<PAGE>
As filed with the Securities and Exchange Commission on May 28, 1999
Registration No. 333-76857
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
McLeodUSA Incorporated
(Exact name of registrant as specified in its charter)
Delaware 4813 42-1407240
(State or other
jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or Industrial Identification Number)
organization) Classification Code
Number)
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.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5600
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
----------------
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act of 1933 registration statement
number of the earlier effective registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
maximum maximum
Title of each class of Amount to be offering aggregate Amount of
securities to be registered registered price per unit(1) offering price(1) registration fee
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
8 1/8% Senior Notes Due
February 15, 2009..... $500,000,000 100% $500,000,000 $139,000 (2)
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
(2) 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>
SUBJECT TO COMPLETION, DATED MAY 28, 1999
PROSPECTUS
$500,000,000
McLeodUSA Incorporated
Offer To Exchange All Outstanding
8 1/8% Senior Notes Due February 15, 2009
For 8 1/8% Senior Notes Due February 15, 2009
Interest Payable February 15 and August 15, Commencing August 15, 1999
Material Terms of the Exchange Offer
. We are offering to exchange all . We will not receive any proceeds
outstanding notes that are validly from the exchange offer.
tendered and not validly withdrawn
for an equal amount of a new . The terms of the exchange notes to
series of notes which are be issued are substantially
registered under the Securities identical to the outstanding
Act of 1933. notes, except for the transfer
restrictions and registration
. The exchange offer will expire at rights relating to the outstanding
5:00 P.M., New York City time, on notes.
, 1999, unless extended.
. You may only tender your
. The exchange offer is subject to outstanding notes in denominations
customary conditions, including of $1,000 and multiples of $1,000.
that the exchange offer not
violate applicable law or any . Affiliates of McLeodUSA may not
applicable interpretation of the participate in the exchange offer.
Staff of the Securities and
Exchange Commission. . The exchange of notes will not be
a taxable exchange for U.S.
. You may withdraw your tender of federal income tax purposes.
your outstanding notes at any time
before the expiration of the
exchange offer.
Please see "Risk Factors" beginning on page 11 for a discussion of factors you
should consider in connection with the exchange offer.
We are not making this exchange offer in any state or jurisdiction where it is
not permitted.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the notes to be distributed in the exchange offer,
nor have any of these organizations determined that this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 11
Cautionary Note Regarding Forward-Looking Statements....................... 19
The Exchange Offer......................................................... 20
Use of Proceeds............................................................ 29
Capitalization............................................................. 30
Selected Consolidated Financial and Operating Data......................... 31
Pro Forma Financial Data................................................... 33
Description of the Exchange Notes.......................................... 36
Other Indebtedness......................................................... 73
Plan of Distribution....................................................... 75
Legal Matters.............................................................. 76
Experts.................................................................... 76
Where You Can Find More Information........................................ 77
</TABLE>
----------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We 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 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.
We have not taken nor will we take any action in any jurisdiction to permit a
public offering of the exchange notes or the possession or distribution of this
prospectus other than in the United States.
(i)
<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
document refers you, including the Letter of Transmittal. 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 March 31, 1999, we served over 494,700 local lines
in 408 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 reduce 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 March 31, 1999, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.3 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 $674.3 million of cash and investments on hand at March 31,
1999
. additional issuances of debt or equity securities
. projected operating cash flow
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>
SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer.......... We are offering to exchange $1,000 principal
amount of our 8 1/8% Senior Notes due February
15, 2009 which have been registered under the
Securities Act of 1933 and which we refer to as
the exchange notes, for each $1,000 principal
amount of our outstanding unregistered 8 1/8%
Senior Notes due February 15, 2009 which were
issued by us on February 22, 1999 in a private
offering and which we refer to as the outstanding
notes. We refer to the exchange notes and the
outstanding notes together as the February 1999
senior notes.
In order for your outstanding notes to be
exchanged, you must properly tender them before
the exchange offer expires. All outstanding notes
that are validly tendered and not validly
withdrawn will be exchanged. We will issue the
exchange notes promptly after the exchange offer
expires.
You may tender your outstanding notes for
exchange in whole or in part in integral
multiples of $1,000 principal amount.
Registration Rights
Agreement................... We sold the outstanding notes on February 22,
1999 to Salomon Smith Barney Inc., Bear, Stearns
& Co. Inc. and Chase Securities Inc., which we
refer to as the initial purchasers.
Simultaneously with that sale we signed a
registration rights agreement with the initial
purchasers which requires us to conduct this
exchange offer.
You have the right under the registration rights
agreement to exchange your outstanding notes for
exchange notes with substantially identical
terms. This exchange offer is intended to satisfy
these rights. After the exchange offer is
complete, you will no longer be entitled to any
exchange or registration rights with respect to
your outstanding notes.
For a description of the procedures for tendering
outstanding notes, see "The Exchange Offer--
Procedures for Tendering Outstanding Notes."
Consequences of Failure to
Exchange Your Outstanding
Notes....................... If you do not exchange your outstanding notes for
exchange notes in the exchange offer, you will
continue to be subject to the restrictions on
transfer provided in the outstanding notes and
the indenture governing the February 1999 senior
notes. In general, the outstanding notes may not
be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the
3
<PAGE>
Securities Act and applicable state securities
laws. We do not plan to register the outstanding
notes under the Securities Act.
Expiration Date............. The exchange offer will expire at 5:00 p.m., New
York City time, on , 1999 unless extended by
us, in which case the term expiration date will
mean the latest date and time to which the
exchange offer is extended. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Conditions to the Exchange
Offer....................... The exchange offer is subject to several
customary conditions which we may waive at our
sole discretion. The exchange offer is not
conditioned upon any minimum principal amount of
outstanding notes being tendered for exchange.
See "The Exchange Offer--Conditions to the
Exchange Offer."
We reserve the right, in our sole and absolute
discretion, subject to applicable law, at any
time and from time to time:
. to delay the acceptance of the outstanding
notes
. to terminate the exchange offer if specified
conditions have not been satisfied
. to extend the expiration date of the exchange
offer and retain all tendered outstanding
notes subject, however, to the right of
tendering holders to withdraw their tender of
outstanding notes
. to waive any condition or otherwise amend the
terms of the exchange offer in any respect
See "The Exchange Offer--Expiration Date;
Extensions; Amendments."
Procedures for Tendering
Outstanding Notes........... If you wish to tender your outstanding notes for
exchange, you must:
. complete and sign a Letter of Transmittal
according to the instructions contained in the
Letter of Transmittal
. forward the Letter of Transmittal by mail,
facsimile transmission or hand delivery,
together with any other required documents, to
the exchange agent, either with the
outstanding notes that you tender or in
compliance with the specified procedures for
guaranteed delivery of your outstanding notes.
Some brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer.
4
<PAGE>
Please do not send your Letter of Transmittal or
certificates representing your outstanding notes
to us. You should send those documents only to
the exchange agent. You should direct any
information requests or questions regarding how
to tender your outstanding notes to the exchange
agent. See "The Exchange Offer--Exchange Agent."
Special Procedures for
Beneficial Owners........... If your outstanding notes are registered in the
name of a broker, dealer, commercial bank, trust
company or other nominee, we urge you to contact
such person promptly if you wish to tender your
outstanding notes pursuant to the exchange offer.
See "The Exchange Offer--Procedures for Tendering
Outstanding Notes."
Withdrawal Rights........... You may withdraw the tender of your outstanding
notes at any time before the expiration date by
delivering a written notice of your withdrawal to
the exchange agent according to the withdrawal
procedures described under the heading "The
Exchange Offer--Withdrawal Rights."
Resales of Exchange Notes... We believe that you will be able to offer for
resale, resell or otherwise transfer exchange
notes issued in the exchange offer without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that:
. you are acquiring the exchange notes in the
ordinary course of your business
. you are not participating, and have no
arrangement or understanding with any person
to participate, in the distribution of the
exchange notes
. you are not an "affiliate" of McLeodUSA within
the meaning of Rule 405 under the Securities
Act
Our belief is based on interpretations by the
Staff of the SEC, as set forth in no-action
letters issued to third parties unrelated to us.
The Staff of the SEC has not considered the
exchange offer in the context of a no-action
letter, and we cannot assure you that the Staff
of the SEC would make a similar determination
with respect to this exchange offer.
If our belief is not accurate and you transfer an
exchange note without delivering a prospectus
meeting the requirements of the Securities Act or
without an exemption from such requirements, you
may incur liability under the Securities Act. We
do not and will not assume or indemnify you
against such liability.
5
<PAGE>
Each broker-dealer that receives exchange notes
for its own account in exchange for outstanding
notes which were acquired by such broker-dealer
as a result of market-making or other trading
activities must acknowledge that it will deliver
a prospectus meeting the requirements of the
Securities Act in connection with any resale of
these exchange notes. A broker-dealer may use
this prospectus for an offer to sell, resale or
other transfer of exchange notes. See "Plan of
Distribution."
Exchange Agent.............. The exchange agent for the exchange offer is
United States Trust Company of New York. The
address, telephone number and facsimile number of
the exchange agent are set forth in "The Exchange
Offer--Exchange Agent" and in the Letter of
Transmittal.
Use of Proceeds............. We will not receive any cash proceeds from the
issuance of the exchange notes offered by this
prospectus. See "Use of Proceeds."
United States Federal
Income Tax Consequences..... Your acceptance of the exchange offer and the
related exchange of your outstanding notes for
exchange notes will not be a taxable exchange for
United States federal income tax purposes. You
should not recognize any taxable gain or loss or
any interest income as a result of the exchange.
See "The Exchange Offer--United States Federal
Income Tax Consequences."
See "The Exchange Offer" for more detailed information concerning the terms
of the exchange offer.
6
<PAGE>
SUMMARY OF TERMS OF THE EXCHANGE NOTES
The exchange offer relates to the exchange of up to $500,000,000 principal
amount of exchange notes for up to an equal principal amount of outstanding
notes. The form and terms of the exchange notes are substantially identical to
the form and terms of the outstanding notes, except the exchange notes will be
registered under the Securities Act. Therefore, the exchange notes will not
bear legends restricting their transfer and will not be entitled to
registration under the Securities Act. The exchange notes will evidence the
same debt as the outstanding notes, which they replace. Both the outstanding
notes and the exchange notes are governed by the same indenture, which we refer
to as the February 1999 indenture.
Securities Offered.......... $500 million principal amount of 8 1/8% Senior
Notes due February 15, 2009.
Interest.................... Interest on the exchange notes will accrue at the
rate of 8 1/8% per year and will be payable in
cash semi-annually in arrears on August 15 and
February 15, commencing August 15, 1999.
Ranking..................... The exchange notes will not be secured by any
assets and:
. will be subordinated to all of our existing
and future secured indebtedness, including any
Senior Credit Facility or Qualified Receivable
Facility, as defined in this prospectus,
. will be subordinated to all liabilities of our
subsidiaries, including trade payables
. will rank equal in right of payment with all
of our existing and future senior unsecured
indebtedness
. will rank senior in right of payment to all of
our existing and future subordinated
indebtedness
As of March 31, 1999:
. we had total secured indebtedness of $52.1
million
. our subsidiaries had total liabilities of
$325.0 million
. we had $1.8 billion of outstanding senior
unsecured indebtedness that will rank equal in
right of payment with the exchange notes
. we had no outstanding subordinated
indebtedness
See "Description of the Exchange Notes--General."
Optional Redemption......... We may redeem the exchange notes at our option,
in whole or in part, at any time on or after
February 15, 2004 at the redemption prices set
forth in this prospectus, plus accrued and unpaid
interest, if any, to the date of redemption. In
addition, in the event we sell our common stock
in a Strategic Equity Investment, as defined in
this prospectus, on or before February 15, 2002,
we may, at our option, use all or a portion of
the net proceeds from such sale to redeem
7
<PAGE>
up to 33 1/3% of the originally issued principal
amount of the exchange notes at a redemption
price equal to 108.125% of the principal amount
of the exchange notes plus accrued and unpaid
interest thereon, if any, to the redemption date;
provided that at least 66 2/3% of the originally
issued principal amount of the exchange notes
would remain outstanding immediately after giving
effect to such redemption. See "Description of
the Exchange Notes--Optional Redemption."
Change of Control........... Upon a Change of Control, as defined in this
prospectus, you will have the right to require us
to repurchase all or any part of your exchange
notes at a purchase price equal to 101% of their
principal amount plus accrued and unpaid
interest. However, we cannot assure you we will
have the financial resources necessary to
repurchase the exchange notes upon a Change of
Control. See "Description of the Exchange Notes--
Repurchase at the Option of Holders upon a Change
of Control."
Restrictive Covenants....... The February 1999 indenture contains several
covenants which, among other things, restrict our
ability and the ability of our subsidiaries to:
. incur additional indebtedness
. pay dividends
. make distributions in respect of our or our
subsidiaries' capital stock
. make other restricted payments
. enter into sale and leaseback transactions
. pledge or mortgage assets
. enter into transactions with affiliates or
related persons
. sell assets
. consolidate, merge or sell all or
substantially all of our or our subsidiaries'
assets
These covenants are subject to important
exceptions and qualifications. See "Description
of the Exchange Notes--Covenants."
RISK FACTORS
You should carefully consider the factors set forth under the caption "Risk
Factors" before tendering your outstanding notes for exchange notes.
8
<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 the outstanding 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 outstanding senior notes as if it had occurred at the end of 1998.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs
and the portion of rental expense that is representative of the interest
component of rental expense (deemed to be one-third of rental expense which
management believes is a reasonable approximation of the interest component).
For each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32 million and $51.7 million, respectively. On a pro forma
basis, earnings would not have been sufficient to cover fixed charges by $188.6
million and $61.7 million for the year ended December 31, 1998 and the three
months ended March 31, 1999, respectively.
(table begins on the next page)
9
<PAGE>
Summary Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 81,323 $267,886 $ 604,146 $ 625,181 $134,331 $181,109 $200,805
-------- -------- --------- --------- -------- -------- --------
Operating expenses:
Cost of service....... 52,624 151,190 323,208 329,527 75,045 92,459 99,797
Selling, general and
administrative....... 46,044 148,158 260,931 274,420 58,768 79,811 90,691
Depreciation and
amortization......... 8,485 33,275 89,107 109,720 19,431 35,110 41,680
Other................. 2,380 4,632 5,575 5,575 1,900 -- --
-------- -------- --------- --------- -------- -------- --------
Total operating
expenses............. 109,533 337,255 678,821 719,242 155,144 207,380 232,168
-------- -------- --------- --------- -------- -------- --------
Operating loss......... (28,210) (69,369) (74,675) (94,061) (20,813) (26,271) (31,363)
Interest income
(expense), net........ 5,369 (11,967) (52,234) (85,898) (10,141) (21,204) (26,074)
Other non-operating
income................ 495 1,426 1,997 1,997
Income taxes........... -- -- -- -- 687 (1) (1)
-------- -------- --------- --------- -------- -------- --------
Net loss............... $(22,346) $(79,910) $(124,912) $(177,962) $(30,267) $(47,476) $(57,438)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.55) $ (1.45) $ (1.99) $ (2.60) $ (.49) $ (.72) $ (.80)
======== ======== ========= ========= ======== ======== ========
Weighted average common
shares outstanding.... 40,506 54,974 62,807 68,404 62,227 66,121 71,718
======== ======== ========= ========= ======== ======== ========
Ratio of earnings to
fixed charges......... -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
December 31, 1999
------------------------------------------ -----------
Pro Forma
1996 1997 1998 1998 Actual
-------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Balance Sheet Data:
Current assets......... $224,401 $ 517,869 $ 793,192 $ 1,179,442 $ 974,218
Working capital
(deficit)............. $185,968 $ 378,617 $ 613,236 $ 967,276 $ 740,191
Property and equipment,
net................... $ 92,123 $ 373,804 $ 629,746 $ 706,406 $ 828,591
Total assets........... $452,994 $1,345,652 $1,925,197 $ 2,738,031 $ 2,836,380
Long-term debt less
current maturities.... $ 2,573 $ 613,384 $1,245,170 $ 1,836,876 $ 1,776,475
Stockholders' equity... $403,429 $ 559,379 $ 462,806 $ 651,724 $ 785,415
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $173,782 $601,137 $339,660 $ 739,497 $ 48,930 $ 538,897 $ 560,894
EBITDA(1).............. $(17,345) $(31,462) $ 20,007 $ 21,234 $ 518 $ 8,839 $ 10,317
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines.................................... 65,400 282,600 397,600 494,700
Cities and towns served........................ 120 227 269 408
Route miles.................................... 2,352 4,908 7,120 7,654
Employees...................................... 2,077 4,941 5,300 6,109
</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.
10
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before tendering your outstanding notes for
exchange notes. 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
incorporated by reference in 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 and 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
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 has placed and will
continue to place significant demands on our management, operational and
financial systems and procedures and controls. We may not be able to manage our
anticipated growth effectively, which would harm our business, results of
operations, financial condition and our ability to repay the exchange notes.
Further expansion and development will depend on a number of factors,
including:
. cooperation of the existing local telephone companies
. regulatory and governmental developments
. changes in the competitive climate in which we operate
. development of customer billing, order processing and network management
systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
11
<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, we could have difficulty
obtaining funds to continue our operations or repay the exchange notes. 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. 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, competitive position and ability to repay the
exchange notes.
As of March 31, 1999, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.3 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, we may not be able to expand our markets, operations,
facilities, network and services through acquisitions as we intend.
12
<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 March 31, 1999, we had $1.8 billion of long-term debt and $785.4
million of stockholders' equity. 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.
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' 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
13
<PAGE>
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, microwave
and satellite carriers, providers of digital access and data services, 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
14
<PAGE>
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 those of us 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 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.
15
<PAGE>
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 Our Debt Holders.
As of May 20, Interstate Energy Corporation, 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 38.7% of our
outstanding Class A common stock. These stockholders can collectively control
management policy and may be able to control corporate actions requiring a
stockholder vote, including election of the board of directors. Conflicts of
interest may arise between the interests of these stockholders and holders of
our debt securities. For example, these stockholders may have an interest in
pursuing acquisitions, financings or other transactions that could enhance
their equity investment, but that also increase the risk that we will not have
sufficient funds to repay you. 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
16
<PAGE>
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.
We Depend upon Payments from Our Subsidiaries to Pay Principal and Interest on
Our Debt Obligations.
We are a holding company, which means we conduct all of our operations and
derive all of our operating income from our subsidiaries. Our ability to pay
our obligations, including our obligation to pay principal and interest on the
exchange notes, depends on receiving dividends and other payments from our
subsidiaries, raising additional funds in a public or private equity or debt
offering or selling assets. Our subsidiaries constitute separate legal entities
and have no obligation to pay any amounts due on the exchange notes or to make
funds available to us. Our subsidiaries' ability to pay dividends or make other
payments or advances to us will depend on their operating results and the
requirements of applicable law.
The February 1999 Senior Notes Are Subordinate to Our Subsidiaries' Obligations
and Our Own Secured Obligations.
The exchange notes will be effectively subordinated in right of payment to
all liabilities of our subsidiaries. This means that in the event of a
bankruptcy, liquidation or reorganization, our subsidiaries must pay their
creditors in full before we could use their assets to pay you. As of March 31,
1999, our subsidiaries had total liabilities after the elimination of loans and
advances from us to our subsidiaries of approximately $325 million. In
addition, the February 1999 indenture and the indentures governing our 10 1/2%
senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes and 9 1/2%
senior notes, which we refer to collectively as our indentures, permit us and
our subsidiaries to incur additional debt.
The exchange notes will be unsecured and will be subordinated to our secured
debt. This means if we default on any of our secured debt, our secured
creditors could foreclose on their collateral and receive payment out of the
proceeds of that collateral before we could use those assets to pay you. If the
value of the collateral is less than the amount owed, our secured creditors
will have equal rights with you to our remaining assets. As of March 31, 1999,
we had total secured debt of approximately $52.1 million. The indentures permit
us and our subsidiaries to incur additional secured debt, including unlimited
purchase money debt and up to $250 million under one or more credit facilities.
