offering price set forth on the cover page of this prospectus. To
the extent that the underwriters exercise such option, in whole or in part,
each underwriter will have a firm commitment, subject to several conditions, to
purchase the same proportion of the option shares as the number of shares of
Class A common stock purchased by such underwriter in the above table bears to
the total number of shares of Class A common stock purchased by all of the
underwriters in the table above.
The following table shows the per share and total public offering price, the
underwriting discount to be paid to the underwriters, and the proceeds before
expenses to the selling stockholders. The totals are presented assuming either
no exercise or full exercise by the underwriters of the over-allotment option.
<TABLE>
<CAPTION>
Total
-----------------
Per No Full
Share Exercise Exercise
----- -------- --------
<S> <C> <C> <C>
Public offering price ............................ $ $ $
Underwriting discount ............................ $ $ $
Proceeds to selling stockholders ................. $ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of our Class A common stock in the
open market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of our Class A common stock in excess of the number of shares to be
purchased by the underwriters in the offering, which creates a syndicate short
position. Syndicate
29
<PAGE>
covering transactions involve purchases of our Class A common stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of bids or purchases of our
Class A common stock made for the purpose of preventing or retarding a decline
in the market price of our Class A common stock while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
underwriters, in covering syndicate short positions or making stabilizing
purchases, repurchase shares originally sold by that syndicate member.
Any of these activities may cause the price of our Class A common stock to be
higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on The Nasdaq
Stock Market or in the over-the-counter market, or otherwise and, if commenced,
may be discontinued at any time.
In addition, in connection with this offering, the underwriters (and selling
group members) may engage in passive market making transactions in our Class A
common stock on The Nasdaq Stock Market prior to the pricing and completion of
the offering. Passive market making consists of displaying bids on The Nasdaq
Stock Market no higher than the bid prices of independent market makers and
making purchases at no higher than those independent bids and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in our Class A common stock during a specified period and must
be discontinued when such limit is reached. Passive market making may cause the
price of our Class A common stock to be higher than the price that otherwise
would exist in the open market in the absence of such transactions. If passive
market making is commenced, it may be discontinued at any time.
McLeodUSA and the selling stockholders estimate that their respective
portions of the total expenses of this offering will be $ and $ .
Salomon Smith Barney Inc. has performed investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. It may, from time to time, engage in transactions with and
perform services for us in the ordinary course of its business.
The underwriting agreement provides that McLeodUSA and the selling
stockholders will indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make in respect of such liabilities.
McLeodUSA, our directors and officers, the selling stockholders and several
other stockholders have each agreed with the underwriters that they will not
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of any shares of our Class A common stock
or any securities convertible into, or exchangeable for, shares of Class A
common stock for a period of 90 days from the date of this prospectus, without
the prior written consent of Salomon Smith Barney Inc., except:
. in the case of McLeodUSA, any such transactions in connection with
acquisitions, employee benefit or option plans, or upon conversion of
outstanding securities
. in the case of our directors, officers and stockholders, dispositions of
shares of our Class A common stock as bona fide gifts or pledges where the
recipients of such gifts or the pledgees, as the case may be, agree in
writing with the underwriters to be bound by these same restrictions
In addition, Clark E. McLeod, Mary E. McLeod, Interstate Energy, M/C, and
Richard A. Lumpkin and Gail G. Lumpkin and several other parties related to the
Lumpkins have agreed not to sell or otherwise dispose of any of our equity
securities without the consent of the board of directors of McLeodUSA. See
"Description of Capital Stock--Stockholders' Agreement."
30
<PAGE>
LEGAL MATTERS
The validity of our Class A common stock offered hereby is being passed upon
for McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
McLeodUSA. Certain legal matters relating to this offering are being passed
upon for the underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
ended December 31, 1998, incorporated by reference in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Ovation Communications, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 incorporated by
reference in this registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report, and are incorporated
by reference herein in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus forms a part.
The registration statement, including the attached exhibits and schedules,
contain additional relevant information about our Class A common stock. The
rules and regulations of the SEC allow us to omit some of the information
included in the registration statement from this prospectus.
In addition, we have filed reports, proxy statements and other information
with the SEC under the Securities Exchange Act. You may read and copy any of
this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC file number for our documents filed under the Securities Exchange Act
is 0-20763.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, except for any such information that is superseded by information
included directly in this document.
31
<PAGE>
This prospectus incorporates by reference the documents listed below that we
have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed on March 24, 1999, as amended by Form 10-K/A filed on April
22, 1999
. Our Current Reports on Form 8-K filed on April 15, 1999, April 16, 1999
and May 5, 1999
. All documents filed with the SEC by us under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act after the date of this
prospectus and before the offering is terminated, are considered to be a
part of this prospectus, effective the date such documents are filed
. The description of our Class A common stock set forth in our registration
statement filed under Section 12 of the Securities Exchange Act on Form
8-A on May 24, 1996, including any amendment or report filed with the SEC
for the purpose of updating such description
. The consolidated financial statements of Ovation Communications, Inc. and
subsidiaries appearing on pages F-1 through F-17 of our definitive
prospectus dated March 24, 1999 and filed with the SEC on March 26, 1999
pursuant to Rule 424(b) under the Securities Act as part of our
Registration Statement on Form S-4 (Registration No. 333-71811).
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 364-0000
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9,000,000 Shares
McLeodUSA Incorporated
Class A Common Stock
[LOGO OF McLEODUSA APPEARS HERE]
--------
P R O S P E C T U S
, 1999
--------
Salomon Smith Barney
Credit Suisse First Boston
Merrill Lynch & Co.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and distribution of the securities being
registered.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $148,541
Printing and Duplicating Expenses................................ 200,000
Legal Fees and Expenses.......................................... 200,000
Accounting Fees and Expenses..................................... 40,000
NASD Fees........................................................ 32,500
Blue Sky Fees and Expenses....................................... 7,500
Miscellaneous.................................................... 136,459
Transfer Agent and Registrar Fees................................ 35,000
--------
Total.......................................................... $800,000
</TABLE>
- --------
Item 15. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and
its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In
addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of the Company (the
"Restated Certificate") contains provisions that provide that no director of
the Company shall be liable for breach of fiduciary duty as a director except
for (1) any breach of the directors' duty of loyalty to the Company or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director
derived an improper personal benefit. The Restated Certificate contains
provisions that further provide for the indemnification of directors and
officers to the fullest extent permitted by the DGCL. Under the Bylaws of the
Company, the Company is required to advance expenses incurred by an officer or
director in defending any such action if the director or officer undertakes to
repay such amount if it is determined that the director or officer is not
entitled to indemnification. In addition, the Company has entered into
indemnity agreements with each of its directors pursuant to which the Company
has agreed to indemnify the directors as permitted by the DGCL. The Company
has obtained directors and officers liability insurance against certain
liabilities, including liabilities under the Securities Act.
II-1
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
1.1 Form of Underwriting Agreement among McLeodUSA, Salomon Smith Barney
Inc., Credit Suisse First Boston Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and certain selling stockholders.
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Registration Statement on Form S-1, File No.
333-3112 ("Initial Form S-1"), and incorporated herein by reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the "November
1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4"),
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on
Form 10-K, File No. 0-20763, filed with the Commission on March 6,
1998 (the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 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).
4.3 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 Registration Statement on Form S-1, File
No. 333-13885 (the "November 1996 Form S-1"), and incorporated herein
by reference).
4.4 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).
4.5 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).
4.6 Stockholders' Agreement dated as of November 18, 1998 by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary
E. McLeod and Richard A. Lumpkin, Gail G. Lumpkin and certain of the
former shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders in each
case who are listed in schedule I thereto. (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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
4.7 Stockholders' Agreement dated as of January 7, 1999, by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod, Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership (Filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763, filed
with the Commission on January 14, 1999 and incorporated herein by
reference).
5.1 Opinion of Hogan & Hartson L.L.P.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
24.1 Power of attorney (included on signature page).
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Annual Report on
Form 10-K for the year ended December 31, 1998, File No. 0-20763,
filed with the Commission on March 24, 1999 and incorporated herein by
reference).
</TABLE>
- --------
(b) Financial Statement Schedules.
The following financial statement schedule was filed with the Company's
Annual Report on Form 10-K (File No. 0-20763), filed with the Commission on
March 24, 1999, and is incorporated herein by reference:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the Consolidated Financial Statements of the
Company or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the Securities offered herein, and the offering of such Securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance under Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration
II-3
<PAGE>
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes that and insofar as
indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described under Item 15 above or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the Securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of each issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act, the Company has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Cedar Rapids, Iowa, on this 11th day
of May, 1999.
McLeodUSA Incorporated
/s/ Stephen C. Gray
By: _________________________________
Stephen C. Gray
President and Chief Operating
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Clark E. McLeod, Stephen C. Gray and Blake O.
Fisher, Jr., jointly and severally, each in his own capacity, his true and
lawful attorneys-in-fact, with full power of substitution, for him and his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents with full power and authority to do so
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-
in-fact, or their substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons, in the capacities
indicated below, on this 11th day of May, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Chairman, Chief Executive Officer
______________________________________ and Director (Principal Executive
Clark E. McLeod Officer)
* Vice Chairman and Director
______________________________________
Richard A. Lumpkin
/s/ Stephen C. Gray President, Chief Operating Officer
______________________________________ and Director
Stephen C. Gray
* Group Vice President and Director
______________________________________
Blake O. Fisher, Jr.
* Group Vice President, Chief
______________________________________ Financial Officer and Treasurer
J. Lyle Patrick (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Director
______________________________________
Thomas M. Collins
* Director
______________________________________
Robert J. Currey
* Director
______________________________________
Lee Liu
* Director
______________________________________
Paul D. Rhines
* /s/ Stephen C. Gray
______________________________________
Stephen C. Gray
Attorney-In-Fact
</TABLE>
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
1.1 Form of Underwriting Agreement among McLeodUSA, Salomon Smith Barney
Inc., Credit Suisse First Boston Corporation, Merrill Lynch, Pierce,
Fenner & Smith Incorporated and certain selling stockholders.