Some Holders of Exchange Notes May Still Be Subject to Various Transfer
Restrictions.
You may generally sell exchange notes without complying with the registration
requirements of the Securities Act, unless you are:
. an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act
. a broker-dealer that acquired outstanding notes as a result of market-
making or other trading activities
. a broker-dealer that acquired outstanding notes directly from us for
resale pursuant to Rule 144A or another available exemption under the
Securities Act
"Affiliates" of the Company may sell exchange notes only in compliance with
the provisions of Rule 144 under the Securities Act
17
<PAGE>
or another available exemption. The broker-dealers described above must deliver
a prospectus in connection with any resale of exchange notes.
There Is No Established Trading Market for the Exchange Notes Which Could Make
it More Difficult for You to Sell Exchange Notes and Could Adversely Affect
Their Price.
The exchange notes constitute a new issue of securities for which no
established trading market exists. Consequently, it may be more difficult for
you to sell exchange notes. If exchange notes are traded after their initial
issuance, they may trade at a discount, depending upon:
. our financial condition
. prevailing interest rates
. the market for similar securities
. other factors beyond our control, including general economic conditions.
We do not intend to apply for a listing or quotation of the exchange notes on
any securities exchange. The initial purchasers have informed us that they
intend to make a market in the exchange notes. However, the initial purchasers
have no obligation to do so, and may discontinue any market-making activities
at any time without notice. We cannot assure you of the development or
liquidity of any trading market for the exchange notes following the exchange
offer.
Holders of Outstanding Notes Who Fail to Tender May Experience Diminished
Liquidity After the Exchange Offer.
We have not registered nor do we intend to register the outstanding notes
under the Securities Act. Consequently, outstanding notes that remain
outstanding after consummation of the exchange offer will remain subject to
transfer restrictions under applicable securities
laws. Unexchanged outstanding notes will continue to bear a legend reflecting
these restrictions on transfer. Furthermore, we have not conditioned the
exchange offer on receipt of any minimum or maximum principal amount of
outstanding notes. As outstanding notes are tendered and accepted in the
exchange offer, the principal amount of remaining outstanding notes will
decrease. This decrease will reduce the liquidity of the trading market for the
outstanding notes which will make it more difficult for you to sell them. We
cannot assure you of the liquidity, or even the continuation, of the trading
market for the outstanding notes following the exchange offer.
Holders of Outstanding Notes Must Ensure Compliance With Exchange Offer
Procedures.
You are responsible for complying with all exchange offer procedures. You
will receive exchange notes in exchange for your outstanding notes only if,
before the expiration date, you deliver the following to the exchange agent:
. certificates for the outstanding notes or a book-entry confirmation of a
book-entry transfer of the outstanding notes into the exchange agent's
account at the Depository Trust Company, or DTC
. the Letter of Transmittal (or a facsimile thereof), properly completed
and duly executed by you, together with any required signature guarantees
. any other documents required by the Letter of Transmittal
You should allow sufficient time to ensure that the exchange agent receives
all required documents before the exchange offer expires. Neither we nor the
exchange agent has any duty to inform you of defects or irregularities with
respect to the tender of your outstanding notes for exchange. See "The Exchange
Offer."
18
<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.
19
<PAGE>
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
In connection with the sale of the outstanding notes, we entered into the
registration rights agreement with the initial purchasers by which we agreed to
file and to use our best efforts to cause to become effective with the SEC a
registration statement with respect to the exchange of the outstanding notes
for exchange notes with terms identical in all material respects to the terms
of the outstanding notes. A copy of the registration rights agreement has been
filed as an exhibit to the registration statement of which this prospectus is a
part. We are making the exchange offer to satisfy our contractual obligations
under the registration rights agreement.
If you tender your outstanding notes in exchange for exchange notes, you will
represent to us that:
. any exchange notes you receive are being acquired in the ordinary course
of your business
. you have no arrangement or understanding with any person to participate
in a distribution, within the meaning of the Securities Act, of exchange
notes
. you are not an "affiliate" of McLeodUSA within the meaning of Rule 405
under the Securities Act or, if you are an affiliate, you will comply
with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable
. you have full power and authority to tender, exchange, sell, assign and
transfer the tendered outstanding notes
. McLeodUSA will acquire good, marketable and unencumbered title to the
outstanding notes you tender, free and clear of all liens, restrictions,
charges and encumbrances
. the outstanding notes you tender for exchange are not subject to any
adverse claims or proxies
You also will warrant and agree that you will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and transfer
of the outstanding notes you tender in the exchange offer. Each broker-dealer
that receives exchange notes for its own account in exchange for outstanding
notes in the exchange offer, where such outstanding notes were acquired by such
broker-dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. See "Plan of Distribution."
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to the
exchange offer means any person in whose name the outstanding notes are
registered on our books or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in DTC
whose name appears on a security position listing as a holder of outstanding
notes, which, for purposes of the exchange offer, include beneficial interests
in the outstanding notes held by direct or indirect participants in DTC and
outstanding notes held in definitive form.
20
<PAGE>
Terms of the Exchange Offer
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying Letter of Transmittal, to exchange
$1,000 principal amount of exchange notes for each $1,000 principal amount of
outstanding notes properly tendered prior to the expiration date and not
properly withdrawn according to the procedures described below. Holders may
tender their outstanding notes in whole or in part in integral multiples of
$1,000 principal amount.
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes except that:
. the exchange notes have been registered under the Securities Act and
therefore will not be subject to some restrictions on transfer applicable
to the outstanding notes and
. holders of the exchange notes will not be entitled to the rights of
holders of the outstanding notes under the registration rights agreement.
The exchange notes evidence the same indebtedness as the outstanding notes,
which they replace, and will be issued pursuant to, and entitled to the
benefits of, the February 1999 indenture.
The exchange offer is not conditioned upon any minimum principal amount of
outstanding notes being tendered for exchange. We reserve the right in our sole
discretion to purchase or make offers for any outstanding notes that remain
outstanding after the expiration date or, as set forth under "--Conditions to
the Exchange Offer," to terminate the exchange offer and, to the extent
permitted by applicable law, purchase outstanding notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of the exchange offer. As of the date of
this prospectus, $500 million principal amount of outstanding notes is
outstanding.
Holders of outstanding notes do not have any appraisal or dissenters' rights
in connection with the exchange offer. Outstanding notes which are not tendered
for, or are tendered but not accepted in connection with, the exchange offer
will remain outstanding. For a description of the consequences of not tendering
oustanding notes for exchange see "Risk Factors--Holders of Outstanding Notes
Who Fail to Tender May Experience Diminished Liquidity After the Exchange
Offer."
If any tendered outstanding notes are not accepted for exchange because of an
invalid tender, the occurrence of other events set forth in this prospectus or
otherwise, certificates for the unaccepted outstanding notes will be returned,
without expense, to the tendering holder of those notes promptly after the
expiration date.
Holders who tender outstanding notes in connection with the exchange offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of outstanding notes in connection with the exchange offer. We will
pay all charges and expenses, other than applicable taxes described below, in
connection with the exchange offer. See "--Fees and Expenses" for a description
of the fees and expenses that we will pay in connection with the exchange
offer.
Our board of directors makes no recommendation to holders of outstanding
notes as to whether to tender or refrain from tendering all or any portion of
their outstanding notes in the exchange offer. In addition, no one has been
authorized to make any similar recommendation. Holders of outstanding notes
must make their own decision whether to tender in the exchange offer and, if
so, the aggregate amount of outstanding notes to tender after reading this
prospectus and the Letter of Transmittal and consulting with their advisers, if
any, based on their financial position and requirements.
21
<PAGE>
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m., New York City time, on , 1999,
unless we extend the exchange offer, in which case the term "expiration date"
shall mean the latest date and time to which the exchange offer is extended.
We expressly reserve the right in our sole and absolute discretion, subject
to applicable law, at any time and from time to time,
. to delay the acceptance of the outstanding notes for exchange
. to terminate the exchange offer, whether or not any outstanding notes
have been accepted for exchange, if we determine, in our sole and
absolute discretion, that any of the events or conditions referred to
under "--Conditions to the Exchange Offer" has occurred or exists or has
not been satisfied
. to extend the expiration date of the exchange offer and retain all
outstanding notes tendered in the exchange offer, subject, however, to
the right of holders of outstanding notes to withdraw their tendered
outstanding notes as described under "--Withdrawal Rights"
. to waive any condition or otherwise amend the terms of the exchange offer
in any respect
If the exchange offer is amended in a manner that we determine to constitute a
material change, or if we waive a material condition of the exchange offer, we
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered holders of the outstanding notes, and we
will extend the exchange offer to the extent required by Rule 14e-1 under the
Securities Exchange Act.
Any delay in acceptance, termination, extension or amendment will be followed
promptly by:
. oral or written notice of the change to the exchange agent, with any such
oral notice to be promptly confirmed in writing
. a public announcement of the change, which announcement, in the case of
an extension, will be made no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date
Without limiting the manner in which we may choose to make any public
announcement, and subject to applicable laws, we shall have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a release to an appropriate news agency.
Acceptance for Exchange and Issuance of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer, promptly
after the expiration date we will exchange, and will issue to the exchange
agent, exchange notes for outstanding notes validly tendered and not withdrawn
as described under "--Withdrawal Rights."
In all cases, delivery of exchange notes in exchange for outstanding notes
tendered and accepted for exchange in the exchange offer will be made only
after timely receipt by the exchange agent of:
. outstanding notes or a book-entry confirmation of a book-entry transfer
of outstanding notes into the exchange agent's account at DTC
. the Letter of Transmittal, or a facsimile of the letter, properly
completed and duly executed, with any required signature guarantees
. any other documents required by the Letter of Transmittal
Accordingly, the delivery of exchange notes might not be made to all
tendering holders at the same time, and will depend upon when outstanding
notes, book-entry confirmations with respect to outstanding notes and other
required documents are received by the exchange agent.
22
<PAGE>
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of outstanding notes into the exchange agent's account at DTC.
Subject to the terms and conditions of the exchange offer, we will be deemed
to have accepted for exchange, and thereby exchanged, outstanding notes validly
tendered and not withdrawn as, if and when we give oral or written notice to
the exchange agent of our acceptance of those outstanding notes for exchange in
the exchange offer. Any such oral notice shall be promptly confirmed in
writing. Our acceptance for exchange of outstanding notes tendered through any
of the procedures described above will constitute a binding agreement between
the tendering holder and McLeodUSA upon the terms and subject to the conditions
of the exchange offer. The exchange agent will act as agent for McLeodUSA for
the purpose of receiving tenders of outstanding notes, Letters of Transmittal
and related documents, and as agent for tendering holders for the purpose of
receiving outstanding notes, Letters of Transmittal and related documents and
transmitting exchange notes to holders who validly tendered outstanding notes.
The exchange will be made promptly after the expiration date. If for any reason
whatsoever the acceptance for exchange or the exchange of any outstanding notes
tendered in the exchange offer is delayed, whether before or after our
acceptance for exchange of outstanding notes, or we extend the exchange offer
or are unable to accept for exchange or exchange outstanding notes tendered in
the exchange offer, then, without prejudice to our rights set forth in this
prospectus, the exchange agent may, nevertheless, on our behalf and subject to
Rule 14e-1(c) under the Securities Exchange Act of 1934, retain tendered
outstanding notes and such outstanding notes may not be withdrawn except to the
extent tendering holders are entitled to withdrawal rights as described under
"--Withdrawal Rights."
Procedures for Tendering Outstanding Notes
Valid Tender. Except as set forth below, in order for outstanding notes to
be validly tendered in the exchange offer, either:
1. before the expiration date,
. a properly completed and duly executed Letter of Transmittal, or
facsimile of the letter with any required signature guarantees and
any other required documents, must be received by the exchange agent
at the address set forth under "--Exchange Agent," and
. tendered outstanding notes must be received by the exchange agent, or
such outstanding notes must be tendered according to the procedures
for book-entry transfer described below and a book-entry confirmation
must be received by the exchange agent, or
2.the guaranteed delivery procedures set forth below must be complied with.
If less than all of the outstanding notes are tendered, a tendering holder
should fill in the amount of outstanding notes being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of outstanding
notes delivered to the exchange agent will be deemed to have been tendered
unless otherwise indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by us, evidence
satisfactory to us, in our sole discretion, of such person's authority to so
act must be submitted.
Any beneficial owner of outstanding notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
or custodian is urged to contact such entity promptly if such beneficial owner
wishes to participate in the exchange offer.
23
<PAGE>
The method of delivery of outstanding notes, the Letter of Transmittal and
all other required documents is at the option and sole risk of the tendering
holder, and delivery will be deemed made only when actually received by the
exchange agent. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure timely delivery and should obtain proper insurance.
No Letter of Transmittal or outstanding notes should be sent to McLeodUSA.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect these transactions for them.
Book-Entry Transfer. The exchange agent will make a request to establish an
account with respect to the outstanding notes at DTC for purposes of the
exchange offer within two business days after the date of this prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the outstanding notes by
causing DTC to transfer those outstanding notes into the exchange agent's
account at DTC according to DTC's procedures for transfers. However, although
delivery of outstanding notes may be effected through book-entry transfer into
the exchange agent's account at DTC, the Letter of Transmittal, or facsimile of
the letter, properly completed and duly executed, with any required signature
guarantees and any other required documents, must in any case be delivered to
and received by the exchange agent at its address set forth under "--Exchange
Agent" before the expiration date, or the guaranteed delivery procedure set
forth below must be complied with.
Delivery of documents to DTC does not constitute delivery to the Exchange
Agent.
Signature Guarantees. Tendering holders do not need to endorse their
certificates for outstanding notes and signature guarantees on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are unnecessary
unless:
1. a certificate for outstanding notes is registered in a name other than
that of the person surrendering the certificate, or
2. a registered holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal
In either of these cases, the certificates for outstanding notes must be duly
endorsed or accompanied by a properly executed bond power, with the endorsement
or signature on the bond power and on the Letter of Transmittal or the notice
of withdrawal, as the case may be, guaranteed by a firm or other entity
identified in Rule 17Ad-15 under the Securities Exchange Act as an "eligible
guarantor institution," including, as such terms are defined in that rule:
. a bank
. a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer
. a credit union
. a national securities exchange, registered securities association or
clearing agency
. a savings association that is a participant in a Securities Transfer
Association
unless surrendered on behalf of such eligible institution. See Instruction 1 to
the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender outstanding notes in the
exchange offer and the certificates for the outstanding notes are not
immediately available or time will not permit all required documents to reach
the exchange agent before the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis, the outstanding notes may
nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
. the tenders are made by or through an eligible institution
24
<PAGE>
. before the expiration date, the exchange agent receives from the eligible
institution a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of
Transmittal, stating the name and address of the holder of outstanding
notes and the amount of outstanding notes tendered, stating that the
tender is being made by the notice and guaranteeing that within three New
York Stock Exchange trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically
tendered outstanding notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the eligible institution with
the exchange agent. The Notice of Guaranteed Delivery may be delivered by
hand, or transmitted by facsimile or mail to the exchange agent and must
include a guarantee by an eligible institution in the form set forth in
the Notice of Guaranteed Delivery
. the certificates (or book-entry confirmation) representing all tendered
outstanding notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal, with any required
signature guarantees and any other documents required by the Letter of
Transmittal, are received by the exchange agent within three New York
Stock Exchange trading days after the date of execution of the Notice of
Guaranteed Delivery
Determination of Validity. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange
of any tendered outstanding notes will be determined by us, in our sole
discretion, and that determination shall be final and binding on all parties.
We reserve the absolute right, in our sole and absolute discretion, to reject
any and all tenders that we determine are not in proper form or the acceptance
for exchange of which may, in the view of our counsel, be unlawful. We also
reserve the absolute right, subject to applicable law, to waive any of the
conditions of the exchange offer as set forth under "--Conditions to the
Exchange Offer" or any defect or irregularity in any tender of outstanding
notes of any particular holder whether or not we waive similar defects or
irregularities in the case of other holders.
Our interpretation of the terms and conditions of the exchange offer,
including the Letter of Transmittal and its instructions, will be final and
binding on all parties. No tender of outstanding notes will be deemed to have
been validly made until all defects or irregularities with respect to such
tender have been cured or waived. Neither McLeodUSA, any affiliates of
McLeodUSA, the exchange agent or any other person shall be under any duty to
give any notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
Resales of Exchange Notes
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to third parties unrelated to us, we believe that holders of
outstanding notes, other than any holder that is (1) a broker-dealer that
acquired outstanding notes as a result of market-making activities or other
trading activities or (2) a broker-dealer that acquired outstanding notes
directly from us for resale in Rule 144A or another available exemption under
the Securities Act, who exchange their outstanding notes for exchange notes in
the exchange offer may offer for resale, resell and otherwise transfer such
exchange notes without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that:
. such exchange notes are acquired in the ordinary course of such holders'
business
. such holders have no arrangement or understanding with any person to
participate in the distribution of such exchange notes
. such holders are not "affiliates" of McLeodUSA within the meaning of
Rule 405 under the Securities Act
25
<PAGE>
However, the staff of the SEC has not considered the exchange offer in the
context of a no-action letter, and we cannot assure you that the staff of the
SEC would make a similar determination with respect to the exchange offer. Each
broker-dealer that receives exchange notes for its own account in exchange for
outstanding notes in the exchange offer, where such outstanding notes were
acquired by such broker-dealer as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
Withdrawal Rights
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time before the expiration date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the exchange agent at its address set forth under "--Exchange Agent" before the
expiration date. Any notice of withdrawal must specify the name of the person
who tendered the outstanding notes to be withdrawn, the principal amount of
outstanding notes to be withdrawn and, if certificates for such outstanding
notes have been tendered, the name of the registered holder of the outstanding
notes as set forth on the outstanding notes, if different from that of the
person who tendered the outstanding notes.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, the notice of withdrawal must specify the
serial numbers on the particular certificates for the outstanding notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by
an eligible institution, except in the case of outstanding notes tendered for
the account of an eligible institution.
If outstanding notes have been tendered by the procedures for book-entry
transfer set forth in "--Procedures for Tendering Outstanding Notes," the
notice of withdrawal must specify the name and number of the account at DTC to
be credited with the withdrawal of outstanding notes and must otherwise comply
with the procedures of DTC. Withdrawals of tenders of outstanding notes may not
be rescinded. Outstanding notes properly withdrawn will not be deemed validly
tendered for purposes of the exchange offer, but may be retendered at any
subsequent time before the expiration date by following any of the procedures
described above under "--Procedures for Tendering Outstanding Notes."
All questions as to the validity, form and eligibility, including time of
receipt, of such withdrawal notices will be determined by us, in our sole
discretion, which determination shall be final and binding on all parties.
Neither McLeodUSA, any affiliates of McLeodUSA, the exchange agent or any other
person shall be under any duty to give any notification of any defects or
irregularities in any notice of withdrawal or incur any liability for failure
to give any such notification. Any outstanding notes which have been tendered
but which are withdrawn will be returned to the holder of those notes promptly
after withdrawal.
Interest on the Exchange Notes
Interest on the outstanding notes and the exchange notes will be payable
semi-annually in arrears on August 15 and February 15 of each year at a rate of
8 1/8% per annum, commencing August 15, 1999.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the exchange offer or any extension
of the exchange offer, we will not be required to accept for exchange, or to
exchange, any outstanding notes for any exchange notes and will not be required
to issue exchange notes in exchange for any outstanding notes and, as described
below, may, at any time and from time to time, terminate or amend the exchange
offer, whether or not any outstanding notes have been accepted for exchange, or
may
26
<PAGE>
waive any conditions to or amend the exchange offer, if any of the following
conditions have occurred or exists or have not been satisfied before the
expiration date:
. there shall occur a change in the current interpretation by the staff of
the SEC which permits the exchange notes issued in exchange for
outstanding notes in the exchange offer to be offered for resale, resold
and otherwise transferred by their holders, other than broker-dealers
that acquired outstanding notes as a result of market-making or other
trading activities or broker-dealers that acquired outstanding notes
directly from McLeodUSA for resale under Rule 144A or another available
exemption under the Securities Act, without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the exchange notes are acquired in the ordinary course of
the holders' business, the holders have no arrangement or understanding
with any person to participate in the distribution of the exchange notes
and such holders are not "affiliates" of McLeodUSA within the meaning of
Rule 405 under the Securities Act
. any action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency or body with respect to the
exchange offer which, in our judgment, would reasonably be expected to
impair our ability to proceed with the exchange offer
. any law, statute, rule or regulation shall have been adopted or enacted
which, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer
. a stop order shall have been issued by the SEC or any state securities
authority suspending the effectiveness of the registration statement, or
proceedings shall have been initiated or, to our knowledge, threatened
for that purpose
. any governmental approval has not been obtained, which approval we shall,
in our sole discretion, deem necessary for the consummation of the
exchange offer as contemplated hereby
. any change, or any development involving a prospective change, in our
business or financial affairs has occurred which, in our sole judgment,
might materially impair our ability to proceed with the exchange offer
If we determine in our sole and absolute discretion that any of the foregoing
events or conditions has occurred or exists or has not been satisfied at any
time prior to the expiration date, we may, subject to applicable law, terminate
the exchange offer, whether or not any outstanding notes have been accepted for
exchange, or may waive any such condition or otherwise amend the terms of the
exchange offer in any respect. If such waiver or amendment constitutes a
material change to the exchange offer, we will promptly disclose such waiver or
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the outstanding notes, and we will extend the exchange
offer to the extent required by Rule 14e-1 under the Securities Exchange Act.
United States Federal Income Tax Consequences
The exchange of the outstanding notes for the exchange notes will not be a
taxable exchange for federal income tax purposes, and holders of outstanding
notes should not recognize any taxable gain or loss or any interest income as a
result of such exchange.
Exchange Agent
We have appointed United States Trust Company of New York as exchange agent
for the exchange offer. Delivery of the Letters of Transmittal and any other
required documents, questions,
27
<PAGE>
requests for assistance, and requests for additional copies of this prospectus
or of the Letter of Transmittal should be directed to the exchange agent as
follows:
By Mail
United States Trust Company of New York
P.O. Box 843
Cooper Station
New York, New York 10276
Attention: Corporate Trust Services
By Hand before 4:30 p.m.
United States Trust Company of New York
111 Broadway
New York, New York 10006
Attention: Lower Level Corporate Trust Window
By Overnight Courier and By Hand after 4:30 p.m.
United States Trust Company of New York
770 Broadway, 13th Floor
New York, New York 10003
By Facsimile
(212) 780-0592
Attention: Customer Service
Confirm by telephone: (800) 548-6565
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made personally or by
telephone or other means by officers, directors or employees of McLeodUSA.
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. We have agreed to pay the
exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus
and related documents to the beneficial owners of outstanding notes, and in
handling or tendering for their customers.
Holders who tender their outstanding notes for exchange will not be obligated
to pay any transfer taxes in connection with the tender, except that if
exchange notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the outstanding notes tendered, or
if a transfer tax is imposed for any reason other than the exchange of
outstanding notes in connection with the exchange offer, then the amount of any
such transfer tax, whether imposed on the registered holder or any other
persons, will be payable by the tendering holder. If satisfactory evidence of
payment of such transfer tax or exemption therefrom is not submitted with the
Letter of Transmittal, the amount of such transfer tax will be billed directly
to such tendering holder.
28
<PAGE>
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement. We will not receive any cash proceeds from the
issuance of the exchange notes offered by this prospectus. In consideration for
issuing the exchange notes as contemplated in this prospectus, we will receive,
in exchange, an equal number of outstanding notes in like principal amount. The
form and terms of the exchange notes are identical in all material respects to
the form and terms of the outstanding notes, except as otherwise described in
this prospectus under "The Exchange Offer--Terms of the Exchange Offer." The
outstanding notes surrendered in exchange for exchange notes will be retired
and canceled by us and cannot be reissued.
29
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999, including
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 effects of 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>
March 31, 1999
--------------
(unaudited)
(in thousands)
<S> <C> <C>
Cash and cash equivalents................................... $ 415,343
Investments in available-for-sale securities................ 278,676
----------
Total cash, cash equivalents and investments in
available-for-sale securities.......................... 694,019
==========
Short-term debt............................................. 10,276
Long-term debt.............................................. 1,776,475
----------
Stockholders' equity:
Class A common stock, $.01 par value, 250,000,000 shares
authorized; 74,440,894 shares issued and outstanding,
actual................................................... 744
Class B common stock, convertible, $.01 par value,
22,000,000 shares authorized; none issued or
outstanding.............................................. --
Additional paid-in capital................................ 1,078,307
Accumulated deficit....................................... (300,123)
Accumulated other comprehensive income.................... 6,487
----------
Total stockholders' equity.............................. 785,415
----------
Total capitalization.................................... $2,572,166
==========
</TABLE>
30
<PAGE>
SELECTED 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 the outstanding 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
outstanding notes as if it had occurred at the end of 1998.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs
and the portion of rental expense that is representative of the interest
component of rental expense (deemed to be one-third of rental expense which
management believes is a reasonable approximation of the interest component).
For each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32 million and $51.7 million, respectively. On a pro forma
basis, earnings would not have been sufficient to cover fixed charges by $188.6
and $61.7 million for the year ended December 31, 1998 and the three months
ended March 31, 1999, respectively.
(table begins on the next page)
31
<PAGE>
Summary Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 81,323 $267,886 $ 604,146 $ 625,181 $134,331 $181,109 $200,805
-------- -------- --------- --------- -------- -------- --------
Operating expenses:
Cost of service....... 52,624 151,190 323,208 329,527 75,045 92,459 99,797
Selling, general and
administrative....... 46,044 148,158 260,931 274,420 58,768 79,811 90,691
Depreciation and
amortization......... 8,485 33,275 89,107 109,720 19,431 35,110 41,680
Other................. 2,380 4,632 5,575 5,575 1,900 -- --
-------- -------- --------- --------- -------- -------- --------
Total operating
expenses............. 109,533 337,255 678,821 719,242 155,144 207,380 232,168
-------- -------- --------- --------- -------- -------- --------
Operating loss......... (28,210) (69,369) (74,675) (94,061) (20,813) (26,271) (31,363)
Interest income
(expense), net........ 5,369 (11,967) (52,234) (85,898) (10,141) (21,204) (26,074)
Other non-operating
income................ 495 1,426 1,997 1,997
Income taxes........... -- -- -- -- 687 (1) (1)
-------- -------- --------- --------- -------- -------- --------
Net loss............... $(22,346) $(79,910) $(124,912) $(177,962) $(30,267) $(47,476) $(57,438)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.55) $ (1.45) $ (1.99) $ (2.60) $ (.49) $ (.72) $ (.80)
======== ======== ========= ========= ======== ======== ========
Weighted average common
shares outstanding.... 40,506 54,974 62,807 68,404 62,227 66,121 71,718
======== ======== ========= ========= ======== ======== ========
Ratio of earnings to
fixed charges......... -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
December 31, 1999
------------------------------ -----------
1996 1997 1998 Actual
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets..................... $224,401 $ 517,869 $ 793,192 $ 974,218
Working capital (deficit).......... $185,968 $ 378,617 $ 613,236 $ 740,191
Property and equipment, net........ $ 92,123 $ 373,804 $ 629,746 $ 828,591
Total assets....................... $452,994 $1,345,652 $1,925,197 $ 2,836,380
Long-term debt less current
maturities........................ $ 2,573 $ 613,384 $1,245,170 $ 1,776,475
Stockholders' equity............... $403,429 $ 559,379 $ 462,806 $ 785,415
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $173,782 $601,137 $339,660 $ 739,497 $ 48,930 $ 538,897 $ 560,894
EBITDA(1).............. $(17,345) $(31,462) $ 20,007 $ 21,234 $ 518 $ 8,839 $ 10,317
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines.................................... 65,400 282,600 397,600 494,700
Cities and towns served........................ 120 227 269 408
Route miles.................................... 2,352 4,908 7,120 7,654
Employees...................................... 2,077 4,941 5,300 6,109
</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.
32
<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 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 outstanding 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 outstanding 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.
33
<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.
34
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------------------------------------
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................ $181,109 $ -- $181,109 $19,696 $ -- $200,805
-------- ------- -------- ------- ------- --------
Operating expenses:
Cost of service........ 92,459 -- 92,459 7,338 -- 99,797
Selling, general and
administrative........ 79,811 -- 79,811 10,880 -- 90,691
Depreciation and
amortization.......... 35,110 -- 35,110 2,829 3,741 41,680
Other.................. -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Total operating
expenses............. 207,380 -- 207,380 21,047 3,741 232,168
-------- ------- -------- ------- ------- --------
Operating loss......... (26,271) -- (26,271) (1,351) (3,741) (31,363)
Interest expense, net.. (21,204) (2,487) (23,691) (2,383) -- (26,074)
Other non-operating
income................ (1) -- (1) -- -- (1)
Income taxes........... -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Net loss............... $(47,476) $(2,487) $(49,963) $(3,734) $(3,741) $ 57,438
======== ======= ======== ======= ======= ========
Loss per common share.. $ (0.72) $ (0.76) $ (0.80)
======== ======== ========
Weighted average common
shares outstanding.... 66,121 66,121 71,718
======== ======== ========
Other Financial Data:
EBITDA(1).............. $ 8,839 $ -- $ 8,839 $ 1,478 $ -- $ 10,317
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
35
<PAGE>
DESCRIPTION OF THE EXCHANGE NOTES
General
The outstanding notes were, and the exchange notes will be, issued under an
indenture dated as of February 22, 1999 between McLeodUSA and United States
Trust Company of New York, as trustee. For purposes of this description of the
exchange notes, references to "McLeodUSA," "we," "our" or "us" refers to
McLeodUSA Incorporated and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the exchange notes are identical in all material respects to the
outstanding notes, except that:
. the exchange notes have been registered under the Securities Act and
therefore will not be subject to the restrictions on transfer applicable
to the outstanding notes and
. holders of the exchange notes will not be entitled to rights of holders
of outstanding notes under the registration rights agreement.
The terms of the exchange notes include those stated in the February 1999
indenture and those made a part of the February 1999 indenture by reference to
the Trust Indenture Act of 1939 as in effect on the date of the February 1999
indenture. The exchange notes are subject to all of those terms, and holders of
the exchange notes should refer to the February 1999 indenture and the Trust
Indenture Act for a complete statement of the applicable terms. A copy of the
February 1999 indenture is available from McLeodUSA on request. The statements
and definitions of terms under this caption relating to the exchange notes and
the February 1999 indenture are summaries and do not purport to be complete.
These summaries make use of terms defined in the February 1999 indenture and
are qualified in their entirety by express reference to the February 1999
indenture. Some of the terms used in this description are defined below under
"--Definitions."
The exchange notes will rank equal in right of payment with our 10 1/2%
senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior
notes, the outstanding notes and all other existing and future senior unsecured
indebtedness of McLeodUSA and will rank senior in right of payment to all
existing and future subordinated indebtedness of McLeodUSA. As of March 31,
1999, McLeodUSA had no outstanding subordinated indebtedness and, other than
our 10 1/2% senior discount notes, the 9 1/4% senior notes, 8 3/8% senior
notes, and 9 1/2% senior notes, had no outstanding indebtedness that would rank
equal with the exchange notes. For a description of these notes and other
outstanding indebtedness of McLeodUSA, see "Other Indebtedness." The exchange
notes will not be secured by any assets and will be effectively subordinated to
any existing and future secured indebtedness of McLeodUSA and its subsidiaries,
including any Senior Credit Facility or Qualified Receivable Facility, to the
extent of the value of the assets securing such indebtedness. As of
March 31, 1999, the total secured indebtedness of McLeodUSA and its
subsidiaries was approximately $52.1 million.
The operations of McLeodUSA are conducted through its subsidiaries and,
therefore, McLeodUSA depends upon cash flow from those entities to meet its
obligations. McLeodUSA's subsidiaries will have no direct obligation to pay
amounts due on the exchange notes and will not guarantee the exchange notes. As
a result, the exchange notes will be effectively subordinated to all existing
and future third-party indebtedness, including any Senior Credit Facility or
any applicable Qualified Receivable Facility, and other liabilities of
McLeodUSA's subsidiaries, including trade payables. As of March 31, 1999, the
total liabilities of McLeodUSA's subsidiaries, after the elimination of loans
and advances by McLeodUSA to its subsidiaries, were approximately $325 million.
Any rights of McLeodUSA and its creditors, including the holders of exchange
notes, to participate in the assets of any of McLeodUSA's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
36
<PAGE>
Principal, Maturity and Interest
The exchange notes will be limited in principal amount to $500 million and
will mature on February 15, 2009. Interest on the exchange notes will accrue at
the rate of 8 1/8% per annum and will be payable in cash semi-annually in
arrears on August 15 and February 15 of each year, commencing August 15, 1999.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Principal and interest will be payable at the office of the Paying Agent but,
at the option of McLeodUSA, interest may be paid by check mailed to the
registered holders at their registered addresses. The exchange notes will be
issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and any integral multiples of $1,000 in excess thereof.
Unless otherwise designated by McLeodUSA, McLeodUSA's office or agency in New
York will be the office of the trustee maintained for such purpose.
The interest rate on the exchange notes will be subject to increase in some
circumstances if several conditions are not satisfied, all as further described
under "--Exchange Offer; Registration Rights." All references herein to
interest shall include such Special Interest, if appropriate.
Book-Entry System
The exchange notes will initially be issued in the form of one or more Global
Securities, as defined in the February 1999 indenture, held in book-entry form.
The exchange notes will be deposited with the trustee as custodian for the
Depository, and the Depository or its nominee will initially be the sole
registered holder of the exchange notes for all purposes under the February
1999 indenture. Except as set forth below, a Global Security may not be
transferred except as a whole by the Depository to a nominee of the Depository
or by a nominee of the Depository to the Depository.
The exchange notes that are issued as described below under "--Certificated
Notes" will be issued in definitive form.
Upon the transfer of an exchange note in definitive form, such exchange note
will, unless the Global Security has previously been exchanged for exchange
notes in definitive form, be exchanged for an interest in the Global Security
representing the principal amount exchange notes being transferred.
Upon the issuance of a Global Security, the Depository or its nominee will
credit, on its internal system, the accounts of persons holding through it with
the individual beneficial interests in such Global Security representing the
respective principal amounts of the exchange notes held by such persons.
Ownership of beneficial interests in a Global Security will be limited to
persons that have accounts with the Depository ("participants") or persons that
may hold interests through participants. Ownership of beneficial interests by
participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by the
Depository or its nominee for such Global Security. Ownership of beneficial
interests in such Global Security by persons that hold through participants
will be shown on, and the transfer of that ownership interest within such
participant will be effected only through, records maintained by such
participant. The laws of some jurisdictions require that some purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
Payment of principal of, premium, if any, on and interest on exchange notes
represented by any such Global Security will be made to the Depository or its
nominee, as the case may be, as the sole registered owner and the sole holder
of the exchange notes represented thereby for all purposes
37
<PAGE>
under the February 1999 indenture. None of McLeodUSA, the trustee, any agent of
McLeodUSA or the initial purchasers will have any responsibility or liability
for:
1. any aspect of the Depository's reports relating to or payments made on
account of beneficial ownership interests in a Global Security
representing any exchange notes or for maintaining, supervising or
reviewing any of the Depository's records relating to such beneficial
ownership interests or
2. any other matter relating to the actions and practices of the Depository
or any of its participants.
McLeodUSA has been advised by the Depository that upon receipt of any payment
of principal of, premium, if any, on or interest on any Global Security, the
Depository will immediately credit, on its book-entry registration and transfer
system, the accounts of participants with payments in amounts proportionate to
their respective beneficial interests in the principal or face amount of such
Global Security, as shown on the records of the Depository. McLeodUSA expects
that payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held
for customer accounts registered in "street name" and will be the sole
responsibility of such participants.
So long as the Depository or its nominee is the registered owner or holder of
such Global Security, the Depository or such nominee, as the case may be, will
be considered the sole owner or holder of the exchange notes represented by
such Global Security for the purposes of receiving payment on the exchange
notes, receiving notices and for all other purposes under the February 1999
indenture and the exchange notes. Beneficial interests in exchange notes will
be evidenced only by, and transfers thereof will be effected only through,
records maintained by the Depository and its participants. Except as provided
above, owners of beneficial interests in a Global Security will not be entitled
to and will not be considered the holders of such Global Security for any
purposes under the February 1999 indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depository and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the February 1999 indenture. McLeodUSA understands that,
under existing industry practices, in the event that McLeodUSA requests any
action of holders or that an owner of a beneficial interest in a Global
Security desires to give or take any action that a holder is entitled to give
or take under the February 1999 indenture, the Depository would authorize the
participants holding the relevant beneficial interest to give or take such
action, and such participants would authorize beneficial owners owning through
such participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
The Depository has advised McLeodUSA that it will take any action permitted
to be taken by a holder of exchange notes, including the presentation of
exchange notes for exchange as described below, only at the direction of one or
more participants to whose account with the Depository interests in the Global
Security are credited and only in respect of such portion of the aggregate
principal amount of the exchange notes as to which such participant or
participants has or have given such direction.
The Depository has advised McLeodUSA that the Depository is a limited-purpose
trust company organized under the Banking Law of the State of New York, a
"banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
New York Uniform Commercial Code and a "clearing agency" registered under the
Securities Exchange Act. The Depository was created to hold the securities of
its participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic book-
entry changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. The Depository's participants
include securities brokers and dealers including the initial
38
<PAGE>
purchasers, banks, trust companies, clearing corporations and various other
organizations some of whom, and/or their representatives, own the Depository.
Access to the Depository's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly, and
dealers including the initial purchasers, banks, trust companies, clearing
corporations and various other organizations some of whom, and/or their
representatives, own the Depository. Access to the Depository's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that McLeodUSA
believes to be reliable, but McLeodUSA takes no responsibility for the accuracy
thereof.
Certificated Notes
The exchange notes represented by a Global Security are exchangeable for
certificated exchange notes only if:
. the Depository notifies McLeodUSA that it is unwilling or unable to
continue as a depository for such Global Security or if at any time the
Depository ceases to be a clearing agency registered under the Securities
Exchange Act, and a successor depository is not appointed by McLeodUSA
within 90 days,
. McLeodUSA executes and delivers to the trustee a notice that such Global
Security shall be so transferable, registrable and exchangeable, and such
transfer shall be registrable or
. there shall have occurred and be continuing an Event of Default with
respect to the exchange notes represented by such Global Security.
Any Global Security that is exchangeable for certificated exchange notes
pursuant to the preceding sentence will be transferred to, and registered and
exchanged for, certificated exchange notes in authorized denominations and
registered in such names as the Depository or its nominee holding such Global
Security may direct. Subject to the foregoing, a Global Security is not
exchangeable, except for a Global Security of like denomination to be
registered in the name of the Depository or its nominee. In the event that a
Global Security becomes exchangeable for certificated exchange notes:
. certificated exchange notes will be issued only in fully registered form
in denominations of $1,000 or integral multiples thereof,
. payment of principal, any repurchase price, and interest on the
certificated exchange notes will be payable, and the transfer of the
certificated exchange notes will be registrable, at the office or agency
of McLeodUSA maintained for such purposes, and
. no service charge will be made for any issuance of the certificated
exchange notes, although McLeodUSA may require payment of a sum
sufficient to cover any tax or governmental charge imposed in connection
therewith.