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Registration Statement on Form S-1, File No.
333-3112 ("Initial Form S-1"), and incorporated herein by reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the "November
1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4"),
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on Form
10-K, File No. 0-20763, filed with the Commission on March 6, 1998
(the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by reference).
4.2 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).
4.3 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 Registration Statement on Form S-1, File No.
333-13885 (the "November 1996 Form S-1"), and incorporated herein by
reference).
4.4 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).
4.5 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).
4.6 Stockholders' Agreement dated as of November 18, 1998 by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod and Richard A. Lumpkin, Gail G. Lumpkin and certain of the
former shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders in each
case who are listed in schedule I thereto. (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).
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<S> <C>
4.7 Stockholders' Agreement dated as of January 7, 1999, by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary E.
McLeod, Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership (Filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763, filed
with the Commission on January 14, 1999 and incorporated herein by
reference).
5.1 Opinion of Hogan & Hartson L.L.P.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
24.1 Power of attorney (included on signature page).
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Annual Report on
Form 10-K for the year ended December 31, 1998, File No. 0-20763,
filed with the Commission on March 24, 1999 and incorporated herein by
reference).
</TABLE>
2
<PAGE>
Exhibit 1.1
MCLEODUSA INCORPORATED
9,000,000 Shares
Class A Common Stock
($.01 par value)
Underwriting Agreement
May __, 1999
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
As Representatives of the several Underwriters
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, New York 10048
Dear Sirs:
The persons identified in Schedule II hereto as selling Underwritten
Securities (as defined below) (the "Selling Stockholders") severally propose to
sell to the underwriters named in Schedule I hereto (the "Underwriters"), for
whom you (the "Representatives") are acting as representatives, an aggregate of
9,000,000 shares of Class A Common Stock, $.01 par value (the "Common Stock") of
McLeodUSA Incorporated, a Delaware corporation (the "Company"), each Selling
Stockholder selling the number of shares of Common Stock set forth opposite such
Selling Stockholders' name in Schedule II hereto in the column entitled "Number
of Shares of Underwritten Securities To Be Sold" (the shares to be so sold by
the Selling Stockholders being hereinafter called the "Underwritten
Securities"). The persons identified in Schedule II hereto as selling Option
Securities (as defined below) (the "Option Selling Stockholders;" the Option
Selling Stockholders, together with the Selling Stockholders, being hereinafter
called the "Selling Stockholders") also propose to grant to the Underwriters an
option to purchase up to 1,350,000 additional shares of Common Stock, as
indicated in Schedule II hereto in the column entitled "Number of Option
Securities To Be Sold" (the "Option Securities"; the Option Securities, together
with the Underwritten Securities, being hereinafter called the "Securities"). To
the extent there are no additional Underwriters listed on Schedule I other than
you, the term Representatives as used herein shall mean you, as Underwriters,
and the terms Representatives and Underwriters shall mean either the singular or
plural as the context requires. In addition, to the extent that there is not
more than one Selling Stockholder named in Schedule II, the term Selling
Stockholder shall mean either the singular or plural. The use of the neuter in
this Agreement shall include the feminine and masculine wherever appropriate.
Any reference herein to the Registration Statement, a Preliminary Prospectus or
the Prospectus shall be deemed to refer to and include the documents
incorporated by reference therein pursuant to Item 12 of Form S-3 which were
filed under the Exchange Act on or before the Effective Date of the Registration
Statement or the issue date of such Preliminary Prospectus or the Prospectus, as
the case may be; and any reference herein to the terms "amend", "amendment" or
"supplement" with respect to the Registration Statement, any Preliminary
Prospectus or the
<PAGE>
Prospectus shall be deemed to refer to and include the filing of any document
under the Exchange Act after the Effective Date of the Registration Statement,
or the issue date of any Preliminary Prospectus or the Prospectus, as the case
may be, deemed to be incorporated therein by reference. Certain terms used
herein are defined in Section 17 hereof. The Company acknowledges that it is
entering into this Agreement in order to secure the significant benefits that
come from the distribution of its shares among a broader group of shareholders.
1. Representations and Warranties.
------------------------------
(a) The Company represents and warrants to, and agrees with, each
Underwriter that:
(i) The Company meets the requirements for use of Form S-3 under the
Act and has prepared and filed with the Commission a registration statement
(file number 333-76501) on Form S-3, including a related preliminary
prospectus, for registration under the Act of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto,
including a related preliminary prospectus, each of which has previously
been furnished to you. The Company will next file with the Commission one
of the following: either (1) prior to the Effective Date of such
registration statement, a further amendment to such registration statement
(including the form of final prospectus), (2) after the Effective Date of
such registration statement, a final prospectus in accordance with Rules
430A and 424(b) or (3) after the Effective Date of such registration
statement, a post-effective amendment to such registration statement
(including a final prospectus). In the case of clause (2), the Company has
included in such registration statement, as amended at the Effective Date,
all information (other than Rule 430A Information) required by the Act and
the rules thereunder to be included in such registration statement and the
Prospectus. As filed, such amendment and form of final prospectus, such
final prospectus, or such post-effective amendment and final prospectus
shall contain all Rule 430A Information, together with all other such
required information, and, except to the extent the Representatives shall
agree in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to the
Execution Time, will be included or made therein.
(ii) On the Effective Date, the Registration Statement did or will,
and when the Prospectus is first filed (if required) in accordance with
Rule 424(b) and on the Closing Date (as defined herein) and on any date on
which Option Securities are purchased, if such date is not the Closing Date
(a "settlement date"), the Prospectus (and any supplements thereto), will
comply in all material respects with the applicable requirements of the Act
and the Exchange Act and the respective rules thereunder; on the Effective
Date and at the Execution Time, the Registration Statement did not or will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements therein not misleading; and, on the Effective Date, the
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the date
of any filing
2
<PAGE>
pursuant to Rule 424(b) and on the Closing Date and any settlement date,
the Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
--------
however, that the Company makes no representations or warranties
-------
as to the information contained in or omitted from the Registration
Statement or the Prospectus (or any supplement thereto) in reliance upon
and in conformity with information furnished in writing to the Company by
or on behalf of any Underwriter through the Representatives or by or on
behalf of any Selling Stockholders specifically for inclusion in the
Registration Statement or the Prospectus (or any supplement thereto).
(iii) The Company's authorized equity capitalization is as set forth
in the Prospectus; the capital stock of the Company conforms in all
material respects to the description thereof contained in the Prospectus;
the outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable; the Securities
are listed on the Nasdaq National Market; and the certificates for the
Securities are in valid and sufficient form.
(iv) The Company has not taken and will not take, directly or
indirectly, any action prohibited by Regulation M under the Exchange Act,
in connection with the offering of the Securities.
(v) The documents filed by the Company under the Exchange Act at the
time they were filed with the Commission, complied in all material respects
with the requirements of the Exchange Act and the rules and regulations of
the thereunder and did not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein, in light of
the circumstances under which they were made, or necessary to make the
statements therein not misleading; and any further documents so filed, when
such documents are filed with the Commission, will conform in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein, in light of the circumstances under which they were made, or
necessary to make the statements therein not misleading.
(vi) Since the date of the most recent financial statements included
or incorporated by reference in the Prospectus (exclusive of any supplement
thereto), there has been no material adverse change, or any development
which could reasonably be expected to result in a material adverse change,
in the condition (financial or other), earnings, business, prospects or
properties of the Company and its subsidiaries, whether or not arising
from transactions in the ordinary course of business, except as set forth
in or incorporated by reference in the Prospectus (exclusive of any
supplement thereto); and, since the respective dates as of which
information is given or incorporated by reference in the Prospectus, there
has not been any change in the capital stock (other than grants of options
and issuances of common stock in connection with the Company's acquisitions
of Talking Directories, Inc.,
3
<PAGE>
InfoAmerica Phone Books, Inc., Dakota Telecommunications Group, Inc. and
Ovation Communications, Inc. or pursuant to existing employee stock option
plans, 401(k) plans, stock ownership plans or stock purchase plans,
repurchases by the Company of its common stock in the ordinary course of
business or conversions of outstanding convertible securities) of the
Company or any of its subsidiaries or long-term debt (other than the
issuance of $500 million aggregate principal amount of the Company's 8 1/8%
senior notes due 2009 in February 1999, changes in connection with the
Company's acquisitions of Talking Directories, Inc., Info America Phone
Books, Inc., Dakota Telecommunications Group, Inc. and Ovation
Communications, Inc., changes as a result of borrowings of the Company or
any of its subsidiaries in the ordinary course of business not exceeding
$12,000,000, maturities, regularly scheduled payments or currency
fluctuations) of the Company or any of its subsidiaries.
(vii) Each of (a) the Company, and (b) McLeodUSA Telecommunications
Services, Inc., McLeodUSA Network Services, Inc., McLeodUSA Publishing
Company, McLeodUSA Media Group, Inc., McLeodUSA Diversified, Inc., Ruffalo,
Cody & Associates, Inc., Consolidated Communications Inc., Illinois
Consolidated Telephone Company, Consolidated Communications Directories,
Inc., Talking Directories, Inc., Ovation Communications, Inc., Ovation
Communications of Minnesota, Inc., BRE Communications L.L.C. and Dakota
Telecommunications Group, Inc. (individually a "Subsidiary" and
collectively the "Subsidiaries") has been duly incorporated or organized
and is validly existing as a corporation or, as applicable, limited
liability company in good standing under the laws of the jurisdiction in
which it is chartered or organized, with full corporate or organizational
power and authority to own its properties and conduct its business as
described in or incorporated by reference in the Prospectus, and is duly
qualified to do business as a foreign corporation or, as applicable,
limited liability company and is in good standing under the laws of each
jurisdiction which requires such qualification, except where the failure to
be so qualified could not reasonably be expected to have a material adverse
effect on the Company and the Subsidiaries. Except for the Subsidiaries,
the Company has no subsidiaries which, considered in the aggregate as a
single subsidiary, would constitute a "significant subsidiary" as defined
in Rule 1-02(w) of Regulation S-X promulgated under the Act.