Optional Redemption
The exchange notes will be subject to redemption at the option of McLeodUSA,
in whole or in part, at any time on or after February 15, 2004 and prior to
maturity, upon not less than 30 nor more than 60 days' notice, in amounts of
$1,000 or an integral multiple of $1,000, at the redemption prices, expressed
as percentages of principal amount, set forth below, plus accrued and unpaid
interest thereon, if any, if redeemed during the twelve month periods beginning
February 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2004.............................................................. 104.063%
2005.............................................................. 102.708%
2006.............................................................. 101.354%
2007 and after.................................................... 100.000%
</TABLE>
39
<PAGE>
The exchange notes will be redeemable prior to February 15, 2002 only in the
event that McLeodUSA receives net proceeds from the sale of its Common Stock in
a Strategic Equity Investment on or before February 15, 2002, in which case
McLeodUSA may, at its option, use all or a portion of any such net proceeds to
redeem up to 33 1/3% of the originally issued principal amount of the February
1999 senior notes; provided, that at least 66 2/3% of the originally issued
principal amount of the February 1999 senior notes would remain outstanding
after such redemption. Such redemption must occur on a Redemption Date within
90 days of such sale and upon not less than 30 nor more than 60 days' notice
mailed to each holder of February 1999 senior notes to be redeemed at such
holder's address appearing in the Note Register, in amounts of $1,000 or an
integral multiple of $1,000 at a redemption price equal to 108.125% of the
principal amount of the February 1999 senior notes so redeemed, plus accrued
and unpaid interest thereon, if any, to but excluding the Redemption Date.
If less than all of the February 1999 senior notes are to be redeemed, the
trustee shall select, in such manner as it shall deem fair and appropriate, the
particular February 1999 senior notes to be redeemed or any portion thereof
that is an integral multiple of $1,000.
Mandatory Redemption
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control" and "--Asset Sales," McLeodUSA is not required to make
mandatory redemption payments or sinking fund payments with respect to the
exchange notes.
Repurchase at the Option of Holders upon a Change of Control
Upon the occurrence of a Change of Control, each holder shall have the right
to require McLeodUSA to repurchase all or any part, equal to $1,000 principal
amount or an integral multiple thereof, of such holder's exchange notes
pursuant to the offer described below (the "Change of Control Offer") at a
purchase price (the "Change of Control Purchase Price") equal to 101% of the
principal amount of the exchange notes plus accrued and unpaid interest, if
any, to any Change of Control Payment Date.
Within 30 days following any Change of Control, McLeodUSA or the trustee, at
the request and expense of McLeodUSA, shall mail a notice to each holder
stating:
. that a Change of Control Offer is being made pursuant to the covenant
described under "--Repurchase at the Option of Holders upon a Change of
Control" and that all exchange notes timely tendered will be accepted for
payment;
. the Change of Control Purchase Price and the purchase date (the "Change
of Control Payment Date"), which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed;
. that any exchange notes or portions thereof not tendered or accepted for
payment will continue to accrue interest;
. that, unless McLeodUSA defaults in the payment of the Change of Control
Purchase Price, all exchange notes or portions thereof accepted for
payment pursuant to the Change of Control Offer shall cease to accrue
interest from and after the Change of Control Payment Date;
. that holders electing to have any exchange notes or portions thereof
purchased under a Change of Control Offer will be required to surrender
their exchange notes before the close of business on the third Business
Day preceding the Change of Control Payment Date;
40
<PAGE>
. that holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of exchange notes delivered for purchase,
and a statement that such holder is withdrawing its election to have such
exchange notes or portions thereof purchased;
. that holders electing to have exchange notes purchased under the Change
of Control Offer must specify the principal amount that is being tendered
for purchase, which principal amount must be $1,000 or an integral
multiple thereof;
. that holders whose exchange notes are being purchased only in part will
be issued new exchange notes equal in principal amount to the unpurchased
portion of the exchange note or exchange notes surrendered, which
unpurchased portion must be equal to $1,000 in principal amount or an
integral multiple thereof; and
. any other information necessary to enable any holder to tender exchange
notes and to have such exchange notes purchased pursuant to the February
1999 indenture.
McLeodUSA will comply with the requirements of Section 14(e) under the
Securities Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
repurchase of exchange notes under a Change of Control Offer.
On the Change of Control Payment Date, McLeodUSA will:
.accept for payment exchange notes or portions thereof properly tendered
under the Change of Control Offer;
. irrevocably deposit with the Paying Agent in immediately available funds
an amount equal to the Change of Control Purchase Price in respect of all
exchange notes or portions thereof so accepted; and
. deliver, or cause to be delivered, to the trustee the exchange notes so
accepted together with an Officers' Certificate listing the exchange
notes or portions thereof tendered to McLeodUSA and accepted for payment.
The Paying Agent shall promptly mail to each holder of exchange notes so
accepted payment in an amount equal to the Change of Control Purchase Price for
such exchange notes, and the trustee shall promptly authenticate and mail to
each holder a new exchange note equal in principal amount to any unpurchased
portion of the exchange notes surrendered, if any; provided that each such new
exchange note shall be in a principal amount of $1,000 or any integral multiple
thereof.
The existence of the holders' right to require, subject to several
conditions, McLeodUSA to repurchase exchange notes upon a Change of Control may
deter a third party from acquiring McLeodUSA in a transaction that constitutes
a Change of Control. If a Change of Control Offer is made, there can be no
assurance that McLeodUSA will have sufficient funds to pay the Change of
Control Purchase Price for all exchange notes tendered by holders seeking to
accept the Change of Control Offer. In addition, instruments governing other
indebtedness of McLeodUSA may prohibit McLeodUSA from purchasing any exchange
notes prior to their Stated Maturity, including under a Change of Control
Offer. In the event that a Change of Control Offer occurs at a time when
McLeodUSA does not have sufficient available funds to pay the Change of Control
Purchase Price for all exchange notes tendered pursuant to such offer or at a
time when McLeodUSA is prohibited from purchasing the exchange notes, and
McLeodUSA is unable either to obtain the consent of the holders of the relevant
indebtedness or to repay such indebtedness, an Event of Default would occur
under the February 1999 indenture. In addition, one of the events that
constitutes a Change of Control under the February 1999 indenture is a sale,
conveyance, transfer or lease of all or substantially all of the property of
McLeodUSA. The February 1999 indenture is governed by New York law, and there
is no established definition under New York law of "substantially all" of the
assets of a corporation. Accordingly, if McLeodUSA were to engage in a
transaction in which it disposed of less than all of its assets, a question of
interpretation could arise as to whether such disposition was of "substantially
all" of its assets and whether McLeodUSA was required to make a Change of
Control Offer.
41
<PAGE>
Except as described herein with respect to a Change of Control, the February
1999 indenture does not contain any other provisions that permit holders of
exchange notes to require that McLeodUSA repurchase or redeem exchange notes in
the event of a takeover, recapitalization or similar restructuring.
Asset Sales
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless:
. McLeodUSA or such Restricted Subsidiary, as the case may be, receives
consideration for such Asset Sale at least equal to the Fair Market
Value, as evidenced by a Board Resolution delivered to the trustee, of
the Property or assets sold or otherwise disposed of;
. at least 75% of the consideration received by McLeodUSA or such
Restricted Subsidiary for such Property or assets consists of (a) cash,
readily-marketable cash equivalents, or Telecommunications Assets; (b)
shares of publicly-traded Voting Stock of any Person engaged in the
Telecommunications Business in the United States; or (c) the assumption
of Indebtedness of McLeodUSA or such Restricted Subsidiary, other than
Indebtedness that is subordinated to the exchange notes, and the release
of McLeodUSA or the Restricted Subsidiary, as the case may be, from all
liability on the Indebtedness assumed; and
. McLeodUSA or such Restricted Subsidiary, as the case may be, uses the Net
Cash Proceeds from such Asset Sale in the manner set forth in the next
paragraph.
Within 360 days after any Asset Sale, McLeodUSA or such Restricted
Subsidiary, as the case may be, may at its option:
. reinvest an amount equal to the Net Cash Proceeds, or any portion thereof
from such Asset Sale in Telecommunications Assets or in Capital Stock of
any Person engaged in the Telecommunications Business and/or
. apply an amount equal to such Net Cash Proceeds, or remaining Net Cash
Proceeds, to the permanent reduction of Indebtedness of McLeodUSA, other
than Indebtedness to a Restricted Subsidiary, that is senior to or pari
passu with the exchange notes or to the permanent reduction of
Indebtedness or preferred stock of any Restricted Subsidiary, other than
Indebtedness to, or preferred stock owned by, McLeodUSA or another
Restricted Subsidiary.
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or to reduce senior or pari passu Indebtedness
of McLeodUSA or Indebtedness or preferred stock of its Restricted Subsidiaries
shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $5 million, McLeodUSA shall, within 30 days, use such Excess
Proceeds to make an offer to purchase (an "Asset Sale Offer") on a pro rata
basis, from all holders, February 1999 senior notes in an aggregate principal
amount equal to the maximum principal amount that may be purchased out of
Excess Proceeds, at a purchase price (the "Offer Purchase Price") in cash equal
to 100% of the principal amount thereof plus accrued and unpaid interest, if
any, to the purchase date, in accordance with the procedures set forth in the
February 1999 indenture. Upon completion of an Asset Sale Offer, including
payment of the Offer Purchase Price, any surplus Excess Proceeds that were the
subject of such offer shall cease to be Excess Proceeds, and McLeodUSA may then
use such amounts for general corporate purposes.
McLeodUSA will comply with the requirements of Section 14(e) under the
Securities Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
repurchase of February 1999 senior notes pursuant to an Asset Sale Offer.
Covenants
Set forth below are several covenants that are contained in the February 1999
indenture:
42
<PAGE>
Limitation on Consolidated Indebtedness
McLeodUSA will not, and will not permit any Restricted Subsidiary to, Incur
any Indebtedness after the Issue Date unless either:
1. the ratio of:
. the aggregate consolidated principal amount of Indebtedness of
McLeodUSA outstanding as of the most recent available quarterly or
annual balance sheet, after giving pro forma effect to the
Incurrence of such Indebtedness and any other Indebtedness Incurred
since such balance sheet date and the receipt and application of the
proceeds thereof, to
. Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters immediately preceding the Incurrence of such
Indebtedness for which consolidated financial statements of
McLeodUSA have been filed with the SEC or have otherwise become
publicly available, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been
applied at the beginning of such four fiscal quarters
would be less than 5.5 to 1.0 for such four-quarter periods ending
prior to December 31, 2000 and 5.0 to 1.0 for such periods ending
thereafter, or
2. McLeodUSA's Consolidated Capital Ratio as of the most recent quarterly or
annual balance sheet of McLeodUSA that has been filed with the SEC or has
otherwise become publicly available, after giving pro forma effect to:
. the Incurrence of such Indebtedness and any other Indebtedness
Incurred since such balance sheet date, and
. paid-in capital received since such balance sheet date or
concurrently with the Incurrence of such Indebtedness, and in each
case the receipt and application of the proceeds thereof,
is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, McLeodUSA and any Restricted
Subsidiary may Incur each and all of the following:
1.Indebtedness under Senior Credit Facilities in an aggregate principal
amount outstanding or available at any one time not to exceed $100 million, and
any renewal, extension, refinancing or refunding thereof in an amount which,
together with any principal amount remaining outstanding or available under all
Senior Credit Facilities, does not exceed the aggregate principal amount
outstanding or available under all Senior Credit Facilities immediately before
such renewal, extension, refinancing or refunding;
2.Indebtedness under Qualified Receivable Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed the
greater of (x) $150 million or (y) an amount equal to 85% of net Receivables
determined in accordance with GAAP, and any renewal, extension, refinancing or
refunding thereof in an amount which, together with any principal amount
remaining outstanding or available under all Qualified Receivable Facilities,
does not exceed the aggregate principal amount outstanding or available under
all Qualified Receivable Facilities immediately before such renewal, extension,
refinancing or refunding;
3.Purchase Money Indebtedness, provided that the amount of such Purchase
Money Indebtedness does not exceed 90% of the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets;
4.Indebtedness owed by McLeodUSA to any Wholly-Owned Restricted Subsidiary of
McLeodUSA or Indebtedness owed by a Restricted Subsidiary of McLeodUSA to
McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA; provided that
upon either (x) the
43
<PAGE>
transfer or other disposition by such Wholly-Owned Restricted Subsidiary or
McLeodUSA of any Indebtedness so permitted to a Person other than McLeodUSA
or another Wholly-Owned Restricted Subsidiary of McLeodUSA or (y) the
issuance, other than directors' qualifying share, sale, lease, transfer or
other disposition of shares of Capital Stock, including by consolidation or
merger, of such Wholly-Owned Restricted Subsidiary to a Person other than
McLeodUSA or another such Wholly-Owned Restricted Subsidiary, the
provisions of this clause 4 shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
5. Indebtedness Incurred to renew, extend, refinance or refund (each, a
"refinancing") the February 1999 senior notes or Indebtedness outstanding
at the date of the February 1999 indenture or Purchase Money Indebtedness
Incurred pursuant to clause 3 of this paragraph in an aggregate principal
amount not to exceed the aggregate principal amount of and accrued interest
on the Indebtedness so refinanced plus the amount of any premium required
to be paid in connection with such refinancing pursuant to the terms of the
Indebtedness so refinanced or the amount of any premium reasonably
determined by McLeodUSA as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of McLeodUSA incurred in connection with such refinancing;
provided that Indebtedness the proceeds of which are used to refinance the
February 1999 senior notes or Indebtedness which is pari passu to the
February 1999 senior notes or Indebtedness which is subordinate in right of
payment to the February 1999 senior notes shall only be permitted under
this clause 5 if (A) in the case of any refinancing of the February 1999
senior notes or Indebtedness which is pari passu to the February 1999
senior notes, the refinancing Indebtedness is made pari passu to the
February 1999 senior notes or constitutes Subordinated Indebtedness, and,
in the case of any refinancing of Subordinated Indebtedness, the
refinancing Indebtedness constitutes Subordinated Indebtedness and (B) in
any case, the refinancing Indebtedness by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is issued, (x)
does not provide for payments of principal of such Indebtedness at stated
maturity or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by
McLeodUSA, including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of the acceleration of any payment with respect to such
Indebtedness upon any event of default thereunder, in each case prior to
the time the same are required by the terms of the Indebtedness being
refinanced and (y) does not permit redemption or other retirement,
including pursuant to an offer to purchase made by McLeodUSA, of such
Indebtedness at the option of the holder thereof prior to the time the same
are required by the terms of the Indebtedness being refinanced, other than
a redemption or other retirement at the option of the holder of such
Indebtedness, including pursuant to an offer to purchase made by McLeodUSA,
which is conditioned upon a change of control pursuant to provisions
substantially similar to those described under "--Repurchase at the Option
of Holders upon a Change of Control;"
6. Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
7. Indebtedness (A) in respect of performance, surety or appeal bonds
provided in the ordinary course of business or (B) arising from customary
agreements providing for indemnification, adjustment of purchase price for
closing balance sheet changes within 90 days after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of McLeodUSA or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of McLeodUSA, other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of McLeodUSA for the purpose of financing such
acquisition, and in an
44
<PAGE>
aggregate principal amount not to exceed the gross proceeds actually
received by McLeodUSA or any Restricted Subsidiary in connection with such
disposition; and
8. Indebtedness not otherwise permitted to be Incurred pursuant to
clauses 1 through 7 above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause 8, has an aggregate principal
amount not in excess of $10 million at any time outstanding.
Notwithstanding any other provision of this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, the maximum amount of Indebtedness that
McLeodUSA or a Restricted Subsidiary may Incur pursuant to this "--Covenants--
Limitation on Consolidated Indebtedness" covenant shall not be deemed to be
exceeded due solely as the result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Indebtedness under this
"--Covenants--Limitation on Consolidated Indebtedness" covenant:
1. Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and
2. any Liens granted pursuant to the equal and ratable provisions
referred to in the "--Covenants--Limitation on Liens" covenant described
below shall not be treated as Indebtedness.
For purposes of determining compliance with this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, McLeodUSA, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries
McLeodUSA will not permit any Restricted Subsidiary of McLeodUSA to Incur any
Indebtedness or issue any Preferred Stock except:
1. Indebtedness or Preferred Stock outstanding on the date of the
February 1999 indenture after giving effect to the application of the
proceeds of the February 1999 senior notes;
2. Indebtedness Incurred or Preferred Stock issued to and held by
McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA, provided
that such Indebtedness or Preferred Stock is at all times held by McLeodUSA
or a Wholly-Owned Restricted Subsidiary of McLeodUSA;
3. Indebtedness Incurred or Preferred Stock issued by a Person prior to
the time (A) such Person became a Restricted Subsidiary of McLeodUSA, (B)
such Person merges into or consolidates with a Restricted Subsidiary of
McLeodUSA or (C) another Restricted Subsidiary of McLeodUSA merges into or
consolidates with such Person in a transaction in which such Person becomes
a Restricted Subsidiary of McLeodUSA, which Indebtedness or Preferred Stock
was not Incurred or issued in anticipation of such transaction and was
outstanding prior to such transaction;
4. Indebtedness under a Senior Credit Facility which is permitted to be
outstanding under clause 1 of the second paragraph of "--Covenants--
Limitation on Consolidated Indebtedness;"
5. in the case of a Restricted Subsidiary that is a Qualified Receivable
Subsidiary, Indebtedness under a Qualified Receivable Facility which is
permitted to be outstanding under clause 2 of the second paragraph of "--
Covenants--Limitation on Consolidated Indebtedness;"
6. Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
45
<PAGE>
7. Indebtedness (A) in respect of performance, surety and appeal bonds
provided in the ordinary course of business or (B) arising from customary
agreements providing for indemnification, adjustment of purchase price for
closing balance sheet changes within 90 days after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligation of such Restricted Subsidiary
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of such
Restricted Subsidiary, other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition, and in
an aggregate principal amount not to exceed the gross proceeds actually
received by such Restricted Subsidiary in connection with such disposition;
8. Indebtedness or Preferred Stock which is exchanged for, or the
proceeds of which are used to refinance, refund or redeem, any Indebtedness
or Preferred Stock permitted to be outstanding pursuant to clauses 1 and 3
hereof or any extension or renewal thereof (for purposes hereof, a
"refinancing"), in an aggregate principal amount, in the case of
Indebtedness, or with an aggregate liquidation preference in the case of
Preferred Stock, not to exceed the aggregate principal amount of the
Indebtedness so refinanced or the aggregate liquidation preference of the
Preferred Stock so refinanced, plus the amount of any premium required to
be paid in connection with such refinancing pursuant to the terms of the
Indebtedness or Preferred Stock so refinanced or the amount of any premium
reasonably determined by McLeodUSA as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase,
plus the amount of expenses of McLeodUSA and the applicable Restricted
Subsidiary Incurred in connection therewith and provided the Indebtedness
or Preferred Stock Incurred or issued upon such refinancing by its terms,
or by the terms of any agreement or instrument pursuant to which such
Indebtedness or Preferred Stock is Incurred or issued, (x) does not provide
for payments of principal or liquidation value at the stated maturity of
such Indebtedness or Preferred Stock or by way of a sinking fund applicable
to such Indebtedness or Preferred Stock or by way of any mandatory
redemption, defeasance, retirement or repurchase of such Indebtedness or
Preferred Stock by McLeodUSA or any Restricted Subsidiary of McLeodUSA,
including any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by virtue of
acceleration of such Indebtedness upon an event of default thereunder, in
each case prior to the time the same are required by the terms of the
Indebtedness or Preferred Stock being refinanced and (y) does not permit
redemption or other retirement, including under an offer to purchase made
by McLeodUSA or a Restricted Subsidiary of McLeodUSA, of such Indebtedness
or Preferred Stock at the option of the holder thereof prior to the stated
maturity of the Indebtedness or Preferred Stock being refinanced, other
than a redemption or other retirement at the option of the holder of such
Indebtedness or Preferred Stock, including pursuant to an offer to purchase
made by McLeodUSA or a Restricted Subsidiary of McLeodUSA, which is
conditioned upon the change of control of McLeodUSA pursuant to provisions
substantially similar to those described under "--Repurchase at the Option
of Holders upon a Change of Control" and provided, further, that in the
case of any exchange or redemption of Preferred Stock of a Restricted
Subsidiary of McLeodUSA, such Preferred Stock may only be exchanged for or
redeemed with Preferred Stock of such Restricted Subsidiary; and
9. Indebtedness Incurred or Preferred Stock issued by a Restricted
Subsidiary, provided that the Fair Market Value of McLeodUSA's Investment
in all Restricted Subsidiaries which Incur Indebtedness or issue Preferred
Stock pursuant to this clause 9 shall not exceed, at any time, $30 million
in the aggregate, provided further, that such Indebtedness Incurred is
otherwise permitted pursuant to the covenant described under "--Covenants--
Limitation on Consolidated Indebtedness."
46
<PAGE>
Limitation on Restricted Payments
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment:
. no Default or Event of Default shall have occurred and be continuing or
shall occur as a consequence thereof;
. after giving effect, on a pro forma basis, to such Restricted Payment
and the incurrence of any Indebtedness the net proceeds of which are
used to finance such Restricted Payment, McLeodUSA could incur at least
$1.00 of additional Indebtedness pursuant to the first paragraph of "--
Covenants--Limitation on Consolidated Indebtedness"; and
. after giving effect to such Restricted Payment on a pro forma basis, the
aggregate amount expended (the amount so expended, if other than cash,
to be determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be
conclusive and evidenced by a resolution thereof) or declared for all
Restricted Payments after the Issue Date does not exceed the sum of (A)
50% of the Consolidated Net Income of McLeodUSA (or, if Consolidated Net
Income shall be a deficit, minus 100% of such deficit) for the period
(taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day
of the fiscal quarter for which McLeodUSA's financial statements have
been filed with the SEC or otherwise become publicly available
immediately preceding the date of such Restricted Payment, plus (B) 100%
of the net reduction in Investments, subsequent to the Issue Date, in
any Person, resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of
Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of
Consolidated Net Income), in each case to McLeodUSA or any Restricted
Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided
in the definition of "Investments"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to the Issue
Date by McLeodUSA or any Restricted Subsidiary in such Person and which
was treated as a Restricted Payment;
provided that McLeodUSA or a Restricted Subsidiary of McLeodUSA may make any
Restricted Payment with the aggregate net proceeds received after the date of
the February 1999 indenture, including the fair value of property other than
cash (determined in good faith by the Board of Directors as evidenced by a
resolution of the Board of Directors filed with the trustee),
(x) as capital contributions to McLeodUSA,
(y) from the issuance (other than to a Restricted Subsidiary) of Capital
Stock (other than Disqualified Stock) of McLeodUSA and warrants, rights or
options on Capital Stock (other than Disqualified Stock) of McLeodUSA, or
(z) from the conversion of Indebtedness of McLeodUSA into Capital Stock
(other than Disqualified Stock and other than by a Restricted Subsidiary) of
McLeodUSA after the date of the February 1999 indenture.
The foregoing limitations shall not prevent McLeodUSA from:
1. paying a dividend on its Capital Stock at any time within 60 days after
the declaration thereof if, on the declaration date, McLeodUSA could have paid
such dividend in compliance with the preceding paragraph;
2. retiring (A) any Capital Stock of McLeodUSA or any Restricted Subsidiary
of McLeodUSA, (B) Indebtedness of McLeodUSA that is subordinate to the February
1999 senior notes, or (C) Indebtedness of a Restricted Subsidiary of McLeodUSA,
in exchange for, or out of the proceeds of the substantially concurrent sale of
Qualified Stock of McLeodUSA;
47
<PAGE>
3. retiring any Indebtedness of McLeodUSA subordinated in right of payment to
the February 1999 senior notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of McLeodUSA (other than
Indebtedness to a Subsidiary of McLeodUSA), provided that such new Indebtedness
(A) is subordinated in right of payment to the February 1999 senior notes at
least to the same extent as, (B) has an Average Life at least as long as, and
(C) has no scheduled principal payments due in any amount earlier than, any
equivalent amount of principal under the Indebtedness so retired;
4. retiring any Indebtedness of a Restricted Subsidiary of McLeodUSA in
exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of McLeodUSA or any Restricted Subsidiary that is
permitted under the covenant described under "--Covenants-- Limitation on
Consolidated Indebtedness" (in the case of Indebtedness of McLeodUSA) and "--
Covenants--Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries" (in the case of Indebtedness of Restricted Subsidiaries) and that
(A) is not secured by any assets of McLeodUSA or any Restricted Subsidiary to a
greater extent than the retired Indebtedness was so secured, (B) has an Average
Life at least as long as the retired Indebtedness, and (C) is subordinated in
right of payment to the February 1999 senior notes at least to the same extent
as the retired Indebtedness;
5. retiring any Capital Stock or options to acquire Capital Stock of
McLeodUSA or any Restricted Subsidiary of McLeodUSA held by any directors,
officers or employees of McLeodUSA or any Restricted Subsidiary, provided that
the aggregate price paid for all such retired Capital Stock shall not exceed,
in the aggregate, the sum of $2 million plus the aggregate cash proceeds
received by McLeodUSA subsequent to the Issue Date from issuances of Capital
Stock or options to acquire Capital Stock by McLeodUSA to directors, officers
or employees of McLeodUSA and its Subsidiaries;
6. making payments or distributions to dissenting stockholders pursuant to
applicable law in connection with a consolidation, merger or transfer of assets
permitted under "--Consolidation, Merger, Conveyance, Lease or Transfer;"
7. retiring any Capital Stock of McLeodUSA to the extent necessary (as
determined in good faith by a majority of the disinterested members of the
Board of Directors, whose determination shall be conclusive and evidenced by a
resolution thereof) to prevent the loss, or to secure the renewal or
reinstatement, of any license or franchise held by McLeodUSA or any Restricted
Subsidiary from any governmental agency;
8. making Investments in any Person primarily engaged in the
Telecommunications Business; provided, that the aggregate amount of such
Investments does not exceed at any time the sum of (A) $30 million plus (B) the
amount of Net Cash Proceeds received by McLeodUSA after the Issue Date as a
capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of McLeodUSA, except to
the extent such Net Cash Proceeds are used to make Restricted Payments
permitted pursuant to clauses (x), (y) and (z) of the first paragraph, or
clause 2 or this clause 8 of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (C) the net reduction in Investments made pursuant to
this clause 8 resulting from distributions on or repayments of such Investments
or from the Net Cash Proceeds from the sale of any such Investment (except in
each case to the extent any such payment or proceeds are included in the
calculation of Consolidated Net Income) or from such Person becoming a
Restricted Subsidiary (valued in each case as provided in the definition of
"Investment"), provided that the net reduction in any Investment shall not
exceed the amount of such Investment; and
9. making Investments not otherwise permitted in an aggregate amount not to
exceed $15 million at any time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses 2, 3 and 4 of the foregoing
paragraph shall not be included as Restricted Payments.
48
<PAGE>
Not later than the date of making any Restricted Payment (including any
Restricted Payment permitted to be made pursuant to the two previous
paragraphs), McLeodUSA shall deliver to the trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon McLeodUSA's latest available financial statements.
Limitation on Liens
McLeodUSA may not, and may not permit any Restricted Subsidiary of McLeodUSA
to, Incur or suffer to exist any Lien on or with respect to any property or
assets now owned or hereafter acquired to secure any Indebtedness without
making, or causing such Restricted Subsidiary to make, effective provision for
securing the February 1999 senior notes (x) equally and ratably with such
Indebtedness as to such property for so long as such Indebtedness will be so
secured or (y) in the event such Indebtedness is Indebtedness of McLeodUSA
which is subordinate in right of payment to the February 1999 senior notes,
prior to such Indebtedness as to such property for so long as such Indebtedness
will be so secured.
The foregoing restrictions shall not apply to:
1. Liens existing on the date of the February 1999 indenture and securing
Indebtedness outstanding on the date of the February 1999 indenture or Incurred
on or after the Issue Date pursuant to any Senior Credit Facility or Qualified
Receivable Facility;
2. Liens securing Indebtedness in an amount which, together with the
aggregate amount of Indebtedness then outstanding or available under all Senior
Credit Facilities (or under refinancings or amendments of such Senior Credit
Facilities), does not exceed 1.5 times McLeodUSA's Consolidated Cash Flow
Available for Fixed Charges for the four full fiscal quarters preceding the
Incurrence of such Lien for which McLeodUSA's consolidated financial statements
have been filed with the SEC or become publicly available, determined on a pro
forma basis as if such Indebtedness had been Incurred and the proceeds thereof
had been applied at the beginning of such four fiscal quarters;
3. Liens in favor of McLeodUSA or any Wholly-Owned Restricted Subsidiary of
McLeodUSA;
4. Liens on Property of McLeodUSA or a Restricted Subsidiary acquired,
constructed or constituting improvements made after the Issue Date of the
February 1999 senior notes to secure Purchase Money Indebtedness which is
otherwise permitted under the February 1999 indenture, provided that (a) the
principal amount of any Indebtedness secured by any such Lien does not exceed
100% of such purchase price or cost of construction or improvement of the
Property subject to such Lien, (b) such Lien attaches to such property prior
to, at the time of or within 180 days after the acquisition, completion of
construction or commencement of operation of such Property and (c) such Lien
does not extend to or cover any Property other than the specific item of
Property (or portion thereof) acquired, constructed or constituting the
improvements made with the proceeds of such Purchase Money Indebtedness;
5. Liens to secure Acquired Indebtedness, provided that (a) such Lien
attaches to the acquired asset prior to the time of the acquisition of such
asset and (b) such Lien does not extend to or cover any other Property;
6. Liens to secure Indebtedness Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Indebtedness secured by any
Lien referred to in the foregoing clauses 1, 2, 4 and 5 so long as such Lien
does not extend to any other Property and the principal amount of Indebtedness
so secured is not increased except as otherwise permitted under clause 5 of the
second paragraph of "--Covenants--Limitation on Consolidated Indebtedness" (in
the case of Indebtedness of McLeodUSA) or clause 7 of "--Covenants--Limitation
on Indebtedness and Preferred Stock of Restricted Subsidiaries" (in the case of
Indebtedness of Restricted Subsidiaries);
49
<PAGE>
7. Liens not otherwise permitted by the foregoing clauses 1 through 6 in an
aggregate amount not to exceed 5% of McLeodUSA's Consolidated Tangible Assets;
8. Liens granted after the Issue Date pursuant to the immediately preceding
paragraph to secure the February 1999 senior notes; and
9. Permitted Liens.
Limitation on Sale and Leaseback Transactions
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction (other than a Sale
and Leaseback Transaction between McLeodUSA or a Restricted Subsidiary on the
one hand and a Restricted Subsidiary or McLeodUSA on the other hand), unless
1. McLeodUSA or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at least equal
to the Fair Market Value, as evidenced by a Board Resolution delivered to the
trustee, of the Property subject to such transaction;
2. the Attributable Indebtedness of McLeodUSA or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under "--Covenants--Limitation on Consolidated Indebtedness"
or "--Covenants--Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries", as the case may be;
3. McLeodUSA or such Restricted Subsidiary would be permitted to create a
Lien on such Property without securing the February 1999 senior notes by the
covenant described under "--Covenants--Limitation on Liens"; and
4. the Net Cash Proceeds from such transaction are applied in accordance with
the covenant described under "--Asset Sales";
provided that McLeodUSA shall be permitted to enter into Sale and Leaseback
Transactions for up to $30 million with respect to construction of McLeodUSA's
headquarters buildings located in Cedar Rapids, Iowa, provided that any such
transaction is entered into within 180 days of the earlier of (x) substantial
completion or (y) occupation of the applicable phase of such headquarters
building.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction, other than by law or regulation, on the
ability of any Restricted Subsidiary to:
1. pay dividends or make any other distributions in respect of its Capital
Stock or pay any Indebtedness or other obligation owed to McLeodUSA or any
Restricted Subsidiary;
2. make loans or advances to McLeodUSA or any Restricted Subsidiary; or
3. transfer any of its Property to McLeodUSA or any other Restricted
Subsidiary,
except:
(a) any encumbrance or restriction existing as of the Issue Date under the
February 1999 Indenture or any other agreement relating to any Existing
Indebtedness or any Indebtedness under a Qualified Receivable Facility
otherwise permitted under the February 1999 indenture;
(b) any encumbrance or restriction under an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in
any such agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted
Subsidiary is acquired by McLeodUSA or another Restricted Subsidiary
(other than any such Indebtedness Incurred by such Restricted
Subsidiary in connection with or in anticipation of such acquisition);
50
<PAGE>
(d) any encumbrance or restriction under an agreement effecting a permitted
refinancing of Indebtedness issued under an agreement referred to in
the foregoing clauses (a) through (c), so long as the encumbrances and
restrictions contained in any such refinancing agreement are not
materially more restrictive than the encumbrances and restrictions
contained in such agreements;
(e) customary provisions (A) that restrict the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance
or contract or similar property or asset; (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of McLeodUSA or any Restricted
Subsidiary not otherwise prohibited by the February 1999 indenture or
(C) arising or agreed to in the ordinary course of business, not
relating to any Indebtedness, and that do not, individually or in the
aggregate, detract from the value of property or assets of McLeodUSA or
any Restricted Subsidiary in any manner material to McLeodUSA or any
Restricted Subsidiary;
(f) in the case of clause (3) above, restrictions contained in any security
agreement, including a Capital Lease Obligation, securing Indebtedness
of McLeodUSA or a Restricted Subsidiary otherwise permitted under the
February 1999 indenture, but only to the extent such restrictions
restrict the transfer of the property subject to such security
agreement; and
(g) any restriction with respect to a Restricted Subsidiary of McLeodUSA
imposed by an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary, provided that the consummation of such
transaction would not result in an Event of Default or an event that,
with the passing of time or the giving of notice or both, would
constitute an Event of Default, that such restriction terminates if
such transaction is not consummated and that the consummation or
abandonment of such transaction occurs within one year of the date such
agreement was entered into.
Nothing contained in this "--Covenants--Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent
McLeodUSA or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted under the "--Covenants--
Limitation on Liens" covenant or (2) restricting the sale or other disposition
of property or assets of McLeodUSA or any of its Restricted Subsidiaries that
secure Indebtedness of McLeodUSA or any of its Restricted Subsidiaries
otherwise permitted under "--Covenants--Limitation on Consolidated
Indebtedness" or "--Covenants--Limitations on Indebtedness and Preferred Stock
of Restricted Subsidiaries," as the case may be.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
McLeodUSA (i) shall not permit any Restricted Subsidiary to issue any Capital
Stock other than to McLeodUSA or a Wholly-Owned Restricted Subsidiary unless
immediately after giving effect thereto such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary and any Investment of McLeodUSA or
any other Restricted Subsidiary in such Restricted Subsidiary would have been
permitted under "--Covenants--Limitation on Restricted Payments" if made on the
date of such issuance and (ii) shall not permit any Person other than McLeodUSA
or a Wholly-Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, other than directors' qualifying shares and except for:
(a) a sale of 100% of the Capital Stock of a Restricted Subsidiary sold in
a transaction not prohibited by the covenant described under "--Asset
Sales";
(b) a sale of the Capital Stock of a Restricted Subsidiary sold in a
transaction not prohibited by the covenant described under "--Asset
Sales" if, after giving effect thereto, greater than 50% of the
Capital Stock of such Restricted Subsidiary is owned by McLeodUSA or
by a Wholly-Owned Restricted Subsidiary;
51
<PAGE>
(c) Capital Stock of a Restricted Subsidiary issued and outstanding on the
Issue Date and held by Persons other than McLeodUSA or any Restricted
Subsidiary;
(d) Capital Stock of a Restricted Subsidiary issued and outstanding prior
to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in anticipation or contemplation
of such Person's becoming a Restricted Subsidiary or otherwise being
acquired by McLeodUSA;
(e) any Preferred Stock permitted to be issued under "--Covenants--
Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries"; and
(f) ownership by any Person other than McLeodUSA or a Subsidiary of less
than 50% of the Capital Stock of a Person (A) in which McLeodUSA or a
Restricted Subsidiary has made a Permitted Investment pursuant to
clause (3) of the definition of "Permitted Investments," (B) of which
more than 50% of such Person's Capital Stock is owned, directly or
indirectly, by McLeodUSA and (C) as to which McLeodUSA has the power
to direct the policies, management and affairs.
Transactions with Affiliates
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of, any
of its Properties or assets to, or purchase any Property or assets from, or
enter into any contract, agreement, understanding, loan, advance or Guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions is on
terms that are no less favorable to McLeodUSA or such Restricted
Subsidiary than those that would have been obtained in a comparable
arm's-length transaction by McLeodUSA or such Restricted Subsidiary
with a Person that is not an Affiliate (or, in the event that there are
no comparable transactions involving Persons who are not Affiliates of
McLeodUSA or the relevant Restricted Subsidiary to apply for
comparative purposes, is otherwise on terms that, taken as a whole,
McLeodUSA has determined to be fair to McLeodUSA or the relevant
Restricted Subsidiary) and
(b) McLeodUSA delivers to the trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1 million, a
certificate of the chief executive, operating or financial officer of
McLeodUSA evidencing such officer's determination that such Affiliate
Transaction or series of Affiliate Transactions complies with clause
(a) above and is in the best interests of McLeodUSA or such Restricted
Subsidiary and (ii) with respect to any Affiliate Transaction or series
of Affiliate Transactions involving aggregate payments in excess of $5
million, a Board Resolution certifying that such Affiliate Transaction
or series of Affiliate Transactions complies with clause (a) above and
that such Affiliate Transaction or series of Affiliate Transactions has
been approved by a majority of the disinterested members of the Board
of Directors who have determined that such Affiliate Transaction or
series of Affiliate Transactions is in the best interest of McLeodUSA
or such Restricted Subsidiary;
provided that the following shall not be deemed Affiliate Transactions:
1. any employment agreement entered into by McLeodUSA or any of its
Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice;
2. any agreement or arrangement with respect to the compensation of a
director or officer of McLeodUSA or any Restricted Subsidiary approved
by a majority of the disinterested members of the Board of Directors and
consistent with industry practice;
3. transactions between or among McLeodUSA and its Restricted Subsidiaries;
52
<PAGE>
4. transactions permitted by the covenant described under "--Covenants--
Limitation on Restricted Payments;"
5. transactions pursuant to any agreement or arrangement existing on the
Issue Date; and
6. transactions with respect to wireline or wireless transmission capacity,
the lease or sharing or other use of cable or fiber optic lines,
equipment, rights-of-way or other access rights, between McLeodUSA or
any Restricted Subsidiary and any other Person;
provided, in any case, that such transaction is on terms that are no less
favorable, taken as a whole, to McLeodUSA or the relevant Restricted Subsidiary
than those that could have been obtained in a comparable transaction by
McLeodUSA or such Restricted Subsidiary with Persons who are not Affiliates of
McLeodUSA or the relevant Restricted Subsidiary, or, in the event that there
are no comparable transactions involving Persons who are not Affiliates of
McLeodUSA or the relevant Restricted Subsidiary to apply for comparative
purposes, is otherwise on terms that, taken as a whole, McLeodUSA has
determined to be fair to McLeodUSA or the relevant Restricted Subsidiary.
Restricted and Unrestricted Subsidiaries
(a) McLeodUSA may designate a Subsidiary (including a newly formed or newly
acquired Subsidiary) of McLeodUSA or any of its Restricted Subsidiaries as an
Unrestricted Subsidiary if such Subsidiary does not have any obligations which,
if in Default, would result in a cross default on Indebtedness of McLeodUSA or
a Restricted Subsidiary (other than Indebtedness to McLeodUSA or a Wholly-Owned
Restricted Subsidiary), and (i) such Subsidiary has total assets of $1,000 or
less, (ii) such Subsidiary has assets of more than $1,000 and an Investment in
such Subsidiary in an amount equal to the Fair Market Value of such Subsidiary
would then be permitted under the first paragraph of "--Covenants--Limitation
on Restricted Payments" or (iii) such designation is effective immediately upon
such Person becoming a Subsidiary. Unless so designated as an Unrestricted
Subsidiary, any Person that becomes a Subsidiary of McLeodUSA or any of its
Restricted Subsidiaries shall be classified as a Restricted Subsidiary thereof.