(viii) All the outstanding shares of capital stock of each Subsidiary
have been duly and validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth or incorporated by
reference in the Prospectus, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company, either directly or through wholly
owned subsidiaries, free and clear of any security interests, claims or
liens.
(ix) Except as disclosed or incorporated by reference in the
Prospectus, there is no pending or, to the Company's knowledge, threatened
action, suit or proceeding before any court or governmental agency,
authority or body or any arbitrator involving the Company or any of its
subsidiaries which, if finally determined adversely to the Company or any
of its subsidiaries, would have a material adverse effect on the condition
(financial or other), earnings, business, prospects or properties of the
Company and its subsidiaries; and the statements in or incorporated by
reference in the Prospectus, under the headings "Risk Factors - Our
Dependence on Regional Bell Operating Companies to Provide Most of Our
4
<PAGE>
Communications Services Could Make it Harder for Us to Offer Our Services
at a Profit," "Risk Factors - Actions by US WEST May Make it More Difficult
for Us to Offer Our Communications Services," and "Business - Legal
Proceedings" fairly summarize the actions, suits and proceedings therein
described except for such changes with respect to such actions, suits and
proceedings which could not have a material adverse effect on the Company
and the statements in or incorporated by reference in the Prospectus
concerning stockholders' agreements to which the Company is a party fairly
summarize the franchises, contracts or other documents therein described
except for such changes with respect to such franchises, contracts or other
documents which could not have a material adverse effect on the Company.
(x) This Agreement has been duly authorized, executed and delivered by
the Company.
(xi) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
of the transactions contemplated herein, except for the declaration of
effectiveness of the Registration Statement and except such as may be
required under all applicable state securities and blue sky laws of any
jurisdiction and such other approvals as have been obtained.
(xii) Neither the sale of the Securities, nor the consummation of any
other of the transactions herein contemplated, nor the fulfillment of the
terms hereof, in each case by the Company, will conflict with, result in a
breach or violation of, or constitute a default under the charter or by-
laws of the Company or the terms of any indenture or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or
bound or (assuming compliance with all applicable state securities and blue
sky laws and that the Registration Statement has been declared effective
and, if required, that the Prospectus has been filed pursuant to Rule
424(b) any law, rule or regulation applicable to the Company or any of the
Subsidiaries or any judgement, order or decree applicable to the Company or
any of its Subsidiaries of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over the
Company or any of its Subsidiaries.
(xiii) Except as set forth in or incorporated by reference in the
Prospectus, no holders of securities of the Company have rights to the
registration of such securities under the Registration Statement that have
not been duly waived.
(xiv) Arthur Andersen LLP, who have reported upon the audited
financial statements incorporated by reference in the Prospectus, are
independent public accountants within the meaning of the Act and the rules
and regulations of the Commission thereunder.
(xv) The consolidated financial statements of the Company and of
certain Subsidiaries included or incorporated by reference in the
Prospectus, present fairly the financial position of the Company and its
subsidiaries and such Subsidiaries as of the dates indicated and the
consolidated results of the operations and cash flows of the Company and
5
<PAGE>
its subsidiaries and such Subsidiaries for the periods specified. Such
financial statements (except as disclosed in the notes thereto or otherwise
stated therein) have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire
period involved. The financial statement schedules, if any, included or
incorporated by reference in the Prospectus, present fairly the information
stated therein. The selected financial data included or incorporated by
reference in the Prospectus present fairly the information shown therein
and have been compiled on a basis consistent with that of the audited
consolidated financial statements included or incorporated by reference in
the Prospectus. The pro forma financial statements and other pro forma
financial information included or incorporated by reference in the
Prospectus present fairly the information shown therein, have been prepared
in accordance with the Commission's rules and guidelines with respect to
pro forma financial statements, have been properly compiled on the pro
forma bases described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein.
(xvi) Neither the Company nor any of the Subsidiaries is in violation
of its charter or in default in the performance or observance of any
obligation, agreement, covenant or condition contained in any indenture or
other agreement or instrument to which the Company or any of the
Subsidiaries is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any of the
Subsidiaries is subject, other than defaults (considered in the aggregate)
which could not reasonably be expected to have a material adverse effect on
the condition (financial or other), earnings, business, prospects or
properties of the Company and its subsidiaries.
(xvii) The Company and the Subsidiaries possess adequate
certificates, authorities or permits issued by the appropriate state,
federal or foreign regulatory agencies or bodies necessary to conduct the
business now operated by them and are in compliance in all material
respects with all such certificates, authorities and permits. Neither the
Company nor any of its subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such certificate,
authority or permit, other than any such revocation or modification that
could not reasonably be expected to, singly or in the aggregate, have a
material adverse effect on the condition (financial or other), earnings,
business, prospects or properties of the Company and its subsidiaries.
(xviii) The Company and its subsidiaries have timely filed all United
States federal income tax returns and all other material tax returns which
are required to be filed by them and have paid all taxes due and payable
(other than taxes, the payment of which are being contested in good faith),
and no tax liens have been filed and no claims are being asserted with
respect to any such taxes, which could reasonably be expected to have a
material adverse effect on the condition (financial or other), earnings,
business, prospects or properties of the Company and its subsidiaries. The
provisions for taxes on the books of the Company are adequate in all
material respects for all open years and for its current fiscal period.
6
<PAGE>
(xix) The Company and the Subsidiaries (A) are in compliance with all
applicable federal, state, local and foreign and other laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (B) have received all permits, licenses and other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (C) are in compliance with all terms and
conditions of any such permit, license and approval, except, in each case,
where such noncompliance with Environmental Law, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals could not
reasonably be expected, singly or in the aggregate, to have a material
adverse effect on the condition (financial or other), earnings, business,
prospects or properties of the Company and its subsidiaries.
(xx) The Company and the Subsidiaries have good and marketable title
to all real property and good and valid title to all personal property
owned by them, in each case free and clear of all liens, encumbrances and
defects, and any real property and buildings held under lease by the
Company and the Subsidiaries are held by them under valid, subsisting and
enforceable leases, except, in each case, for such exceptions as are set
forth or incorporated by reference in the Prospectus or which could not
reasonably be expected to have a material adverse effect on the condition
(financial or other), earnings, business, prospects or properties of the
Company and its subsidiaries.
(xxi) The Company and its subsidiaries own and possess all right,
title and interest in and to, or have duly licensed from third parties a
valid, enforceable right to use, all patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names currently
employed by the Company and its subsidiaries in connection with the
business conducted by them (collectively, "Patent and Proprietary Rights")
and neither the Company nor any of its subsidiaries has received notice of
infringement or misappropriation of or conflict with asserted rights of
others with respect to any Patent and Proprietary Rights, or of any facts
which would render any Patent and Proprietary Rights invalid or inadequate
to protect the interest of the Company or of its subsidiaries therein, and
which infringement, misappropriation or conflict or invalidity or
inadequacy, individually or in the aggregate, could reasonably be expected
to result in a material adverse effect on the condition (financial or
other), earnings, business, prospects or properties of the Company and its
subsidiaries.
(xxii) The Company has complied with all provisions of Section 1 of
Laws of Florida, Chapter 92-198 Securities-Business with Cuba.
Any certificate signed by any officer of the Company and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
as to matters covered thereby, to each Underwriter.
7
<PAGE>
(b) Each Selling Stockholder represents and warrants to, and agrees with,
each Underwriter that:
(i) Such Selling Stockholder is the lawful owner of the Securities to
be sold by such Selling Stockholder hereunder and upon sale and delivery
of, and payment for, such Securities, as provided herein, such Selling
Stockholder will convey good and marketable title to such Securities, free
and clear of all liens, encumbrances, equities and claims whatsoever.
(ii) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section 1
are not true and correct and has no knowledge of any material fact,
condition or information not disclosed in or incorporated by reference in
the Prospectus or any supplement thereto which has adversely affected or
could reasonably be expected to materially adversely affect the business of
the Company and its subsidiaries; provided, that the Underwriters
--------
acknowledge that the foregoing representations insofar as made by MHC
Investment Company, the Lumpkin family trusts, David M. Boatner, Kirk E.
Kaalberg, The Rhines Family Limited Partnership, Sally W. Gray, Angela R.
Kaalberg and Lydia L. Brown are based primarily on the Company's
representations to such effect, and are made without independent
investigation by MHC Investment Company, the Lumpkin family trusts, David
M. Boatner, Kirk E. Kaalberg, The Rhines Family Limited Partnership, Sally
W. Gray, Angela R. Kaalberg or Lydia L. Brown; and the sale of Securities
by such Selling Stockholder pursuant hereto is not prompted by any
information concerning the Company or any of its subsidiaries which is not
set forth in or incorporated by reference in the Prospectus or any
supplement thereto. For purposes of this Agreement, knowledge of a trust
that is a Selling Stockholder only includes knowledge of the trustee and
not any knowledge attributable to such trustee through such trustee's
membership in a law firm.
(iii) Such Selling Stockholder has not taken and will not take,
directly or indirectly, any action designed to or which has constituted or
which might reasonably be expected to cause or result, under the Exchange
Act, or otherwise, in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities.