(b) McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness to
McLeodUSA or a Restricted Subsidiary) at the date of determination) becoming a
Restricted Subsidiary (whether through an acquisition, the redesignation of an
Unrestricted Subsidiary or otherwise) unless, after giving effect to such
action, transaction or series of transactions, on a pro forma basis, (i)
McLeodUSA could incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of "--Covenants--Limitation on Consolidated Indebtedness" and
(ii) no Default or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be redesignated as
a Restricted Subsidiary. The designation of a Subsidiary as an Unrestricted
Subsidiary or the designation of an Unrestricted Subsidiary as a Restricted
Subsidiary in compliance with clause (b) shall be made by the Board of
Directors pursuant to a Board Resolution delivered to the trustee and shall be
effective as of the date specified in such Board Resolution, which shall not be
prior to the date such Board Resolution is delivered to the trustee.
Reports
McLeodUSA has agreed that, for so long as any February 1999 senior notes
remain outstanding, it will furnish to the holders of the February 1999 senior
notes and to securities analysts and prospective investors, upon their request,
the information required to be delivered pursuant to Rule
53
<PAGE>
144A(d)(4) under the Securities Act. McLeodUSA will file with the trustee
within 15 days after it files them with the SEC copies of the annual and
quarterly reports and the information, documents, and other reports that
McLeodUSA is required to file with the SEC pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act ("SEC Reports"). In the event McLeodUSA shall
cease to be required to file SEC Reports pursuant to the Securities Exchange
Act, McLeodUSA will nevertheless continue to file such reports with the SEC,
unless the SEC will not accept such a filing, and the trustee. McLeodUSA will
furnish copies of the SEC Reports to the holders of November 1999 senior notes
at the time McLeodUSA is required to file the same with the trustee and will
make such information available to investors who request it in writing.
Consolidation, Merger, Conveyance, Lease or Transfer
McLeodUSA will not, in any transaction or series of transactions, consolidate
with, or merge with or into, any other Person or permit any other Person to
merge with or into McLeodUSA, other than a merger of a Restricted Subsidiary
into McLeodUSA in which McLeodUSA is the continuing corporation, or sell,
convey, assign, transfer, lease or otherwise dispose of all or substantially
all of the Property and assets of McLeodUSA and the Restricted Subsidiaries
taken as a whole to any other Person, unless:
(i) either (a) McLeodUSA shall be the continuing corporation or (b) the
corporation, if other than McLeodUSA, formed by such consolidation or into
which McLeodUSA is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of McLeodUSA and the
Restricted Subsidiaries taken as a whole (such corporation or Person, the
"Surviving Entity"), shall be a corporation organized and validly existing
under the laws of the United States of America, any political subdivision
thereof, any state thereof or the District of Columbia, and shall expressly
assume, by a supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the February 1999
senior notes and the performance of McLeodUSA's covenants and obligations
under the February 1999 indenture;
(ii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions, no Event of
Default or Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or
in respect of such transaction or series of transactions, McLeodUSA (or the
Surviving Entity, if McLeodUSA is not continuing) would (A) be permitted to
Incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of "--Covenants--Limitation on Consolidated Indebtedness" and (B)
have a Consolidated Net Worth that is not less than the Consolidated Net
Worth of McLeodUSA immediately before such transaction or series of
transactions; and
(iv) if, as a result of any such transaction, Property of McLeodUSA would
become subject to a Lien prohibited by the provisions of the February 1999
indenture described under "--Covenants --Limitation on Liens" above,
McLeodUSA or the successor entity to McLeodUSA shall have secured the
February 1999 senior notes as required thereby.
Events of Default
Each of the following is an "Event of Default" under the February 1999
indenture:
(a) default in the payment of interest on any February 1999 senior note
when the same becomes due and payable, and the continuance of such default
for a period of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any February 1999 senior note at its maturity, upon optional redemption,
required repurchase (including pursuant
54
<PAGE>
to a Change of Control Offer or an Asset Sale Offer) or otherwise or the
failure to make an offer to purchase any February 1999 senior note as
required;
(c) failure by McLeodUSA to comply with any of its covenants or
agreements described under "--Repurchase at the Option of the Holders upon
a Change of Control," "--Asset Sales" or "--Consolidation, Merger,
Conveyance, Lease or Transfer;"
(d) default in the performance, or breach, of any covenant or warranty of
McLeodUSA in the February 1999 indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or
breach for a period of 60 days after written notice thereof has been given
to McLeodUSA by the trustee or to McLeodUSA and the trustee by holders of
at least 25% of the aggregate principal amount of the outstanding February
1999 senior notes;
(e) Indebtedness of McLeodUSA or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by
the holders thereof and, in either case, the principal amount of such
unpaid or accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more final
judgments against McLeodUSA or any Restricted Subsidiary in an uninsured or
unindemnified aggregate amount in excess of $10 million which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of
45 consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of McLeodUSA or any Restricted
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws,
as now or hereafter constituted, or any other applicable Federal, state, or
foreign bankruptcy, insolvency, or other similar law or (ii) a decree or
order adjudging McLeodUSA or any Restricted Subsidiary bankrupt or
insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of
McLeodUSA or any Restricted Subsidiary under U.S. bankruptcy laws, as now
or hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or similar law, or appointing a custodian, receiver,
liquidator, assignee, trustee, sequestrator or other similar official of
McLeodUSA or any Restricted Subsidiary or of any substantial part of the
Property or assets of McLeodUSA or any Restricted Subsidiary, or ordering
the winding up or liquidation of the affairs of McLeodUSA or any Restricted
Subsidiary, and the continuance of any such decree or order for relief or
any such other decree or order unstayed and in effect for a period of 60
consecutive days; or
(h) (i) the commencement by McLeodUSA or any Restricted Subsidiary of a
voluntary case or proceeding under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent; or (ii) the consent
by McLeodUSA or any Restricted Subsidiary to the entry of a decree or order
for relief in respect of McLeodUSA or any Restricted Subsidiary in an
involuntary case or proceeding under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against McLeodUSA or any
Restricted Subsidiary; or (iii) the filing by McLeodUSA or any Restricted
Subsidiary of a petition or answer or consent seeking reorganization or
relief under U.S. bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state or foreign bankruptcy, insolvency or other
similar law; or (iv) the consent by McLeodUSA or any Restricted Subsidiary
to the filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of McLeodUSA or any Restricted Subsidiary
or of any substantial part of the Property or assets of McLeodUSA or any
Restricted Subsidiary, or the making by McLeodUSA or any Restricted
Subsidiary of an assignment for the benefit of creditors; or (v) the
admission by McLeodUSA or any Restricted Subsidiary in writing of its
inability to pay its
55
<PAGE>
debts generally as they become due; or (vi) the taking of corporate action
by McLeodUSA or any Restricted Subsidiary in furtherance of any such
action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case the
trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of February 1999 senior notes may declare the Default Amount
(as defined herein) and any accrued and unpaid interest on all February 1999
senior notes then outstanding to be immediately due and payable by a notice in
writing to McLeodUSA (and to the trustee if given by holders of the February
1999 senior notes), and upon any such declaration, such Default Amount and any
accrued interest will become and be immediately due and payable. If any Event
of Default specified in clause (g) or (h) above occurs, the Default Amount and
any accrued and unpaid interest on the February 1999 senior notes then
outstanding shall become immediately due and payable without any declaration or
other act on the part of the trustee or any holder of February 1999 senior
notes. In the event of a declaration of acceleration because an Event of
Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
the event of default triggering such Event of Default pursuant to clause (e)
shall be remedied, or cured or waived by the holders of the relevant
Indebtedness, within 60 days after such event of default, provided that no
judgment or decree for the payment of money due on the February 1999 senior
notes has been obtained by the trustee. The Default Amount shall equal 100% of
the principal amount of the February 1999 senior notes. Under specified
circumstances, the holders of a majority in principal amount of the outstanding
February 1999 senior notes by notice to McLeodUSA and the trustee may rescind
an acceleration and its consequences.
McLeodUSA will be required to deliver to the trustee annually a statement
regarding compliance with the February 1999 indenture, and McLeodUSA is
required within 30 days after becoming aware of any Default or Event of
Default, to deliver to the trustee a statement describing such Default or Event
of Default, its status and what action McLeodUSA is taking or proposes to take
with respect thereto. The trustee may withhold from holders of the February
1999 senior notes notice of any continuing Default or Event of Default, other
than relating to the payment of principal or interest, if the trustee
determines that withholding such notice is in the holders' interest.
Amendment, Supplement and Waiver
McLeodUSA and the trustee may, at any time and from time to time, without
notice to or consent of any holder of February 1999 senior notes, enter into
one or more indentures supplemental to the February 1999 indenture:
(1) to evidence the succession of another Person to McLeodUSA and the
assumption by such successor of the covenants of McLeodUSA in the February 1999
indenture and the February 1999 senior notes;
(2) to add to the covenants of McLeodUSA, for the benefit of the holders, or
to surrender any right or power conferred upon McLeodUSA by the February 1999
indenture;
(3) to add any additional Events of Default;
(4) to provide for uncertificated February 1999 senior notes in addition to
or in place of certificated February 1999 senior notes;
(5) to evidence and provide for the acceptance of appointment under the
February 1999 indenture of a successor trustee;
(6) to secure the February 1999 senior notes;
56
<PAGE>
(7) to cure any ambiguity in the February 1999 indenture, to correct or
supplement any provision in the February 1999 indenture which may be
inconsistent with any other provision therein or to add any other provisions
with respect to matters or questions arising under the February 1999 indenture;
provided such actions shall not adversely affect the interests of the holders
in any material respect; or
(8) to comply with the requirements of the SEC in order to effect or maintain
the qualification of the February 1999 indenture under the Trust Indenture Act.
With the consent of the holders of not less than a majority in principal
amount of the outstanding February 1999 senior notes, McLeodUSA and the trustee
may enter into one or more indentures supplemental to the February 1999
indenture for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the February 1999 indenture or
modifying in any manner the rights of the holders; provided that no such
supplemental indenture shall, without the consent of the holder of each
outstanding February 1999 senior note:
(1) change the Stated Maturity of the principal of, or any installment of
interest on, any February 1999 senior note, or alter the redemption provisions
thereof, or reduce the principal amount thereof (or premium, if any), or the
interest thereon that would be due and payable upon Maturity thereof, or change
the place of payment where, or the coin or currency in which, any February 1999
senior note or any premium or interest thereon is payable, or impair the right
to institute suit for the enforcement of any such payment on or after the
maturity thereof;
(2) reduce the percentage in principal amount of the outstanding
February 1999 senior notes, the consent of whose holders is necessary for any
such supplemental indenture or required for any waiver of compliance with
several provisions of the February 1999 indenture or several Defaults
thereunder;
(3) subordinate in right of payment, or otherwise subordinate, the February
1999 senior notes to any other Indebtedness; or
(4) modify any provision of this paragraph, except to increase any percentage
set forth herein.
The holders of not less than a majority in principal amount of the
outstanding February 1999 senior notes may, on behalf of the holders of all the
February 1999 senior notes, waive any past Default under the February 1999
indenture and its consequences, except a Default (1) in the payment of the
principal of (or premium, if any) or interest on any February 1999 senior note,
or (2) in respect of a covenant or provision hereof which under the proviso to
the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding February 1999 senior note affected.
Satisfaction and Discharge of the Indenture; Defeasance
McLeodUSA may terminate its obligations under the February 1999 indenture
when:
(i) either (A) all outstanding February 1999 senior notes have been delivered
to the trustee for cancellation or (B) all such February 1999 senior notes not
theretofore delivered to the trustee for cancellation have become due and
payable, will become due and payable within one year or are to be called for
redemption within one year under irrevocable arrangements satisfactory to the
trustee for the giving of notice of redemption by the trustee in the name and
at the expense of McLeodUSA, and McLeodUSA has irrevocably deposited or caused
to be deposited with the trustee funds in an amount sufficient to pay and
discharge the entire indebtedness on the February 1999 senior notes not
theretofore delivered to the trustee for cancellation, for principal of (or
premium, if any, on) and interest to the date of deposit or maturity or date of
redemption;
(ii) McLeodUSA has paid or caused to be paid all sums payable by McLeodUSA
under the February 1999 indenture; and
57
<PAGE>
(iii) McLeodUSA has delivered an Officers' Certificate and an Opinion of
Counsel relating to compliance with the conditions set forth in the February
1999 indenture.
McLeodUSA, at its election, shall:
(a) be deemed to have paid and discharged its debt on the February 1999
senior notes and the February 1999 indenture shall cease to be of further
effect as to all outstanding February 1999 senior notes, except as to (i)
rights of registration of transfer, substitution and exchange of February 1999
senior notes and McLeodUSA's right of optional redemption, (ii) rights of
holders to receive payments of principal of, premium, if any, and interest on
the February 1999 senior notes (but not the Change of Control Purchase Price or
the Offer Purchase Price) and any rights the holders with respect to such
amounts, (iii) the rights, obligations and immunities of the trustee under the
February 1999 indenture and (iv) several other specified provisions in the
February 1999 indenture, or
(b) cease to be under any obligation to comply with specified restrictive
covenants including those described under "--Covenants," after the irrevocable
deposit by McLeodUSA with the trustee, in trust for the benefit of the holders,
at any time prior to the maturity of the February 1999 senior notes, of (A)
money in an amount, (B) U.S. Government Obligations which through the payment
of interest and principal will provide, not later than one day before the due
date of payment in respect of the February 1999 senior notes, money in an
amount, or (C) a combination thereof, sufficient to pay and discharge the
principal of, and interest on, the February 1999 senior notes then outstanding
on the dates on which any such payments are due in accordance with the terms of
the February 1999 Indenture and of the February 1999 senior notes.
Such defeasance or covenant defeasance shall be deemed to occur only if
specified conditions are satisfied, including, among other things, delivery by
McLeodUSA to the trustee of an opinion of counsel reasonably acceptable to the
trustee to the effect that (i) such deposit, defeasance and discharge will not
be deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) McLeodUSA's deposit will not result in the
Trust or the trustee being subject to regulation under the Investment Company
Act of 1940.
The Trustee
United States Trust Company of New York is the trustee under the February
1999 indenture and its current address is 114 West 47th Street, New York, New
York 10036.
The holders of not less than a majority in principal amount of the
outstanding February 1999 senior notes will have the right to direct the time,
method and place of conducting any proceeding for exercising any remedy
available to the trustee, subject to several exceptions. Except during the
continuance of an Event of Default, the trustee will perform only such duties
as are specifically set forth in the February 1999 indenture. The February 1999
indenture provides that in case an Event of Default shall occur (which shall
not be cured or waived), the trustee will be required, in the exercise of its
rights and powers under the February 1999 indenture, to use the degree of care
of a prudent person in the conduct of such person's own affairs. Subject to
such provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the February 1999 indenture at the request of any of the
holders of the February 1999 senior notes, unless such holders shall have
offered to the trustee indemnity satisfactory to it against any loss, liability
or expense.
No Personal Liability of Controlling Persons, Directors, Officers, Employees
and Stockholders
No controlling Person, director, officer, employee, incorporator or
stockholder of McLeodUSA, as such, shall have any liability for any covenant,
agreement or other obligations of McLeodUSA under the February 1999 senior
notes or the February 1999 indenture or for any claim based on, in respect of,
or by reason of, such obligations or their creation, solely by reason of its
past, present or
58
<PAGE>
future status as a controlling Person, director, officer, employee,
incorporator or stockholder of McLeodUSA. By accepting a February 1999 senior
note each holder waives and releases all such liability (but only such
liability). The waiver and release are part of the consideration for issuance
of the February 1999 senior notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has
been the view of the SEC that such a waiver is against public policy.
Transfer and Exchange
The outstanding notes are subject to various restrictions on transfer. A
holder may transfer or exchange February 1999 senior notes in accordance with
the February 1999 indenture. McLeodUSA, the Registrar and the trustee may
require a holder, among other things, to furnish appropriate endorsements and
transfer documents and McLeodUSA may require a holder to pay any taxes and fees
required by law or permitted by the February 1999 indenture.
Exchange Offer; Registration Rights
McLeodUSA entered into the registration rights agreement with the initial
purchasers, for the benefit of the holders of outstanding notes, pursuant to
which McLeodUSA agreed to file the registration statement of which this
prospectus constitutes a part with the SEC. The registration rights agreement
provides that McLeodUSA will, at its cost, use its best efforts to cause the
registration statement to be declared effective under the Securities Act not
later than 150 days
after February 22, 1999 (the "Closing Date"). Upon the effectiveness of the
registration statement, McLeodUSA will offer the exchange notes in exchange for
surrender of the outstanding notes. McLeodUSA has agreed to keep the exchange
offer open for not less than 30 days and not more than 45 days (or longer if
required by applicable law) after the date notice of the exchange offer is
mailed to the holders of outstanding notes. For each outstanding note
surrendered to McLeodUSA pursuant to the exchange offer, the holder of such
outstanding note will receive an exchange note having a principal amount equal
to that of the surrendered outstanding note. Under existing SEC
interpretations, the exchange notes would be freely transferable by holders
other than affiliates of McLeodUSA after the exchange offer without further
registration under the Securities Act if the holder of the exchange notes
represents that it is acquiring the exchange notes in the ordinary course of
its business, that it has no arrangement or understanding with any person to
participate in the distribution of the exchange notes and that it is not an
affiliate of McLeodUSA, as such terms are interpreted by the SEC; provided that
broker-dealers that acquired outstanding notes as a result of market-making or
other trading activities or directly from McLeodUSA for resale pursuant to Rule
144A or another available exemption under the Securities Act ("Participating
Broker-Dealers") and who receive exchange notes in the exchange offer will have
a prospectus delivery requirement with respect to resales of such exchange
notes. The SEC has taken the position that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to exchange notes
with this prospectus under specific circumstances. Under the registration
rights agreement, McLeodUSA is required to allow Participating Broker-Dealers
and other persons, if any, with similar prospectus delivery requirements to use
this prospectus in connection with the resale of such exchange notes.
A holder of outstanding notes (other than specified holders) who wishes to
exchange such outstanding notes for exchange notes in the exchange offer will
be required to represent that, among other things, any exchange notes to be
received by it will be acquired in the ordinary course of its business and that
at the time of the commencement of the exchange offer it has no arrangement or
understanding with any person to participate in the distribution (within the
meaning of the Securities Act) of the exchange notes and that it is not an
"affiliate" of McLeodUSA, as defined in Rule 405 of the Securities Act, or if
it is an affiliate, that it will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable.
59
<PAGE>
McLeodUSA has filed the registration statement and will commence the exchange
offer pursuant to the registration rights agreement. In the event that
applicable interpretations of the staff of the SEC do not permit McLeodUSA to
effect the exchange offer, or if for any other reason the exchange offer is not
consummated within 180 days after the Closing Date, or if the initial
purchasers so request with respect to outstanding notes not eligible to be
exchanged for exchange notes in the exchange offer, or if any holder of
outstanding notes does not receive freely tradeable exchange notes in the
exchange offer, McLeodUSA has agreed, at its cost,
(a) as promptly as practicable, to file a shelf registration statement
covering resales of the outstanding notes or the exchange notes, as the
case may be,
(b) to use its best efforts to cause the shelf registration statement to be
declared effective under the Securities Act and
(c) to keep the shelf registration statement effective until two years
after its effective date or such shorter period ending when all resales
of outstanding notes or exchange notes covered by such shelf
registration statement have been made.
McLeodUSA has agreed, in the event a shelf registration statement is filed,
among other things, to provide to each holder for whom such shelf registration
statement was filed copies of the prospectus which is a part of the shelf
registration statement, to notify each such holder when the shelf registration
statement has become effective and to take various other actions as are
required to permit unrestricted resales of the outstanding notes or the
exchange notes, as the case may be. A holder selling such outstanding notes or
exchange notes pursuant to the shelf registration statement generally would be
required to be named as a selling security holder in the related prospectus and
to deliver a prospectus to purchasers, will be subject to several of the civil
liability provisions under the Securities Act in connection with such sales and
will be bound by the provisions of the registration rights agreement which are
applicable to such holder (including certain indemnification obligations).
If (i) within 150 days after the Closing Date, the registration statement has
not been declared effective; (ii) within 180 days after the Closing Date,
neither the exchange offer has been consummated nor the shelf registration
statement has been declared effective; or (iii) after either the registration
statement or the shelf registration statement has been declared effective, such
registration statement thereafter ceases to be effective or usable (subject to
several exceptions) in connection with resales of outstanding notes or exchange
notes in accordance with and during the periods specified in the registration
rights agreement (each such event referred to in clauses (i) through (iii), a
"Registration Default"), additional interest ("Special Interest") will accrue
on the outstanding notes and the exchange notes (in addition to the stated
interest on the outstanding notes and the exchange notes) from and including
the date on which any such Registration Default shall occur to but excluding
the date on which all Registration Defaults have been cured. Special Interest
will accrue at a rate of 0.50% per annum during the 90-day period immediately
following the occurrence of any Registration Default and shall increase by
0.25% per annum at the end of each subsequent 90-day period, but in no event
shall such rate exceed 2.00% per annum in the aggregate regardless of the
number of Registration Defaults.
The summary herein of provisions of the registration rights agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the registration rights agreement, a
copy of which has been filed as an exhibit to the registration statement of
which this prospectus is a part.
Definitions
Set forth below is a summary of several of the defined terms used in the
February 1999 indenture. Reference is made to the February 1999 indenture for
the full definition of all such terms, as well as any capitalized terms used
herein for which no definition is provided.
60
<PAGE>
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that
such Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding Indebtedness which is
extinguished, retired or repaid in connection with such other Person merging
with or into or becoming a Subsidiary of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of McLeodUSA and of each other Subsidiary of McLeodUSA; provided,
further, that neither McLeodUSA nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"under common control with" and "controlled by"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of Voting Stock, by agreement or otherwise.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person
to such Person or a Wholly-Owned Restricted Subsidiary of such Person or by
such Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i)
shares of Capital Stock or other ownership interests of a Restricted Subsidiary
of such Person (other than as permitted by the provisions of the February 1999
indenture described above under "--Covenants--Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries"), (ii) substantially all of the
assets of such Person or any of its Restricted Subsidiaries representing a
division or line of business (other than as part of a Permitted Investment) or
(iii) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business and, in each case, that
is not governed by the provisions of the February 1999 indenture applicable to
consolidations, mergers, and transfers of all or substantially all of the
assets of the McLeodUSA; provided that "Asset Sale" shall not include (i) sales
or other dispositions of inventory, receivables and other current assets in the
ordinary course of business, (ii) simultaneous exchanges by McLeodUSA or any
Restricted Subsidiary of Telecommunications Assets for other Telecommunications
Assets in the ordinary course of business; provided that the applicable
Telecommunications Assets received by McLeodUSA or such Restricted Subsidiary
have at least substantially equal Fair Market Value to McLeodUSA or such
Restricted Subsidiary (as determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a Board Resolution), and
(iii) sales or other dispositions of assets with a Fair Market Value (as
certified in an Officers' Certificate) not in excess of $1 million.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of (i)
the capitalized amount in respect of such transaction that would appear on the
balance sheet of such Person in accordance with GAAP and (ii) the present value
(discounted at a rate consistent with accounting guidelines, as determined in
good faith by the responsible accounting officer of such Person) of the
payments during the remaining term of the lease (including any period for which
such lease has been extended or may, at the option of the lessor, be extended)
or until the earliest date on which the lessee may terminate such lease without
penalty or upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking
61
<PAGE>
fund or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (y) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"Board of Directors" means the Board of Directors of McLeodUSA or any
committee thereof duly authorized to act on behalf of the Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability
on the face of a balance sheet of such Person prepared in accordance with GAAP,
and the stated maturity thereof shall be the date of the last payment of rent
or any amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Change of Control" shall be deemed to occur if (i) the sale, conveyance,
transfer or lease of all or substantially all of the assets of McLeodUSA to any
"Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of
the Securities Exchange Act or any successor provision to either of the
foregoing, including any group acting for the purpose of acquiring, holding or
disposing of securities within the meaning of Rule 13d-5(b)(i) under the
Securities Exchange Act), other than any Permitted Holder (as defined below) or
any Restricted Subsidiary of McLeodUSA, shall have occurred; (ii) any "Person"
or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(i) under the Securities
Exchange Act), other than any Permitted Holder, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Securities Exchange Act) of more than 35%
of the total voting power of all classes of the Voting Stock of McLeodUSA
(including any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage is
greater than or equal to the total voting power percentage then beneficially
owned by the Permitted Holders in the aggregate; or (iii) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors (together with any directors whose election
or appointment by the Board of Directors or whose nomination for election by
the stockholders of McLeodUSA was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office.
"Common Stock" means Capital Stock other than Preferred Stock.
"Consolidated Capital Ratio" of any Person as of any date means the ratio of
(i) the aggregate consolidated principal amount of Indebtedness of such Person
then outstanding to (ii) the aggregate consolidated paid-in capital of such
Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means the
Consolidated Net Income of McLeodUSA and its Restricted Subsidiaries for such
period increased by the sum of (i) Consolidated Interest Expense of McLeodUSA
and its Restricted Subsidiaries for such period, plus (ii) Consolidated Income
Tax Expense of McLeodUSA and its Restricted Subsidiaries for such
62
<PAGE>
period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of McLeodUSA and its Restricted Subsidiaries
for such period, plus (iv) any non-cash expense related to the issuance to
employees of McLeodUSA or any Restricted Subsidiary of McLeodUSA of options to
purchase Capital Stock of McLeodUSA or such Restricted Subsidiary, plus (v) any
charge related to any premium or penalty paid in connection with redeeming or
retiring any Indebtedness prior to its stated maturity; and plus (vi) any non-
cash expense related to a purchase accounting adjustment not requiring an
accrual or reserve and separately disclosed in McLeodUSA's Consolidated Income
Statement, and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in
accordance with GAAP; provided that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Restricted Subsidiary of McLeodUSA (calculated separately for such Restricted
Subsidiary in the same manner as provided above for McLeodUSA) that is subject
to a restriction which prevents the payment of dividends or the making of
distributions to McLeodUSA or another Restricted Subsidiary of McLeodUSA to the
extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate amounts
of the provisions for income taxes of McLeodUSA and its Restricted Subsidiaries
for such period calculated on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of
McLeodUSA and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of), (i) the amortization of Indebtedness discount;
(ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees with respect to interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends of McLeodUSA and its Restricted
Subsidiaries (other than dividends paid in shares of Preferred Stock that is
not Disqualified Stock) declared and paid or payable; (v) accrued Disqualified
Stock dividends of McLeodUSA and its Restricted Subsidiaries, whether or not
declared or paid; (vi) interest on Indebtedness guaranteed by McLeodUSA and its
Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation
paid during such period that is allocable to interest expense in accordance
with GAAP.
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for
such period on a consolidated basis determined in accordance with GAAP;
provided that there shall be excluded therefrom, without duplication (i) all
items classified as extraordinary, (ii) any net income (or net loss) of any
Person other than such Person and its Restricted Subsidiaries, except to the
extent of the amount of dividends or other distributions actually paid to such
Person or its Restricted Subsidiaries by such other Person during such period,
(iii) the net income of any Person acquired by such Person or any of its
Restricted Subsidiaries in a pooling-of-interests transaction for any period
prior to the date of the related acquisition, (iv) any gain or loss, net of
taxes, realized on the termination of any employee pension benefit plan, (v)
net gains (or net losses) in respect of Asset Sales by such Person or its
Restricted Subsidiaries, (vi) the net income (or net loss) of any Restricted
Subsidiary of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or distributions
actually paid by such Restricted Subsidiary to such Person, (vii) with regard
to a non-wholly owned Restricted Subsidiary, any aggregate net income (or loss)
in excess of such Person's or such Restricted Subsidiary's pro rata share of
such non-wholly owned Restricted Subsidiary's net income (or loss) and (viii)
the cumulative effect of changes in accounting principles.
"Consolidated Net Worth" of any Person means, at any date of determination,
the consolidated stockholders' equity or partners' capital (excluding
Disqualified Stock) of such Person and its subsidiaries, as determined in
accordance with GAAP.
63
<PAGE>
"Consolidated Tangible Assets" of any Person means the total amount of assets
(less applicable reserves and other properly deductible items) which under GAAP
would be included on a consolidated balance sheet of such Person and its
Subsidiaries after deducting therefrom all goodwill, trade names, trademarks,
patents, unamortized debt discount and expense and other like intangibles,
which in each case under GAAP would be included on such consolidated balance
sheet.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Depository" means, with respect to the February 1999 senior notes issuable
or issued in whole or in part in the form of one or more Global Notes, The
Depository Trust Company for so long as it shall be a clearing agency
registered under the Securities Exchange Act, or such successor as McLeodUSA
shall designate from time to time in an Officers' Certificate delivered to the
trustee.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, prior to the Stated Maturity of
the February 1999 senior notes.
"Eligible Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof, provided that the full faith and credit of the United
States of America is pledged in support thereof; (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above; (iv) direct obligations issued
by any state of the United States of America or any political subdivision of
any such state or any public instrumentality thereof maturing, or subject to
tender at the option of the holder thereof within 270 calendar days after the
date of acquisition thereof and, at the time of acquisition, having a rating of
A or better from Standard & Poor's Corporation or A-2 or better from Moody's
Investors Service, Inc., (v) commercial paper issued by the parent corporation
of any commercial bank organized in the United States having capital and
surplus in excess of $500 million and commercial paper issued by others having
one of the two highest ratings obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc. and in each case maturing within
270 calendar days after the date of acquisition, (vi) overnight bank deposits
and bankers' acceptances at any commercial bank organized in the United States
having capital and surplus in excess of $500 million; (vii) deposits available
for withdrawal on demand with a commercial bank organized in the United States
having capital and surplus in excess of $500 million; and (viii) investments in
money market funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (vi).
"Existing Indebtedness" means Indebtedness outstanding on the date of the
February 1999 indenture (other than under any Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer under no compulsion to buy, as determined in good faith by the Board of
Directors.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the
64
<PAGE>
circumstances as of the date of determination; provided that, except as
otherwise specifically provided, all calculations made for purposes of
determining compliance with the terms of the provisions of the February 1999
indenture shall utilize GAAP as in effect on the Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or otherwise,
of a Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person in any manner (and "Guaranteed,"
"Guaranteeing" and "Guarantor" shall have meanings correlative to the
foregoing).
"holder" means (i) in the case of any certificated February 1999 senior note,
the Person in whose name such certificated February 1999 senior note is
registered in the Note Register and (ii) in the case of any Global February
1999 senior note, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Indebtedness or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such Person
that exists at such time becoming Indebtedness shall not be deemed an
Incurrence of such Indebtedness and that neither the accrual of interest nor
the accretion of original issue discount shall be deemed an Incurrence of
Indebtedness. Indebtedness otherwise incurred by a Person before it becomes a
Subsidiary of McLeodUSA (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to have been incurred at the time at which such
Person becomes a Subsidiary of McLeodUSA.
"Indebtedness" means, at any time (without duplication), with respect to any
Person, whether recourse as to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business, (iii) any reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person, (iv) any obligation of such Person issued or
assumed as the deferred purchase price of Property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such
Person, (vi) the maximum fixed redemption or repurchase price of Disqualified
Stock of such Person and, to the extent held by Persons other than such Person
or its Restricted Subsidiaries, the maximum fixed redemption or repurchase
price of Disqualified Stock of such Person's Restricted Subsidiaries, at the
time of determination, (vii) every obligation under Interest Rate and Currency
Protection Agreements of such Person, (viii) any Attributable Indebtedness with
respect to any Sale and Leaseback Transaction to which such Person is a party
and (ix) any obligation of the type referred to in clauses (i) through (viii)
of this definition of another Person and all dividends and distributions of
another Person the payment of which, in either case, such Person has Guaranteed
or is responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the February 1999 indenture;
provided that, if such Disqualified Stock is not then permitted to be
repurchased, the repurchase price shall be the book value of such Disqualified
Stock. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation; provided that
the amount outstanding at any time of any Indebtedness issued with
65
<PAGE>
original issue discount (including, without limitation, our 10 1/2% senior
discount notes) is the face amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP.
"Interest Rate or Currency Protection Agreement"of any Person means any
forward contract, futures contract, swap, option, future option or other
financial agreement or arrangement (including, without limitation, caps,
floors, collars and similar agreements) relating to, or the value of which is
dependent upon, interest rates or currency exchange rates or indices.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups, write-
downs or write-offs with respect to such Investment. In determining the amount
of any Investment involving a transfer of any Property other than cash, such
Property shall be valued at its Fair Market Value at the time of such transfer.
"Issue Date" means the date on which the outstanding notes were first
authenticated and delivered under the February 1999 indenture.
"Lien" means, with respect to any Property or other asset, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien (statutory or other), charge, easement, encumbrance, preference,
priority or other security or similar agreement or preferential arrangement of
any kind or nature whatsoever on or with respect to such Property or other
asset (including, without limitation, any conditional sale or title retention
agreement having substantially the same economic effect as any of the
foregoing).
"Maturity" means, when used with respect to a February 1999 senior note, the
date on which the principal of such February 1999 senior note becomes due and
payable as provided therein or in the February 1999 indenture, whether on the
date specified in such February 1999 senior note as the fixed date on which the
principal of such February 1999 senior note is due and payable, a Change of
Control Payment Date or an Asset Sale Payment Date, or by declaration of
acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or assets
by any Person or any of its Restricted Subsidiaries, cash or readily marketable
cash equivalents received net of (i) all reasonable out-of-pocket expenses of
such Person or such Restricted Subsidiary incurred in connection with such
sale, including, without limitation, all legal, title and recording tax
expenses, commissions and other fees and expenses incurred (but excluding any
finder's fee or broker's fee payable to any Affiliate of such Person) and all
federal, state, foreign and local taxes arising in connection with such sale
that are paid or required to be accrued as a liability under GAAP by such
Person or its Restricted Subsidiaries, (ii) all payments made or required to be
made by such Person or its Restricted Subsidiaries on any Indebtedness which is
secured by such Properties or other assets in accordance with the terms of any
Lien upon or with respect to such Properties or other assets or which must, by
the terms of such Lien, or in order to obtain a necessary consent to such
transaction or by applicable law, be repaid in connection with such sale, (iii)
all contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of
such Person) in Restricted Subsidiaries of such Person as a result of such
transaction and (iv) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated
66
<PAGE>
with such assets and retained by such Person or any Restricted Subsidiary
thereof, as the case may be, after such transaction, including, without
limitation, liabilities under any indemnification obligations and severance and
other employee termination costs associated with such transaction, in each case
as determined by the Board of Directors of such Person, in its reasonable good
faith judgment evidenced by a resolution of the Board of Directors filed with
the trustee; provided that, in the event that any consideration for a
transaction (which would otherwise constitute Net Cash Proceeds) is required to
be held in escrow pending determination of whether a purchase price adjustment
will be made, such consideration (or any portion thereof) shall become Net Cash
Proceeds only at such time as it is released to such Person or its Restricted
Subsidiaries from escrow; and provided, further, that any non-cash
consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at such
time, and shall thereafter be applied in accordance with the February 1999
indenture.
"Officers' Certificate" means a certificate signed by (i) the Chairman of the
Board, a Vice Chairman of the Board, the President, the Chief Executive Officer
or a Vice President, and (ii) the Chief Financial Officer, the Chief Accounting
Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant
Secretary of McLeodUSA and delivered to the trustee, which shall comply with
the February 1999 indenture.
"Paying Agent" means any Person authorized by McLeodUSA to make payments of
principal, premium or interest with respect to the February 1999 senior notes
on behalf of McLeodUSA.
"Permitted Holders" means IES Industries Inc. and MidAmerican Energy Holdings
Company and their respective successors and assigns, and Clark E. and Mary E.
McLeod and foundations and trusts controlled by them or either of them, and
Affiliates (other than McLeodUSA and the Restricted Subsidiaries) of each of
the foregoing.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Indebtedness Incurred and which shall
have a notional amount no greater than the payments due with respect to the
Indebtedness being hedged thereby and not for purposes of speculation.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii) Investments
in Property used in the ordinary course of business; (iii) Investments in any
Person as a result of which such Person becomes a Restricted Subsidiary in
compliance with the February 1999 indenture; (iv) Investments pursuant to
agreements or obligations of McLeodUSA or a Restricted Subsidiary, in effect on
the Issue Date, to make such Investments; (v) Investments in prepaid expenses,
negotiable instruments held for collection and lease, utility and workers'
compensation, performance and other similar deposits; (vi) Permitted Interest
Rate or Currency Protection Agreements with respect to any floating rate
Indebtedness that is permitted by the terms of the February 1999 indenture to
be outstanding; (vii) bonds, notes, debentures or other debt securities
received as a result of Asset Sales permitted under the covenant described
under "--Asset Sales"; (viii) Investments in existence at the Issue Date; (ix)
commission, payroll, travel and similar advances to employees in the ordinary
course of business to cover matters that are expected at the time of such
advances ultimately to be treated as expenses in accordance with GAAP; (x)
stock, obligations or securities received in satisfaction of judgments; and
(xi) Investments made pursuant to any deferred-compensation plan, including
Investments made through a trust (including a grantor trust) established in
connection with any such plan, for the benefit of employees of McLeodUSA or of
any Restricted Subsidiary.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall
67
<PAGE>
have been made therefor; (ii) other Liens incidental to the conduct of
McLeodUSA's and its Restricted Subsidiaries' business or the ownership of its
property and assets not securing any Indebtedness, and which do not in the
aggregate materially detract from the value of McLeodUSA's and its Restricted
Subsidiaries' property or assets when taken as a whole, or materially impair
the use thereof in the operation of its business; (iii) Liens with respect to
assets of a Restricted Subsidiary granted by such Restricted Subsidiary to
McLeodUSA to secure Indebtedness owing to McLeodUSA; (iv) pledges and deposits
made in the ordinary course of business in connection with workers'
compensation and unemployment insurance, statutory Liens of landlords,
carriers, warehousemen, mechanics, materialmen, repairmen and other types of
statutory obligations; (v) deposits made to secure the performance of tenders,
bids, leases, and other obligations of like nature incurred in the ordinary
course of business (exclusive of obligations for the payment of borrowed
money); (vi) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the ordinary
course of business which, in the aggregate, do not materially detract from the
value of the property subject thereto or interfere with the ordinary conduct of
the business of McLeodUSA or its Restricted Subsidiaries; (vii) Liens arising
out of judgments or awards against McLeodUSA or any Restricted Subsidiary with
respect to which McLeodUSA or such Restricted Subsidiary is prosecuting an
appeal or proceeding for review and McLeodUSA or such Restricted Subsidiary is
maintaining adequate reserves in accordance with GAAP; (viii) any interest or
title of a lessor in the property subject to any lease other than a Capital
Lease; (ix) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Issue Date; provided that (a) such Lien is
created solely for the purpose of securing Indebtedness Incurred, in accordance
with "--Covenants--Limitation on Consolidated Indebtedness," (1) to finance the
cost (including the cost of improvement or construction) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property or (2)
to refinance any Indebtedness previously so secured, (b) the principal amount
of the Indebtedness secured by such Lien does not exceed 100% of such cost and
(c) any such Lien shall not extend to or cover any property or assets other
than such item of property or assets and any improvements on such item; (x)
leases or subleases granted to others that do not materially interfere with the
ordinary course of business of McLeodUSA and its Restricted Subsidiaries; (xi)
Liens encumbering property or assets under construction arising from progress
or partial payments by a customer of McLeodUSA or its Restricted Subsidiaries
relating to such property or assets; (xii) Liens arising from filing
precautionary Uniform Commercial Code financing statements regarding leases;
(xiii) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes a part
of, any Restricted Subsidiary; provided that such Liens do not extend to or
cover any property or assets of McLeodUSA or any Restricted Subsidiary other
than the property or assets acquired; (xiv) Liens in favor of McLeodUSA or any
Restricted Subsidiary; (xv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof; (xvi)
Liens in favor of customs and revenue authorities arising as a matter of law to
secure payment of customs duties in connection with the importation of goods;
(xvii) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are either within the general parameters customary in the
industry and incurred in the ordinary course of business, in each case,
securing Indebtedness under Permitted Interest Rate Agreements and Currency
Agreements; and (xviii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
McLeodUSA or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of McLeodUSA and its Restricted
Subsidiaries prior to the Issue Date.