(iv) Certificates in negotiable form for such Selling Stockholder's
Securities have been placed in custody, for delivery pursuant to the terms
of this Agreement, under a Custody Agreement and Power of Attorney duly
executed and delivered by such Selling Stockholders, in the form heretofore
furnished to you (the "Custody Agreement") with Norwest Bank Minnesota,
N.A., as Custodian (the "Custodian"); the Securities represented by the
certificates so held in custody for such Selling Stockholder are subject to
the interests hereunder of the Underwriters, the Company and the other
Selling Stockholders, the arrangements for custody and delivery of such
certificates, made by such Selling Stockholder hereunder and under the
Custody Agreement, are not subject to termination by any acts of such
Selling Stockholder, or by operation of law, whether by the death or
incapacity of such Selling Stockholder or the occurrence of any other
event; and if any such death, incapacity or any other such event shall
occur before the delivery of such Securities hereunder, certificates for
the Securities will be delivered by the Custodian in accordance with the
8
<PAGE>
terms and conditions of this Agreement and the Custody Agreement as if such
death, incapacity or other event had not occurred, regardless of whether or
not the Custodian shall have received notice of such death, incapacity or
other event.
(v) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except such as
may have been obtained under the Act and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other approvals
as have been obtained.
(vi) Neither the sale of the Securities being sold by such Selling
Stockholder nor the consummation of any other of the transactions herein
contemplated by such Selling Stockholder or the fulfillment of the terms
hereof by such Selling Stockholder will conflict with, result in a breach
or violation of, or constitute a default under any law or the charter or
by-laws of such Selling Stockholder or the terms of any indenture or other
agreement or instrument to which such Selling Stockholder or any of its
subsidiaries is a party or bound, or any judgement, order or decree
applicable to such Selling Stockholder or any of its subsidiaries of any
court, regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over such Selling Stockholder or any of its
subsidiaries.
In respect of any statements in or omissions from the Registration Statement or
the Prospectus or any supplements thereto made in reliance upon and in
conformity with information furnished in writing to the Company by any Selling
Stockholder specifically for inclusion in the Registration Statement or
Prospectus (or any amendment or supplement thereto), such Selling Stockholder
hereby makes the same representations and warranties to each Underwriter as the
Company makes to such Underwriter under paragraph (a)(ii) of this Section. The
Company and each Underwriter acknowledges that the information set forth with
respect to each Selling Stockholder under the heading "Principal and Selling
Stockholders" and the statements regarding the Selling Stockholders' portion of
the total expenses of the offering under the heading "Underwriting" in any
Preliminary Prospectus and the Prospectus constitutes the only information
furnished in writing by or on behalf of such Selling Stockholder for inclusion
in any Preliminary Prospectus or the Prospectus.
Any certificate signed by any Selling Stockholder and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by such Selling
Stockholder, as to matters covered thereby, to each Underwriter.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
-----------------
reliance upon the representations and warranties herein set forth: each Selling
Stockholder agrees, severally and not jointly, to sell to the Underwriters the
number of shares of Underwritten Securities set forth in Schedule II opposite
the name of such Selling Stockholder, and each Underwriter agrees, severally and
not jointly, to purchase from such Selling Stockholder, at a purchase price of
$____ per share (the "Purchase Price"),that proportion of the number of shares
of Underwritten Securities set forth
9
<PAGE>
in Schedule II opposite the name of such Selling Stockholder which the number of
shares of Underwritten Securities set forth in Schedule I opposite the name of
such Underwriter bears to the total number of Underwritten Securities, subject,
in each case, to adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional shares.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Option Selling Stockholders
hereby grant an option to the several Underwriters to purchase, severally and
not jointly, up to an aggregate of 1,350,000 shares of Option Securities, with
each Option Selling Stockholder granting an option to purchase up to the number
of shares of Option Securities set forth in Schedule II opposite the name of
such Option Selling Stockholder, at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may be
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or in
part at any time (but not more than once) on or before the 30th day after the
date of the Prospectus upon written or telegraphic notice by the Representatives
to the Company and such Option Selling Stockholders (or their attorney) setting
forth the aggregate number of shares of the Option Securities as to which the
several Underwriters are exercising the option and the settlement date. In the
event that the Underwriters exercise less than their full over-allotment option,
the number of Option Securities to be sold by each Option Selling Stockholder
shall be, as nearly as practicable, in the same proportion to the total number
of Option Securities to be sold as the number of Option Securities set forth in
Schedule II opposite the name of such Option Selling Stockholder bears to the
total number of Option Securities. The number of shares of the Option
Securities to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Securities to be purchased by the
several Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as the Representatives in their absolute
discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the Underwritten
--------------------
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third business day prior to
the Closing Date) shall be made at 10:00 AM, New York City time, on May __,
1999, which date and time may be postponed by agreement among the
Representatives and the Company or as provided in Section 9 hereof (such date
and time of delivery and payment for the Securities being herein called the
"Closing Date"). Delivery of the Securities shall be made to the
Representatives for the respective accounts of the several Underwriters against
payment by the several Underwriters through the Representatives of the
respective aggregate purchase prices of the Securities being sold by the Selling
Stockholders to or upon the order of the Selling Stockholders by wire transfer
payable in same day funds to an account or accounts specified by the Selling
Stockholders. Delivery of the Securities shall be made at such location in New
York, New York as Salomon Smith Barney Inc. shall reasonably designate at least
one business day in advance of the Closing Date and payment for such Securities
shall be made at the offices of Hogan & Hartson L.L.P., 555 Thirteenth Street,
N.W., Washington, D.C. 20004. Certificates for the Securities shall be
registered in such names and in such denominations as Salomon Smith Barney Inc.
may request not less than two business days in advance of the Closing Date.
10
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The Selling Stockholders agree to have the certificates for the Securities
available for inspection, checking and packaging by the Representatives in New
York, New York, not later than 1:00 PM on the business day prior to the Closing
Date.
Each Selling Stockholder will pay all applicable state transfer taxes, if
any, involved in the transfer to the several Underwriters of the Securities to
be purchased by them from such Selling Stockholder and the respective
Underwriters will pay any additional stock transfer taxes involved in further
transfers.
If the option provided for in Section 2(b) hereof is exercised after the
third business day prior to the Closing Date, the Option Selling Stockholders
will deliver to the Representatives, at 388 Greenwich Street, New York, New
York, on the date specified by the Representatives (which shall be within three
business days after exercise of said option), certificates for the Option
Securities in such names and denominations as the Representatives shall have
requested at least two business days in advance of the settlement date against
payment of the purchase price thereof to or upon the order of the Option Selling
Stockholders by wire transfer payable in same day funds to an account specified
by the Option Selling Stockholders at least one business day in advance of the
settlement date. The Option Selling Stockholders agree to have the certificates
for the Option Securities available for inspection, checking and packaging by
the Representatives in New York, New York, not later than 1:00 p.m. on the
business day prior to the settlement date. If settlement for the Option
Securities occurs after the Closing Date, the Company and such Option Selling
Stockholders will deliver to the Representatives on the settlement date for the
Option Securities, and the obligation of the Underwriters to purchase the Option
Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters confirming as of such date the opinions, certificates
and letters delivered on the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
------------------------
Underwriters propose to offer the Securities for sale to the public as set forth
in the Prospectus.
5. Agreements.
----------
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof to become effective. Prior to the termination of the offering of
the Securities, the Company will not file any amendment of the Registration
Statement or supplement to the Prospectus or any Rule 462(b) Registration
Statement unless the Company has furnished you a copy for your review prior
to filing and will not file any such proposed amendment or supplement to
which you reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule 424(b),
the Company will cause the Prospectus, properly completed, and any
supplement thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to
11
<PAGE>
the Representatives of such timely filing. The Company will promptly advise
the Representatives (A) when the Registration Statement, if not effective
at the Execution Time, and any amendment thereto, shall have become
effective, (B) when the Prospectus, and any supplement thereto, shall have
been filed (if required) with the Commission pursuant to Rule 424(b) or
when any Rule 462(b) Registration Statement shall have been filed with the
Commission, (C) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have been
filed or become effective, (D) of any request by the Commission or its
staff for any amendment of the Registration Statement, or any 462(b)
Registration Statement or supplement to the Prospectus or for any
additional information with respect to the Registration Statement or the
Prospectus, (E) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (F) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order and, if issued, to obtain as soon as possible the
withdrawal thereof.
(ii) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Prospectus as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary
to make the statements therein in the light of the circumstances under
which they were made not misleading, or if it shall be necessary to amend
the Registration Statement or supplement the Prospectus to comply with the
Act or the Exchange Act or the respective rules thereunder, the Company
promptly will (1) notify the Representatives of such event, (2) prepare and
file with the Commission, subject to the second sentence of paragraph (a)
(i) of this Section 5, an amendment or supplement which will correct such
statement or omission or effect such compliance and (3) supply any
supplemented Prospectus to you in such quantities as you may reasonably
request.
(iii) As soon as reasonably practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries which
will satisfy the provisions of Section 11(a) of the Act and Rule 158 under
the Act.
(iv) The Company will furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a copy
of the Registration Statement (without exhibits thereto) and, so long as
delivery of a prospectus by an Underwriter or dealer may be required by the
Act, as many copies of each Preliminary Prospectus and the Prospectus and
any supplement thereto as the Representatives may reasonably request. The
Company will pay the expenses of printing or other production of all
documents relating to the offering.
(v) The Company will cooperate with the Representatives and counsel
for the Underwriters to register or qualify the Securities for sale under
the laws of such jurisdictions
12
<PAGE>
as the Representatives may designate, will maintain such registrations or
qualifications in effect so long as required for the distribution of the
Securities and will pay the fee of the National Association of Securities
Dealers, Inc. in connection with its review of the offering; provided,
--------
however, that in no event shall the Company be obligated to register or
-------
qualify as a foreign corporation where it is not now so qualified or to
take any action that would subject it to general service of process in
suits in any jurisdiction where it is not now so subject.