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
68
<PAGE>
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.
"Purchase Money Indebtedness" means Indebtedness of McLeodUSA (including
Acquired Indebtedness and Capital Lease Obligations, mortgage financings and
purchase money obligations) incurred for the purpose of financing all or any
part of the cost of construction, acquisition, development or improvement by
McLeodUSA or any Restricted Subsidiary of any Telecommunications Assets of
McLeodUSA or any Restricted Subsidiary and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Qualified Receivable Facility" means Indebtedness of McLeodUSA or any
Subsidiary Incurred from time to time pursuant to either (x) credit facilities
secured by Receivables or (y) receivable purchase facilities, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed solely
for the purpose of obtaining a Qualified Receivable Facility and substantially
all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money and
proceeds and products thereof in each case generated in the ordinary course of
business.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of McLeodUSA or to McLeodUSA's stockholders (in their
capacity as such), or declared or paid to any Person other than McLeodUSA or a
Restricted Subsidiary of McLeodUSA on the Capital Stock of any Restricted
Subsidiary of McLeodUSA, in each case, other than dividends, distributions or
payments made solely in Qualified Stock of McLeodUSA or such Restricted
Subsidiary, (ii) a payment made by McLeodUSA or any of its Restricted
Subsidiaries (other than to McLeodUSA or any Restricted Subsidiary) to
purchase, redeem, acquire or retire any Capital Stock of McLeodUSA or of a
Restricted Subsidiary, (iii) a payment made by McLeodUSA or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
McLeodUSA) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of McLeodUSA or such
Restricted Subsidiary which is subordinate (whether pursuant to its terms or by
operation of law) in right of payment to the February 1999 senior notes and
which was scheduled to mature on or after the maturity of the February 1999
senior notes or (iv) an Investment in any Person, including an Unrestricted
Subsidiary or the designation of a Subsidiary as an Unrestricted Subsidiary,
other than (a) a Permitted Investment, (b) an Investment by McLeodUSA in a
Wholly-Owned Restricted Subsidiary or (c) an Investment by a Restricted
Subsidiary in McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA.
"Restricted Subsidiary" means any Subsidiary of McLeodUSA that has not been
designated as an "Unrestricted Subsidiary."
69
<PAGE>
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Senior Credit Facility" means Indebtedness of McLeodUSA and its Subsidiaries
Incurred from time to time pursuant to one or more credit agreements or similar
facilities made available from time to time to McLeodUSA and its Subsidiaries,
whether or not secured, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Strategic Equity Investment" means an equity investment made by a Strategic
Investor in McLeodUSA in an aggregate amount of not less than $25 million.
"Strategic Investor" means a Person (other than the Permitted Holders)
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial Investment in McLeodUSA in excess of
$2 billion.
"Subordinated Indebtedness" means Indebtedness of McLeodUSA as to which the
payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the February 1999 senior notes to at least the following
extent: (i) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so long as
any default in the payment of principal (or premium, if any) or interest on the
February 1999 senior notes exists; (ii) in the event that any other default
that with the passing of time or the giving of notice, or both, would
constitute an event of default exists with respect to the February 1999 senior
notes, upon notice by 25% or more in principal amount of the February 1999
senior notes to the trustee, the trustee shall give notice to McLeodUSA and the
holders of such Indebtedness (or trustees or agents therefor) of a payment
blockage, and thereafter no payments of principal of (or premium, if any) or
interest on or otherwise due in respect of such Indebtedness may be made for a
period of 179 days from the date of such notice; and (iii) such Indebtedness
may not (x) provide for payments of principal of such Indebtedness at the
stated maturity thereof or by way of a sinking fund applicable thereto or by
way of any mandatory redemption, defeasance, retirement or repurchase thereof
by McLeodUSA (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Indebtedness upon an event of default
thereunder), in each case prior to the final Stated Maturity of the February
1999 senior notes or (y) permit redemption or other retirement (including
pursuant to an offer to purchase made by McLeodUSA) of such other Indebtedness
at the option of the holder thereof prior to the final Stated Maturity of the
February 1999 senior notes, other than a redemption or other retirement at the
option of the holder of such Indebtedness (including pursuant to an offer to
purchase made by McLeodUSA) which is conditioned upon a change of control of
McLeodUSA pursuant to provisions substantially similar to those described under
"--Repurchase at the Option of Holders upon a Change of Control" (and which
shall provide that such Indebtedness will not be repurchased pursuant to such
provisions prior to McLeodUSA's repurchase of the February 1999 senior notes
required to be repurchased by McLeodUSA pursuant to the provisions described
under "--Repurchase at the Option of Holders upon a Change of Control").
70
<PAGE>
"Subsidiary" means, with respect to any Person, (i) any corporation more than
50% of the outstanding shares of Voting Stock of which is owned, directly or
indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(ii) any general partnership, limited liability company, joint venture or
similar entity, more than 50% of the outstanding partnership, membership or
similar interests of which are owned, directly or indirectly, by such Person,
or by one or more other Subsidiaries of such Person, or by such Person and one
or more other Subsidiaries of such Person and (iii) any limited partnership of
which such Person or any Subsidiary of such Person is a general partner.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (ii)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, (iii) creating, developing, producing or marketing
audiotext or videotext, (iv) publishing or distributing telephone (including
Internet) directories, whether in paper, electronic, audio or video format, (v)
marketing (including direct marketing and telemarketing), or (vi) evaluating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i), (ii), (iii), (iv) or (v) above
(in the case of clauses (iii), (iv) and (v), however, in a manner consistent
with McLeodUSA's manner of business on the Issue Date), and shall, in any
event, include all businesses in which McLeodUSA or any of its Subsidiaries are
engaged on the Issue Date; provided that the determination of what constitutes
a Telecommunications Business shall be made in good faith by the Board of
Directors.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"Unrestricted Subsidiary" means any Subsidiary of McLeodUSA that McLeodUSA
has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the February
1999 indenture.
"U.S. Government Obligations" means (x) securities that are (i) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof, and (y) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Obligation which is specified in clause (x) above and held
by such Bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Obligation which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific
payment of principal or interest of the U.S. Government Obligation evidenced by
such depository receipt.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the board of directors or comparable body of such Person.
71
<PAGE>
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary of such
Person all of the outstanding Capital Stock or other ownership interests (other
than any director's qualifying shares) of which shall at the time be owned by
such Person or by one or more other Wholly-Owned Restricted Subsidiaries of
such Person or by such Person and one or more other Wholly-Owned Restricted
Subsidiaries of such Person.
72
<PAGE>
OTHER INDEBTEDNESS
On March 4, 1997, we completed an offering of $500 million aggregate
principal amount at maturity of our 10 1/2% senior discount notes. Our 10 1/2%
senior discount notes were priced at a discount and we received net proceeds of
approximately $288.9 million from the offering of our 10 1/2% senior discount
notes. Our 10 1/2% senior discount notes will accrete to an aggregate principal
amount of $500 million by March 1, 2002. Interest will not accrue on our 10
1/2% senior discount notes prior to March 1, 2002. Thereafter, interest will
accrue at a rate of 10 1/2% per annum which will be payable in cash semi-
annually in arrears on March 1 and September 1 of each year, commencing
September 1, 2002. Our 10 1/2% senior discount notes rank pari passu in right
of payment with our 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes. Our 10 1/2% senior discount notes will mature on
March 1, 2007 and will be payable prior to the maturity of our 9 1/4% senior
notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes.
On July 21, 1997, we completed an offering of $225 million principal amount
of our 9 1/4% senior notes. We received net proceeds of approximately $217.6
million from the offering of our 9 1/4% senior notes. Our 9 1/4% senior notes
accrue interest at a rate of 9 1/4% per annum which is payable in cash semi-
annually in arrears on July 15 and January 15 of each year, commencing January
15, 1998. Our 9 1/4% senior notes rank pari passu in right of payment with our
10 1/2% senior discount notes, 8 3/8% senior notes, 9 1/2% senior notes and 8
1/8% senior notes. Our 9 1/4% senior notes will mature on July 15, 2007 and
will be payable prior to the maturity of 8 3/8% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes.
On March 16, 1998, we completed an offering of $300 million principal amount
of our 8 3/8% senior notes. We received net proceeds of approximately $291.9
million from the offering of our 8 3/8% senior notes. Our 8 3/8% senior notes
accrue interest at a rate of 8 3/8% per annum which is payable in cash semi-
annually in arrears on March 15 and September 15 of each year, commencing
September 15, 1998. Our 8 3/8% senior notes rank pari passu in right of payment
with our 10 1/2% senior discount notes, 9 1/4% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes. Our 8 3/8% senior notes will mature on March 15,
2008 and will be payable prior to the maturity of our 9 1/2% senior notes and 8
1/8% senior notes.
On October 30, 1998, we completed an offering of $300 million principal
amount of our 9 1/2% senior notes. We received net proceeds of approximately
$291.9 million from the offering of our 9 1/2% senior notes. Our 9 1/2% senior
notes accrue interest at a rate of 9 1/2% per annum which is payable in cash
semi-annually in arrears on May 1 and November 1 of each year, commencing May
1, 1999. Our 9 1/2% senior notes rank pari passu in right of payment with our
10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes and 8
1/8% senior notes. Our 9 1/2% senior notes will mature on November 1, 2008 and
will be payable prior to the maturity of our 8 1/8% senior notes.
The indentures governing our 10 1/2% senior discount notes, 9 1/4% senior
notes, 8 3/8% senior notes and 9 1/2% senior notes impose operating and
financial restrictions on us and our subsidiaries that are substantially the
same as the restrictions governing the 8 1/8% senior notes. These restrictions
affect, and in some cases significantly limit or prohibit, among other things,
our ability and the ability of our subsidiaries to incur additional
indebtedness, pay dividends or make distributions in respect of our or such
subsidiaries' capital stock, make other restricted payments, enter into sale
and leaseback transactions, create liens upon assets, enter into transactions
with affiliates or related persons, sell assets, or consolidate, merge or sell
all or substantially all of our, or our subsidiaries' assets. There can be no
assurance that such covenants will not adversely affect our ability to finance
our future operations or capital needs or to engage in other business
activities that may be in our interest.
73
<PAGE>
We have received a non-binding commitment from The Chase Manhattan Bank to
lead a syndication to provide a proposed revolving credit facility to a newly
formed, wholly owned subsidiary of McLeodUSA (the "Borrower"). The proposed
revolving credit facility would be guaranteed by us and all of our subsidiaries
and would be secured by a first priority lien on all our, our subsidiaries' and
the Borrower's current and future assets and properties and by a first priority
pledge of the stock of the Borrower and our other subsidiaries. One of the
covenants in the proposed revolving credit facility would restrict our ability
to prepay, redeem or purchase debt and one of the events of default would be
the occurrence of a default by us or the Borrower with respect to other
indebtedness. The Borrower would be obligated to pay interest and fees with
respect to the proposed revolving credit facility at the rates and in the
amounts specified in such commitment. We expect that revisions will be made to
such commitment and that additional matters will be negotiated with the
prospective lenders prior to the finalization of the proposed revolving credit
facility. We cannot assure you that we will complete the proposed revolving
credit facility on acceptable terms or at all.
74
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. This prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for outstanding notes where
such outstanding notes were acquired as a result of market-making activities or
other trading activities. We have agreed that, starting on the expiration date
and ending on the close of business on the first anniversary of the expiration
date, we will make this prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by broker-
dealers. Exchange notes received by broker-dealers for their own account in the
exchange offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the exchange notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such exchange notes. Any broker-dealer that
resells exchange notes that were received by it for its own account in the
exchange offer and any broker or dealer that participates in a distribution of
such exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit of any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the outstanding notes,
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the outstanding notes, including any broker-dealers,
against various liabilities, including liabilities under the Securities Act.
75
<PAGE>
LEGAL MATTERS
The legality of the exchange notes offered by this prospectus are being
passed upon for McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C., special
counsel for McLeodUSA. Certain legal matters relating to the offering of the
outstanding notes were passed upon for the initial purchasers 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.
76
<PAGE>
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 the exchange notes. 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:
<TABLE>
<CAPTION>
Public Reference Room New York Regional Office Chicago Regional Office
<S> <C> <C>
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet Web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC file number for our documents filed under the 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.
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 Quarterly Report on Form 10-Q for our quarterly period ended March 31,
1999, filed on May 17, 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 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.
77
<PAGE>
You can obtain any of the documents listed above from the SEC, through the
SEC's Internet 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.
You should make your request by , 1999 in order to ensure timely delivery
of these documents before the exchange offer expires.
The indenture that governs the outstanding notes and which will govern the
exchange notes requires us to furnish the trustee with annual reports
containing consolidated financial statements audited by our independent public
accountants and with quarterly reports containing unaudited condensed
consolidated financial statements for each of the first three quarters of each
fiscal year.
78
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$500,000,000
McLeodUSA
Incorporated
8 1/8% Senior Notes
Due 2009
--------
PROSPECTUS
Dated , 1999
--------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and
its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In
addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of 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.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*1.1 Purchase Agreement, dated as of February 11, 1999 among Salomon Smith
Barney Inc., Bear, Stearns & Co. Inc., Chase Securities Inc. and
McLeodUSA Incorporated.
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).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4"),
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on Form
10-K, File No. 0-20763, filed with the Commission on March 6, 1998
(the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10 1/2% Senior
Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2 to
Annual Report on Form 10-K, File No. 0-20763, filed with the
Commission on March 31, 1997 (the "1996 Form 10-K") and incorporated
herein by reference).
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
4.5 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).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod. (Filed
as Exhibit 4.3 to the November 1996 Form S-1 and incorporated herein
by reference).
4.7 Form of 10 1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated and
United States Trust Company of New York, as Trustee, relating to the 9
1/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed as
Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
reference).
4.9 Form of Initial Global 9 1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
4.10 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).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.11 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., Clarke 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).
4.12 Form of 9 1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 8 3/8% Senior Notes Due 2008 of McLeodUSA Incorporated. (Filed as
Exhibit 4.15 to Registration Statement on Form S-4, File No. 333-
52793 (the "May 1998 Form S-4") and incorporated herein by
reference).
4.14 Form of Global 8 3/8% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.13).
4.15 Stockholders' Agreement dated as of November 18, 1998 by and among
McLeodUSA Incorporated, IES Investments Inc., Clarke 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).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9 1/2% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
Exhibit 4.19 to Registration Statement on Form S-4, File No. 333-
69621 (the "December 1998 Debt Form S-4") and incorporated herein by
reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.16).
4.18 Indenture dated as of February 22, 1999 between McLeodUSA
Incorporated and United States Trust Company of New York, as Trustee,
relating to the 8 1/8% Senior Notes Due 2009 of McLeodUSA
Incorporated (Filed as Exhibit 4.22 to the Company's 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 (the "1998 Form 10-K")
and incorporated herein by reference).
4.19 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA Incorporated
(contained in the Indenture filed as Exhibit 4.18).
4.20 Registration Agreement dated February 22, 1999 among McLeodUSA
Incorporated, Salomon Smith Barney Inc., Bear, Stearns & Co.
Incorporated and Chase Securities Inc. (Filed as Exhibit 4.24 to the
1998 Form 10-K and incorporated herein by reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*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).
*25.1 Statement on Form T-1 of Eligibility of Trustee.
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the 1998 Form 10-K
and incorporated herein by reference).
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies
and other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- --------
* Previously filed.
** Filed herewith.
(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 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
II-4
<PAGE>
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement;
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered
which remain unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the 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 28th 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 28th 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-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Director
______________________________________
Thomas M. Collins
* Director
______________________________________
Robert J. Currey
* Director
______________________________________
Lee Liu
* Director
______________________________________
Paul D. Rhines
Director
______________________________________
Peter H.O. Claudy
* /s/ Stephen C. Gray
______________________________________
Stephen C. Gray
ATTORNEY-IN-FACT
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
------- ------------------- ------
<C> <S> <C>
*1.1 Purchase Agreement, dated as of February 11, 1999 among
Salomon Smith Barney Inc., Bear, Stearns & Co. Inc., Chase
Securities Inc. and McLeodUSA Incorporated.
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 Indenture dated March 4, 1997 between McLeod, Inc. and United
States Trust Company of New York, as Trustee, relating to the
10 1/2% Senior Discount Notes Due 2007 of McLeod, Inc. (Filed
as Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-
20763, filed with the Commission on March 31, 1997 (the "1996
Form 10-K") and incorporated herein by reference).
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3
to the 1996 Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March
1, 2007 of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996
Form 10-K and incorporated herein by reference).
4.5 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).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23,
1996 by and among McLeod, Inc., IES Investments Inc., Midwest
Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod. (Filed as Exhibit 4.3 to the November 1996
Form S-1 and incorporated herein by reference).
4.7 Form of 10 1/2% Senior Discount Exchange Note Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.8 to the July
1997 Form S-4 and incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 9 1/4% Senior Notes Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.9 to the July
1997 Form S-4 and incorporated herein by reference).
4.9 Form of Initial Global 9 1/4% Senior Note Due 2007 of
McLeodUSA Incorporated. (Filed as Exhibit 4.10 to the July
1997 Form S-4 and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
------- ------------------- ------
<C> <S> <C>
4.10 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).
4.11 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., Clarke 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).
4.12 Form of 9 1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K
and incorporated herein by reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 8 3/8% Senior Notes Due 2008 of
McLeodUSA Incorporated. (Filed as Exhibit 4.15 to
Registration Statement on Form S-4, File No. 333-52793 (the
"May 1998 Form S-4") and incorporated herein by reference).
4.14 Form of Global 8 3/8% Senior Note Due 2008 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit
4.13).
4.15 Stockholders' Agreement dated as of November 18, 1998 by and
among McLeodUSA Incorporated, IES Investments Inc., Clarke
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).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 9 1/2% Senior Notes Due 2008 of
McLeodUSA Incorporated (Filed as Exhibit 4.19 to
Registration Statement on Form S-4, File No. 333-69621 (the
"December 1998 Debt Form S-4") and incorporated herein by
reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit
4.16).
4.18 Indenture dated as of February 22, 1999 between McLeodUSA
Incorporated and United States Trust Company of New York, as
Trustee, relating to the 8 1/8% Senior Notes Due 2009 of
McLeodUSA Incorporated (Filed as Exhibit 4.22 to the
Company's 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 (the "1998 Form 10-K") and
incorporated herein by reference).
4.19 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA
Incorporated (contained in the Indenture filed as Exhibit
4.18).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Exhibit Description Number
------- ------------------- ------
<C> <S> <C>
4.20 Registration Agreement dated February 22, 1999 among
McLeodUSA Incorporated, Salomon Smith Barney Inc., Bear,
Stearns & Co. Incorporated and Chase Securities Inc. (Filed
as Exhibit 4.24 to the 1998 Form 10-K 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).
*25.1 Statement on Form T-1 of Eligibility of Trustee.
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the 1998
Form 10-K and incorporated herein by reference).
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- --------
* Previously filed.
** Filed herewith.
<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. 1 to Registration Statement on Form S-4 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 27, 1999
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in Amendment
No. 1 to the Registration Statement (Form S-4) and related Prospectus of
McLeodUSA Incorporated for the registration of $500,000,000 of its 8 1/8% Senior
Notes due February 15, 2009 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.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
May 27, 1999