(vi) Unless this Agreement shall be terminated prior to the Closing
Date, the Company will not, without the prior written consent of Salomon
Smith Barney Inc., offer, sell, contract to sell, pledge, or otherwise
dispose of (or enter into any transaction which is designed to, or might
reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing (or participation in the filing) of a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange Act,
any other shares of Common Stock or any securities convertible into, or
exercisable, or exchangeable for, shares of Common Stock; or publicly
announce an intention to effect any such transaction, for a period of 90
days after the date of this Agreement, provided, however, that the Company
-------- -------
may (A) issue and sell Common Stock or securities convertible into or
exchangeable or exercisable for or repayable with Common Stock in
connection with acquisitions or any employee or director benefit or stock
purchase or stock option plans, (B) grant or award Common Stock, options to
purchase Common Stock, or other securities convertible into or exchangeable
for or repayable with Common Stock, in connection with acquisitions or
under such plans, as such plans are in effect at the Execution Time, (C)
issue Common Stock issuable upon the conversion of securities or the
exercise of warrants outstanding at the Execution Time or issued, sold,
granted or awarded pursuant to this proviso, and (D) take any other actions
necessary in connection with any of the foregoing in order to register such
securities or Common Stock with the Commission under the Act.
(vii) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(b) Each Selling Stockholder agrees with the several Underwriters that:
(i) Unless this Agreement shall be terminated prior to the Closing
Date, each such Selling Stockholder (other then MHC Investment Company)
will not, without the prior written consent of Salomon Smith Barney Inc.,
offer, sell, contract to sell, pledge or otherwise dispose of, (or enter
into any transaction which is designed to, or might reasonably be expected
to, result in the disposition (whether by actual disposition or effective
economic disposition due to cash settlement or otherwise) by such Selling
Stockholder or any affiliate of such Selling Stockholder or any person in
privity with such Selling Stockholder or any affiliate of such Selling
Stockholder) directly or indirectly, or participate in the filing of a
registration statement with the Commission in respect of, or establish or
increase a put equivalent position or liquidate or decrease a call
13
<PAGE>
equivalent position within the meaning of Section 16 of the Exchange Act
with respect to, any shares of Common Stock of the Company or any
securities convertible into or exercisable or exchangeable for such Common
Stock, or publicly announce an intention to effect any such transaction of,
any shares of Common Stock beneficially owned by such Selling Stockholder,
or any securities convertible into, or exchangeable for, shares of Common
Stock, for a period of 90 days after the date of this Agreement, other than
shares of Common Stock disposed of as bona fide gifts or pledges or private
sales by a trust to a settlor of such trust where the recipients of such
gifts or the pledgees or settlor, as the case may be, agree in writing with
the Underwriters to be bound by the terms of this paragraph. The foregoing
sentence shall not apply to the Securities to be sold by such Selling
Stockholder under this Agreement.
(ii) Such Selling Stockholder will not take any action designed to or
which has constituted or which might reasonably be expected to cause or
result, under the Exchange Act or otherwise, in stabilization or
manipulation of the price of any security of the Company to facilitate the
sale or resale of the Securities.
(iii) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as delivery
of a prospectus relating to the Securities by an underwriter or dealer may
be required under the Act, of (a) any material change in the Company's
condition (financial or otherwise), prospects, earnings, business or
properties which comes to the attention of such Selling Stockholder,
without requiring any independent investigation by such Selling
Stockholder, (b) any change in information in the Registration Statement or
the Prospectus relating to such Selling Stockholder or (c) any new material
information relating to the Company or relating to any matter stated in the
Prospectus which comes to the attention of such Selling Stockholder,
without requiring any independent investigation by such Selling
Stockholder.
6. Conditions to the Obligations of the Underwriters. The obligations of
-------------------------------------------------
the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Company and the Selling Stockholders made in any certificates pursuant to
the provisions hereof, to the performance by the Company and the Selling
Stockholders of their respective obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of the Prospectus, or any
14
<PAGE>
supplement thereto, is required pursuant to Rule 424(b), the Prospectus,
and any such supplement, will be filed in the manner and within the time
period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been instituted or threatened.
(b) The Company shall have furnished to the Representatives the
opinion of counsel for the Company, dated the Closing Date, substantially
in the form of Exhibit A.
(c) The Company shall have furnished to the Purchasers the opinion of
Swidler Berlin Shereff Friedman, LLP, special counsel to the Company on
regulatory matters, dated the Closing Date, to the effect that:
(i) the statements in or incorporated by reference in the
Prospectus under the headings "Risk Factors - 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,"
"Risk Factors - We May Not Succeed in Developing or Making a Profit
from Wireless Services," "Risk Factors - Competition in the Wireless
Telecommunications Industry Could Make it Harder for Us to
Successfully Offer Wireless Services," "Risk Factors - Government
Regulation May Increase Our Cost of Providing Services, Slow Our
Expansion into New Markets and Subject Our Services to Additional
Competitive Pressures," "Business - Market Potential," "Business -
Expansion of Services Using Our Own Communications Network
Facilities," "Business - Proposed Wireless Services," "Business -
Competition" and "Business - Regulation" fairly and accurately
summarize the laws, case law, rules, regulations and orders of the
Federal Communications Commission ("FCC") and the comparable state
regulatory agencies or bodies with direct regulatory jurisdiction over
telecommunications matters in the states in which the Company and any
of the Subsidiaries provide intrastate services (the "State Regulatory
Agencies") except for such changes with respect to such laws, case
law, rules, regulations and orders which could not have a material
adverse effect on the Company and, to the best knowledge of such
counsel, the statements in or incorporated by reference in the
Prospectus under the headings "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," "Risk Factors - Actions by US WEST May Make it
More Difficult for Us to Offer Our Communications Services" and
"Business - Legal Proceedings" fairly and accurately summarize the
legal proceedings set forth therein with respect to US WEST
Communications, Inc. except for such changes with respect to such
legal proceedings and action which could not have a material adverse
effect on the Company;
(ii) the Company and the Subsidiaries possess all material
certificates, authorities and permits required by the FCC and State
Regulatory Agencies for the provision of the telecommunications
services currently provided by the Company and the Subsidiaries,
except where the failure to possess such certificates, authorities or
15
<PAGE>
permits could not reasonably be expected to have a material adverse
effect on the Company and its subsidiaries; and the Company and the
Subsidiaries are in compliance in all material respects with such
certificates, authorities and permits;
(iii) to the best knowledge of such counsel, neither the Company
nor any of the Subsidiaries is subject to any pending or threatened
action, suit or proceeding before the FCC or any State Regulatory
Agency or (with respect to federal or state telecommunications laws)
any court which could reasonably be expected to have a material
adverse effect on the Company and its subsidiaries, except as
disclosed in or incorporated by reference in the Prospectus;
(iv) no consent, approval, authorization or order of the FCC or
any State Regulatory Agency is required for the sale of the Securities
or the consummation of the transactions contemplated hereby; and
(v) neither the sale of the Securities nor the consummation of
the transactions contemplated hereby will result in a breach or
violation of any law, rule, regulation, judgment, order or decree of
the FCC or any State Regulatory Agency applicable to the Company or
any of the Subsidiaries.
In rendering such opinion, such counsel may rely as to matters of fact, to
the extent they deem proper and reasonable, on certificates of public
officials and responsible officers of the Company, including certificates
that define the scope of the telecommunications services provided by the
Company and the Subsidiaries.
(d) The Selling Stockholders shall have furnished to the
Representatives the opinion of Shuttleworth & Ingersoll P.C. for certain
Selling Stockholders, Schiff Hardin & Waite for the Lumpkin family trusts,
Paul Leighton, Assistant General Counsel of MidAmerican Energy Holdings
Company for MHC Investment Company and Edwards & Angell, LLP for
Media/Communications Partners III Limited Partnership and M/C Investors
L.L.C., dated the Closing Date, to the effect that:
(i) this Agreement and the Custody Agreement have been duly
executed and delivered by the Selling Stockholders, the Custody
Agreement is valid and binding on the Selling Stockholders and each
Selling Stockholder has full legal right and authority to sell,
transfer and deliver in the manner provided in this Agreement and the
Custody Agreement the Securities being sold by such Selling
Stockholder hereunder;
(ii) the delivery by each Selling Stockholder to the several
Underwriters of certificates for the Securities being sold hereunder
by such Selling Stockholder against payment therefor as provided
herein, will pass good title to such Securities to the several
Underwriters, free and clear of all liens, encumbrances, equities and
claims whatsoever;
16
<PAGE>
(iii) no consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by any
Selling Stockholder of the transactions contemplated herein, except
such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters and such other approvals (specified in such opinion) as
have been obtained; and
(iv) neither the sale of the Securities being sold by any Selling
Stockholder nor the consummation of any other of the transactions
herein contemplated by any Selling Stockholder or the fulfillment of
the terms hereof by any Selling Stockholder will conflict with, result
in a breach or violation of, or constitute a default under any law or
the charter or by-laws of the Selling Stockholder or the terms of any
indenture or other agreement or instrument known to such counsel and
to which any Selling Stockholder or any of its subsidiaries is a party
or bound, or any judgement, order or decree known to such counsel to
be applicable to any Selling Stockholder or any of its subsidiaries of
any court, regulatory body, administrative agency, governmental body
or arbitrator having jurisdiction over any Selling Stockholder or any
of its subsidiaries.
In rendering such opinion, such counsel may rely as to matters of fact, to
the extent they deem proper and reasonable, on certificates of the Selling
Stockholders and public officials.
(e) The Representatives shall have received from Mayer, Brown & Platt,
counsel for the Underwriters, such opinion or opinions, dated the Closing
Date, with respect to the sale of the Securities, the Registration
Statement, the Prospectus (together with any supplement thereto) and other
related matters as the Representatives may reasonably require, and the
Company and the Selling Stockholders shall have furnished to such counsel
such documents as they may reasonably request for the purpose of enabling
them to pass upon such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the Closing Date, to the effect that the signers of such certificate
have carefully examined the Registration Statement, the Prospectus, any
supplements to the Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of
the Closing Date with the same effect as if made on the Closing Date
and the Company has complied in all material respects with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to the Closing Date;
17
<PAGE>
(ii) the Registration Statement has become effective under the
Act; any required filing of the Prospectus, and any supplement
thereto, pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); and no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or, to
the Company's knowledge, threatened; and
(iii) since the date of the most recent audited financial
statements included or incorporated by reference in the Prospectus
(exclusive of any supplement thereto), there has been no material
adverse change in the condition (financial or other), earnings,
business, prospects or properties of the Company and its subsidiaries,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto).
(g) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by or on behalf of such Selling
Stockholder, dated the Closing Date, to the effect that the signer of such
certificate has reviewed the Prospectus, any supplement to the Prospectus
and this Agreement and that the representations and warranties of such
Selling Stockholder in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as if made on
the Closing Date.
(h) At the Execution Time and at the Closing Date, Arthur Andersen LLP
shall have furnished to the Representatives a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the Exchange Act
and the respective applicable published rules and regulations thereunder
and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules, if any, included or incorporated by
reference in the Registration Statement and the Prospectus and
reported on by them, as applicable, comply in form in all material
respects with the applicable accounting requirements of the Act and
the Exchange Act and the related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and its subsidiaries;
carrying out certain specified procedures (but not an examination in
accordance with generally accepted auditing standards) which would not
necessarily reveal matters of significance with respect to the
comments set forth in such letter; a reading of the minutes of the
meetings of the stockholders, directors and the Audit and Compensation
Committee of the Company and the Subsidiaries; and inquiries of
certain officials of the Company who have responsibility for financial
and accounting matters of the Company and its subsidiaries as to
18
<PAGE>
transactions and events subsequent to December 31, 1998, nothing came
to their attention which caused them to believe that:
(1) any unaudited financial statements included or
incorporated by reference in the Registration Statement and the
Prospectus do not comply in form in all material respects with
applicable accounting requirements of the Act and with the
published rules and regulations of the Commission with respect to
financial statements included or incorporated in quarterly
reports on Form 10-Q under the Exchange Act; and said unaudited
financial statements are not in conformity with generally
accepted accounting principles applied on a basis substantially
consistent with that of the audited financial statements included
in the Registration Statement and the Prospectus; or
(2) with respect to the period subsequent to December 31,
1998, there were any changes, at a specified date not more than
five business days prior to the date of the letter, in the long-
term debt of the Company and its subsidiaries or capital stock of
the Company or decreases in the stockholders' equity of the
Company and its subsidiaries as compared with the amounts shown
on the December 31, 1998 consolidated balance sheet included or
incorporated by reference in the Registration Statement and the
Prospectus, or for the period from January 1, 1999 to such
specified date as compared with the corresponding period in the
preceding year, there were any decreases in revenue or increases
in operating loss or net loss of the Company and its
subsidiaries, except in all instances for such changes, decreases
or increases set forth in such letter, in which case the letter
shall be accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed
necessary by the Representatives;
(iii) they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company and its subsidiaries) set
forth in or incorporated by reference in the Registration Statement
and the Prospectus, including the information set forth under the
captions "Selected Consolidated Financial Data", "Pro Forma Financial
Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in or incorporated by reference in the
Prospectus, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation; and
(iv) on the basis of a reading of the unaudited pro forma
financial statements included or incorporated by reference in the
Registrations Statement and the Prospectus (the "pro forma financial
statements"); carrying out certain specified
19
<PAGE>
procedures; inquiries of certain officials of the Company who have
responsibility for financial and accounting matters; and proving the
arithmetic accuracy of the application of the pro forma adjustments to
the historical amounts in the pro forma financial statements, nothing
came to their attention which caused them to believe that the pro
forma financial statements do not comply in form in all material
respects with the applicable accounting requirements of Rule 11-02 of
Regulation S-X or that the pro forma adjustments have not been
properly applied to the historical amounts in the compilation of such
statements.
References to the Prospectus in this paragraph (h) includes any
supplement thereto at the date of the letter.
(i) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change, decrease or increase
specified in the letter or letters referred to in paragraph (h) of this
Section 6 or (ii) any change, or any development involving a prospective
change, in or affecting the condition (financial or otherwise), earnings,
business, prospects or properties of the Company and its subsidiaries taken
as a whole, whether or not arising from transactions in the ordinary course
of business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto) the effect of which, in any case
referred to in clause (i) or (ii) above, is, in the judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment
thereof) and the Prospectus (exclusive of any supplement thereto).
(j) At the Execution Time, the Company shall have furnished to the
Representatives a letter substantially in the form of Exhibit B hereto from
each director and officer of the Company and each Selling Stockholder
except for MHC Investment Company, addressed to the Representatives, in
which each such person or entity agrees not to offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, or
participate in the filing of a registration statement with the Commission
in respect of, or establish or increase a put equivalent position or
liquidate or decrease a call equivalent position within the meaning of
Section 16 of the Exchange Act with respect to, any shares of Common Stock
of the Company or any securities convertible into or exercisable or
exchangeable for such Common Stock, or publicly announce an intention to
effect any such transaction of any shares of Common Stock beneficially
owned by such person or entity or any securities convertible into, or
exchangeable for, shares of Common Stock for a period of 90 days following
the Execution Time without the prior written consent of Salomon Smith
Barney Inc., except in the case of each of such persons and entities,
shares of Common Stock disposed of as bona fide gifts or pledges or private
sales by a trust to a settlor of such trust where the recipients of such
gifts or the pledgees or settlor, as the case may be, agree in writing with
the Underwriters to be bound by the terms of this paragraph (j).
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<PAGE>
(k) Prior to the Closing Date, the Company shall have furnished to the
Representatives such further information, certificates and documents as the
Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled in all material respects when and as provided in this Agreement, or if
any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled at,
or at any time prior to, the Closing Date by the Representatives. Notice of
such cancellation shall be given to the Company and each Selling Stockholder in
writing or by telephone confirmed in writing.
The documents required to be delivered by this Section 6 shall be delivered
at the office of Hogan & Hartson L.L.P., Columbia Square, 555 Thirteenth Street,
N.W., Washington, DC 20004, counsel for the Company, at 9:00 a.m., on the
Closing Date.
7 Reimbursement of Underwriters' Expenses. If the sale of the Securities
---------------------------------------
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof or because of any refusal,
inability or failure on the part of the Company or any Selling Stockholder to
perform any agreement herein or comply with any provision hereof other than by
reason of a default by any of the Underwriters, the Company will reimburse the
Underwriters severally through Salomon Smith Barney Inc. upon demand for all
reasonable out-of-pocket expenses (including reasonable fees and disbursements
of counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. If the Company is required to
make any payments to the Underwriters under this Section 7 because of any
Selling Stockholder's refusal, inability or failure to satisfy any condition to
the obligations of the Underwriters set forth in Section 6, then such Selling
Stockholder shall reimburse the Company on demand for all amounts so paid.
8 Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls any Underwriter 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 for the registration of the
Securities as originally filed or in any amendment thereof, or in any
Preliminary Prospectus or the 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 such case to the extent that any such loss,
claim, damage or
21
<PAGE>
liability arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with information furnished in writing to the Company by or on
behalf of any Underwriter through the Representatives or by or on behalf of any
Selling Stockholder specifically for inclusion therein; and provided, further,
-------- -------
that the foregoing indemnity agreement with respect to any Preliminary
Prospectus or Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting or causing any such losses, claims, damages or
liabilities purchased Securities (or to the benefit of any person controlling
such Underwriter or any directors, officers, employees and agents of each
Underwriter), if a copy of the Prospectus (or the Prospectus as amended or
supplemented), if the Company shall have timely furnished the Underwriters with
sufficient copies thereof, was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Securities to such person
and if the Prospectus (or the Prospectus as amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage or liability. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls the Company or any
Underwriter within the meaning of either the Act or the Exchange Act and each
other Selling Stockholder to the same extent as the foregoing indemnity from the
Company to each Underwriter, but only with reference to information furnished in
writing to the Company by or on behalf of such Selling Stockholder specifically
for inclusion in the documents referred to in the foregoing indemnity. The
Company and each Underwriter acknowledges that the information set forth
with respect to each Selling Stockholder under the heading "Principal and
Selling Stockholders" and the statements regarding the Selling Stockholders'
portion of the total expenses of the offering under the heading "Underwriting"
in any Preliminary Prospectus and the Prospectus constitutes the only
information furnished in writing by or on behalf of such Selling Stockholder for
inclusion in any Preliminary Prospectus or the Prospectus; and provided,
--------
further, that the foregoing indemnity agreement with respect to any Preliminary
- -------
Prospectus or Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting or causing any such losses, claims, damages or
liabilities purchased Securities (or to the benefit of any person controlling
such Underwriter or any directors, officers, trustees, employees and agents of
each Underwriter), if a copy of the Prospectus (or the Prospectus as amended or
supplemented), if the Company shall have timely furnished the Underwriters with
sufficient copies thereof, was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered, at or
prior to the written confirmation of the sale of the Securities to such person
and if the Prospectus (or the Prospectus as amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage or liability. This
indemnity agreement will be in addition to any liability which each Selling
Stockholder may otherwise have.
22
<PAGE>
(c) Each Underwriter severally and not jointly agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each Selling Stockholder and
their directors, officers, employees and agents, to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with
reference to information relating to such Underwriter furnished in writing to
the Company by or on behalf of such Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity. This indemnity agreement will be in addition to any liability which
any Underwriter may otherwise have. The Company and each Selling Stockholder
acknowledge that the statements regarding delivery set forth in the last
paragraph of the cover page and under the heading "Underwriting," the list of
Underwriters and their respective participation in the sale of the Securities,
the sentences related to concessions and reallowances and the paragraph related
to stabilization, syndicate covering transactions and penalty bids in any
Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus, and you, as the
Representatives, confirm that such statements are correct.
(d) Promptly after receipt by an indemnified party under this Section 8 of
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 8, 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), (b) or (c) above unless and to the extent it did
not otherwise learn of such action and such failure results in the forfeiture by
the indemnifying party of substantial rights and defenses and (ii) will not, in
any event, relieve the indemnifying party from any obligations to any
indemnified party other than the indemnification obligation provided in
paragraph (a), (b) or (c) 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 reasonably 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 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,
23
<PAGE>
action, suit or proceeding in respect of which indemnification or contribution
may be sought hereunder (whether or not the indemnified parties are actual or
potential parties to such claim or action) unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a), (b) or (c)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason in respect of any and all losses, claims,
damages or liabilities (or actions in respect thereof), the relevant
indemnifying party agrees 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 the Company, the Selling
Stockholders and the Underwriters, as applicable, from the offering of the
Securities; provided, however, that in no case shall any Underwriter (except as
-------- -------
may be provided in any agreement among underwriters relating to the offering of
the Securities) be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities purchased by such
Underwriter hereunder. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company, the Selling Stockholders
and the Underwriters shall contribute in such proportion as is appropriate to
reflect not only such relative benefits of the Company, the Selling Stockholders
and the Underwriters, as applicable, but also the relative fault of the Company,
of the Selling Stockholders and of the Underwriters in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Selling Stockholders
shall be deemed to be equal to the total net proceeds from the offering (before
deducting expenses) received by each of them, and benefits received by the
Underwriters shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover page of the Prospectus;
provided that, for purposes of the contribution provisions contained in this
Section 8(e), any benefits received by the Selling Stockholders shall be deemed
to have been received by the Company if the Company is an indemnifying party.
Relative fault shall be determined by reference to whether any alleged untrue
statement of a material fact or the omission or alleged omission of a material
fact relates to information provided by the Company, the Selling Stockholders on
the or the Underwriters on the other, the intent of the parties and their
relative knowledge, access to information and opportunity to correct or prevent
such untrue statement or omission. The Company, the Selling Stockholders and the
Underwriters 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 (e), 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 8, each person who
controls an Underwriter within the meaning of either the Act or the Exchange Act
and each director, officer, employee and agent of an Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Company within the meaning of either the Act or the Exchange Act, each
director of the Company and each officer who shall have signed the Registration
Statement shall have the same rights to contribution as the Company, subject in
each case to the applicable terms and conditions of this paragraph (e).
24
<PAGE>
9 Default by an Underwriter. If any one or more Underwriters shall fail
-------------------------
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Underwritten
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate amount of Underwritten Securities set forth opposite the names of all
the remaining Underwriters) the Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase; provided, however, that in the event
-------- -------
that the aggregate amount of Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase shall exceed 10% of the aggregate
amount of Underwritten Securities set forth in Schedule I hereto, the remaining
Underwriters shall have the right to purchase all, but shall not be under any
obligation to purchase any, of such Securities, and if such nondefaulting
Underwriters do not purchase all such Securities, this Agreement will terminate
without liability to any nondefaulting Underwriter, the Selling Stockholders or
the Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
five days, as the Representatives shall determine in order that the required
changes in the Registration Statement and the Prospectus or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Underwriter of its liability, if any, to the
Company, the Selling Stockholders and any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10 Termination. This Agreement shall be subject to termination in the
-----------
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if prior to such time (i) trading
in the Company's Common Stock shall have been suspended by the Commission or the
Nasdaq National Market or trading in securities generally on the New York Stock
Exchange or the Nasdaq National Market shall have been suspended or limited or
minimum prices shall have been established on either of such Exchange or Market,
(ii) a banking moratorium shall have been declared either by Federal or New York
State authorities or (iii) there shall have occurred any outbreak or escalation
of hostilities, declaration by the United States of a national emergency or war
or other calamity or crisis the effect of which on financial markets is such as
to make it, in the judgment of the Representatives, impracticable or inadvisable
to proceed with the offering or delivery of the Securities as contemplated by
the Prospectus (exclusive of any supplement thereto).
11 Representations and Indemnities to Survive. The respective
------------------------------------------
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors or
controlling persons referred to in Section 8 hereof, and will survive delivery
of and payment for the Securities. The provisions of Sections 7 and 8 hereof
shall survive the termination or cancellation of this Agreement.
25
<PAGE>
12 Notices. All communications hereunder will be in writing and
-------
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or sent by facsimile transmission and confirmed to Salomon Smith
Barney Inc., General Counsel (fax no.: (212) 816-7912) and confirmed to the
General Counsel, Salomon Smith Barney Inc., at 388 Greenwich Street, New York,
New York, 10013; or, if sent to the Company, will be mailed, delivered or sent
by facsimile transmission and confirmed to it at McLeodUSA Incorporated,
McLeodUSA Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa
52406, attention of the legal department; or if sent to the Selling
Stockholders, will be mailed, delivered or sent by facsimile transmission and
confirmed to them at the addresses set forth on Schedule II hereto.
13 Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14 Applicable Law. This Agreement will be governed by and construed in
--------------
accordance with the laws of the State of New York.
15 Counterparts. This Agreement may be signed in one or more
------------
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16 Headings. The section headings used herein are for convenience only
--------
and shall not affect the construction hereof.
17 Definitions. The terms which follow, when used in this Agreement,
-----------
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated
thereunder.
26
<PAGE>
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a)(i) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that omits
Rule 430A Information.
"Prospectus" shall mean the prospectus relating to the Securities that
is first filed pursuant to Rule 424(b) after the Execution Time or, if no
filing pursuant to Rule 424(b) is required, shall mean the form of final
prospectus relating to the Securities included in the Registration
Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a)(i) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and, in the
event any post-effective amendment thereto or any Rule 462(b) Registration
Statement becomes effective prior to the Closing Date, shall also mean such
registration statement as so amended or such Rule 462(b) Registration
Statement, as the case may be. Such term shall include any Rule 430A
Information deemed to be included therein at the Effective Date as provided
by Rule 430A.
"Rule 424", "Rule 430A" and "Rule 462" refer to such rules under the
Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating
to the offering covered by the registration statement referred to in
Section 1(a) hereof.
27
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the
Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
MCLEODUSA INCORPORATED
By:
-----------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By: Salomon Smith Barney Inc.
By:
-----------------------------------
Name:
Title:
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
28
<PAGE>
The foregoing Agreement is hereby
confirmed and accepted as of the
date first written.
HEARTLAND PROPERTIES, INC.
By:
------------------------------
ALLIANT ENERGY
CHARITABLE FOUNDATION
By:
------------------------------
MHC INVESTMENT COMPANY
By:
------------------------------
MEDIA/COMMUNICATIONS PARTNERS II LIMITED PARTNERSHIP
By:
------------------------------
M/C INVESTORS L.L.C.
By:
------------------------------
MARGARET LUMPKIN KEON TRUST
DATED MAY 13, 1978
By:
------------------------------
By:
------------------------------
MARGARET L. KEON 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
JOSEPH JOHN KEON III DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARGARET L. KEON 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
KATHERINE STODDERT KEON DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARGARET L. KEON 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
LISA ANNE KEON DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARGARET L. KEON 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
MARGARET LYNLEY KEON DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
The Selling Stockholders as named
in Schedule II to the foregoing
Agreement.
<PAGE>
MARGARET L. KEON 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
PAMELA KEON VITALE DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARGARET L. KEON 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
SUSAN TAMARA KEON DEWYNGAERT
DATED APRIL 20, 1990
By:
------------------------------
By:
------------------------------
RICHARD ANTHONY LUMPKIN 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
BENJAMIN IVERSON LUMPKIN DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
RICHARD ANTHONY LUMPKIN 1990 PERSONAL
INCOME TRUST FOR THE BENEFIT OF
ELIZABETH ARABELLA LUMPKIN DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARY LEE SPARKS 1990 PERSONAL INCOME
TRUST FOR THE BENEFIT OF
ANNE ROMAYNE SPARKS DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARY LEE SPARKS 1990 PERSONAL INCOME
TRUST FOR THE BENEFIT OF
BARBARA LEE SPARKS DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARY LEE SPARKS 1990 PERSONAL INCOME
TRUST FOR THE BENEFIT OF
CHRISTINA LOUISE SPARKS DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
MARY LEE SPARKS 1990 PERSONAL INCOME
TRUST FOR THE BENEFIT OF
JOHN WOODRUFF SPARKS DATED
APRIL 20, 1990
By:
------------------------------
By:
------------------------------
The Selling Stockholders as named in Schedule II of the foregoing Agreement.
STEPHEN C. GRAY
By:
------------------------------
SALLY W. GRAY
By:
------------------------------
BLAKE O. FISHER, JR.
By:
------------------------------
STEPHEN K. BRANDENBURG
By:
------------------------------
DAVID M. BOATNER
By:
------------------------------
DENNIS L. ERICKSON
By:
------------------------------
THOMAS M. COLLINS
By:
------------------------------
ROBERT J. CURREY
By:
------------------------------
LEE LIU
By:
------------------------------
ARTHUR L. CHRISTOFFERSEN
By:
------------------------------
PAUL D. RHINES
By:
------------------------------
THE RHINES FAMILY LIMITED PARTNERSHIP
By:
------------------------------
KIRK E. KAALBERG
By:
------------------------------
ANGELA R. KAALBERG
By:
------------------------------
MICHAEL J. BROWN
By:
------------------------------
LYDIA L. BROWN
By:
------------------------------
ALBERT P. RUFFALO
By:
------------------------------
J. LYLE PATRICK
By:
------------------------------
The Selling Stockholders as named in Schedule II to the foregoing Agreement.
29
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares of
Underwritten Securities
Underwriters To Be Purchased
- ------------ -----------------------
<S> <C>
Salomon Smith Barney Inc...................................
Credit Suisse First Boston Corporation.....................
Merrill Lynch, Pierce, Fenner & Smith Incorporated.........
Total................................................. 9,000,000
=========
</TABLE>
30
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Shares of Number of
Underwritten Securities Option Securities
To Be Sold To Be Sold
----------------------- -----------------
<S> <C>
Heartland Properties, Inc. .................... 639,692 0
Alliant Energy Charitable Foundation........... 300,000 0
MHC Investment Company......................... 6,741,116 28,124
Margaret Lumpkin Keon Trust dated May 13, 600 111,678
1978*.........................................
Margaret L. Keon 1990 Personal Income 58,631 16,406
Trust for the Benefit of Joseph John
Keon III dated April 20, 1990*................
Margaret L. Keon 1990 Personal Income 58,631 16,406
Trust for the Benefit of Katherine
Stoddert Keon dated April 20, 1990*...........
Margaret L. Keon 1990 Personal Income 58,631 16,406
Trust for the Benefit of Lisa Anne Keon
dated April 20, 1990*.........................
Margaret L. Keon 1990 Personal Income 58,631 16,406
Trust for the Benefit of Margaret Lynley
Keon dated April 20, 1990*....................
Margaret L. Keon 1990 Personal Income 58,631 16,406
Trust for the Benefit of Pamela Keon
Vitale dated April 20, 1990*..................
Margaret L. Keon 1990 Personal Income 58,631 16,406
Trust for the Benefit of Susan Tamara
Keon DeWyngaert dated April 20, 1990*.........
Richard Anthony Lumpkin 1990 Personal 137,037 81,713
Income Trust for the Benefit of Benjamin
Iverson Lumpkin dated April 20, 1990*.........
Richard Anthony Lumpkin 1990 Personal 137,037 81,713
Income Trust for the Benefit of
Elizabeth Arabella Lumpkin dated April
20, 1990*.....................................
Mary Lee Sparks 1990 Personal Income 78,308 46,692
Trust for the Benefit of Anne Romayne
Sparks dated April 20, 1990*..................
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Mary Lee Sparks 1990 Personal Income 78,308 46,692
Trust for the Benefit of Barbara Lee
Sparks dated April 20, 1990*..................
Mary Lee Sparks 1990 Personal Income 78,308 46,692
Trust for the Benefit of Christina
Louise Sparks dated April 20, 1990*...........
Mary Lee Sparks 1990 Personal Income 78,308 46,692
Trust for the Benefit of John Woodruff
Sparks dated April 20, 1990*..................
Stephen C. Gray**.............................. 29,296 0
Stephen C. Gray and Sally W. Gray**............ 93,704 17,000
Blake O. Fisher, Jr............................ 30,000 20,000
McLeodUSA Incorporated......................... 5,000 0
Stephen K. Brandenburg......................... 5,000 0
David M. Boatner............................... 20,000 15,000
Dennis L. Erickson............................. 7,500 0
Thomas M. Collins.............................. 50,000 50,000
Robert J. Currey............................... 10,000 0
Lee Liu........................................ 20,000 0
Paul D. Rhines................................. 7,000 0
The Rhines Family Limited Partnership.......... 29,500 3,000
Kirk E. Kaalberg............................... 20,000 20,000
Kirk E. Kaalberg and Angela R. Kaalberg........ 20,000 0
Michael J. Brown**............................. 29,500 20,000
Michael J. Brown and Lydia L. Brown**.......... 20,500 0
Albert P. Ruffalo**............................ 10,000 0
Arthur L. Christoffersen**..................... 0 35,000
J. Lyle Patrick**.............................. 0 10,000
Media/Communication Partners III
Limited Partnership.................... 0 544,514
M/C Investors L.L.C. .......................... 0 27,054
Total..................................... 9,000,000 1,350,000
========= =========
</TABLE>
* The address for this trust is c/o Steven L. Grissom, 121 South 17th Street,
Mattoon, Illinois 61938. These trusts are collectively referred to in this
Agreement as the Lumpkin family trusts.
**The address for this individual or these individuals, as the case may be, is
c/o the name of this individual or these individuals, McLeodUSA Incorporated,
6400 C. Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52401-3177
32
<PAGE>
EXHIBIT B
[Letterhead of Stockholder]
McLeodUSA Incorporated
----------------------
Public Offering of Class A Common Stock
---------------------------------------
May__, 1999
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
As Representatives of the several Underwriters
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, New York 10048
Dear Sirs:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between McLeodUSA
Incorporated, a Delaware corporation (the "Company"), certain Selling
Stockholders named therein and each of you as Representatives of a group of
Underwriters named therein, relating to an underwritten public offering of Class
A Common Stock, $.01 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned agrees not to offer, sell or contract to
sell, pledge or otherwise dispose of, directly or indirectly, or participate in
the filing of a registration statement with the Commission in respect of, or
establish or increase a put equivalent position or liquidate or decrease a call
equivalent position within the meaning of Section 16 of the Exchange Act with
respect to, any shares of Common Stock of the Company or any securities
convertible into or exercisable or exchangeable for such Common Stock, or
publicly announce an intention to effect any such transaction of, any shares of
Common Stock beneficially owned by the undersigned or any securities convertible
into, or exchangeable for, shares of Common Stock for a period of 90 days
following the day on which the Underwriting Agreement is executed without the
prior written consent of Salomon Smith Barney Inc., except shares of Common
Stock disposed of as bona fide gifts or pledges or private sales by a trust to a
settlor of such trust where the recipients of such gifts or the pledgees or
settlor, as the case may be, agree in writing with the Underwriters to be bound
by the terms of this letter.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
<PAGE>
Exhibit 5.1
May 11, 1999
Board of Directors
McLeodUSA Technology Park
McLeodUSA Incorporated
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Gentlemen:
We are acting as special counsel to McLeodUSA Incorporated, a Delaware
corporation (the "Company"), in connection with its registration statement on
Form S-3, as amended (File No. 333-76501) (the "Registration Statement") filed
with the Securities and Exchange Commission relating to the proposed public
offering of up to 10,350,000 shares of the Company's Class A common stock, par
value $0.01 per share, (including 1,350,000 shares subject to an over-allotment
option granted to the Underwriters) all of which shares (the "Shares") are to be
sold by the Selling Stockholders identified in the Registration Statement.
This opinion letter is furnished to you at your request to enable you to fulfill
the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section
229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Amended and Restated Certificate of Incorporation of the Company, as
certified by the Secretary of State of the State of Delaware on May 10,
1999 (the "Amended and Restated Certificate"), the Certificate of
Amendment of Amended and Restated Certificate of Incorporation of the
Company, as certified by the Secretary of State of the State of Delaware
on May 10, 1999 (the "Certificate of Amendment"), the Certificate of
Change of Registered Agent and Registered Office of the Company, as
certified by the Secretary of State of the State of Delaware on May 10,
1999 (together with the Amended and Restated Certificate and the
Certificate of Amendment, the "Certificate of Incorporation"), and the
Certificate of Incorporation as certified by the Secretary of the
Company on the date hereof as being complete, accurate and in effect.
3. The Amended and Restated By-laws of the Company, as certified by the
Secretary of the Company on the date hereof as then being complete,
accurate and in effect.
<PAGE>
May 11, 1999
Page 2
4. The proposed form of Underwriting Agreement among the Company, the
several Underwriters to be named therein, for whom Salomon Smith
Barney Inc., Credit Suisse First Boston Corporation and Merrill Lynch,
Pierce, Fenner & Smith Incorporated will act as representatives, and
the Selling Stockholders, filed as Exhibit 1.1 to the Registration
Statement (the "Underwriting Agreement").
5. A certificate of certain officers of the Company, dated as of the date
hereof, as to certain facts relating to the Company.
6. Resolutions of the Board of Directors of the Company adopted on
March 25, 1999, as certified by the Secretary of the Company on the date
hereof as then being complete, accurate and in effect, relating to the
sale of the Shares and and arrangements in connection therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter is
given, and all statements herein are made, in the context of the foregoing.
In rendering this opinion letter we have relied as to factual matters,
without independent investigation, upon the representations, warranties and
certifications made by the Company in or pursuant to the officers' certificate
indentified in Paragraph 5 above.
This opinion letter is based as to matters of law solely on the General
Corporation Law of the State of Delaware. We express no opinion herein as to any
other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the opinion
that, assuming the receipt by the Company of the consideration as provided in
resolutions of the Company's Board of Directors authorizing issuance of the
Shares, the Shares are validly issued, fully paid and non-assessable under the
General Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the foregoing
subsequent to the delivery of this opinion letter. This opinion letter has been
prepared solely for your use in connection with the filing of the Registration
Statement on the date of this opinion letter and should not be quoted in whole
or in part or otherwise be referred to, nor filed with or furnished to any
governmental agency or other person or entity, without the prior written consent
of this firm.
We hereby consent to the filing of this opinion letter as Exhibit 5.1 to
the Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus constituting a part of the
<PAGE>
May 11, 1999
Page 3
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
HOGAN & HARTSON L.L.P.
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Amendment No. 2 to Form S-3 Registration Statement of our
McLeodUSA Incorporated reports dated January 27, 1999 (except with respect to
the matter discussed in Note 16, as to which the date is March 5, 1999) and to
all references to our Firm included in or made a part of this Registration
Statement.
/s/ Arthur Andersen LLP
Chicago, Illinois
May 11, 1999
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 2 to the Registration Statement (Form S-3) and related Prospectus of
McLeodUSA Incorporated for the registration of 10,350,000 shares of its Class A
Common Stock and to the incorporation by reference therein of our report dated
February 26, 1999, with respect to the consolidated financial statements of
Ovation Communications, Inc. as of December 31, 1998 and 1997 and for the period
from March 27, 1997 (inception) to December 31, 1997 and the year ended December
31, 1998, included in the Registration Statement on Form S-4 (No. 333-71811) of
McLeodUSA Incorporated filed with the Securities and Exchange Commission.
Minneapolis, Minnesota /s/ Ernst & Young L.L.P.
May 11, 1999
