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Filed Pursuant to Rule 424(b)3
Registration No. 333-69621
PROSPECTUS
$300,000,000
McLeodUSA Incorporated
Offer To Exchange All Outstanding
9 1/2% Senior Notes Due November 1, 2008
For 9 1/2% Senior Notes Due November 1, 2008
Interest Payable May 1 and November 1, Commencing May 1, 1999
Material Terms of the Exchange Offer
. We are offering to . We will not receive any
exchange all Outstanding proceeds from the
Notes that are validly Exchange Offer.
tendered and not validly
withdrawn for an equal . The terms of the
amount of a new series Exchange Notes to be
of notes which are issued are substantially
registered under the identical to the
Securities Act of 1933. Outstanding Notes,
except for certain
. The Exchange Offer will transfer restrictions
expire at 5:00 P.M., New and registration rights
York City Time, on March relating to the
3, 1999, unless Outstanding Notes.
extended.
. The Exchange Offer is . Outstanding Notes may be
subject to certain tendered only in
customary conditions, denominations of $1,000
including that the and multiples of $1,000.
Exchange Offer not
violate applicable law . Affiliates of McLeodUSA
or any applicable may not participate in
interpretation of the the Exchange Offer.
Staff of the Securities
and Exchange Commission. . The exchange of notes
should not be a taxable
. Tenders of Outstanding exchange for U.S.
Notes may be withdrawn federal income tax
at any time before the purposes.
expiration of the
Exchange Offer.
Please see "Risk Factors" beginning on page 14 for a discussion of certain
factors which 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 January 29, 1999.
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TABLE OF CONTENTS
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Page
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Where You Can Get More Information....................................... ii
Forward-Looking Statements............................................... iii
Summary.................................................................. 1
Risk Factors............................................................. 14
The Exchange Offer....................................................... 24
Recent Developments...................................................... 33
Use of Proceeds.......................................................... 36
Capitalization........................................................... 37
Selected Consolidated Financial Data..................................... 38
Pro Forma Financial Data................................................. 40
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 43
Description of the Exchange Notes........................................ 58
Other Indebtedness....................................................... 93
Plan of Distribution..................................................... 95
Legal Matters............................................................ 95
Experts.................................................................. 96
Changes in Accountants................................................... 96
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(i)
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WHERE YOU CAN GET MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (the "SEC" or the
"Commission") under the Securities Exchange Act of 1934 (the "Exchange Act").
You may read and copy any of this information at the SEC's public reference
rooms at:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may call the SEC at 1-800-SEC-0330 for further information about the
public reference rooms. Copies of filed documents also can be obtained by mail
from the Public Reference Room at the above address or may be accessed at the
SEC's web site at http://www.sec.gov. The SEC filing number for our documents
filed under the Exchange Act is 0-20763. Our Class A Common Stock is quoted on
The Nasdaq Stock Market's National Market System under the symbol "MCLD." You
can look at SEC reports, proxy statements and other information about our
Company at Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
We filed with the SEC a Registration Statement under the Securities Act of
1933 (the "Securities Act"), covering the Exchange Notes to be issued in the
Exchange Offer. As permitted by SEC rules, this Prospectus omits certain
information included in the Registration Statement and its exhibits. Statements
in this Prospectus concerning the contents of any contract, agreement or other
document are not necessarily complete. If we have filed any such contract,
agreement or other document as an exhibit to the Registration Statement, you
should read the exhibit for a more complete understanding of the document or
matter involved.
The SEC allows us to "incorporate by reference" information into this
Prospectus, which means we can disclose important information to you simply by
referring you to another document filed separately with the SEC. This
Prospectus incorporates by reference the following documents which contain
important information about us and our financial condition:
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1997, filed on March 9, 1998
. Our Current Reports on Form 8-K, filed on March 20, 1998, October 29,
1998, November 19, 1998 and January 14, 1999
. Our Quarterly Reports on Form 10-Q for the quarterly periods ended March
31, 1998, June 30, 1998 and September 30, 1998, filed on May 13, 1998,
August 14, 1998 and November 16, 1998, respectively
. The consolidated financial statements of Consolidated Communications
Inc. and subsidiaries appearing on pages F-45 through F-60 of our
definitive prospectus dated December 1, 1997 and filed with the SEC on
December 2, 1997 pursuant to Rule 424(b) under the Securities Act as
part of our Registration Statement on Form S-4 (Registration No. 333-
34227)
. All documents filed by us pursuant to Sections 13(a), 13(c), 14 and
15(d) of the Exchange Act, during the offering made by this Prospectus,
effective the date such documents are filed
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
(ii)
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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.
You can obtain the documents incorporated by reference at no cost by
contacting us at McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C
Street SW, P.O. Box 3177, Cedar Rapids, IA 52406-3177, telephone number: (319)
364-0000, Attention: General Counsel. In order to ensure timely delivery of
these documents before the Exchange Offer expires, any request should be made
by February 27, 1999.
You should rely only on the information incorporated by reference or
contained in this Prospectus. We have not authorized anyone else to provide
you with different information. You should not assume that the information in
this Prospectus is accurate as of any date other than the date on the front
cover.
FORWARD-LOOKING STATEMENTS
Some of the statements contained, or incorporated by reference, in this
Prospectus discuss future expectations, contain projections of results of
operations or financial condition or state other "forward-looking"
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these so-called "forward-looking"
statements by words like "may," "will," "should," "expects," "plans,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue"
or the negative of those words and other comparable words. You should be aware
that those statements only reflect our predictions. Actual events or results
may differ substantially. Important factors that could cause our actual
results to be materially different from the "forward-looking" statements are
disclosed under the heading "Risk Factors" and throughout this Prospectus.
(iii)
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SUMMARY
The following summary highlights selected information from this Prospectus
and may not contain all of the information that is important to you. The
summary is qualified in its entirety by the more detailed information and by
our Consolidated Financial Statements, the notes thereto and the other
financial data that are contained elsewhere, or incorporated by reference, in
this Prospectus. You should carefully consider the factors set forth under the
caption "Risk Factors" and we urge you to read this Prospectus and the Letter
of Transmittal in their entirety. Unless otherwise indicated, references in
this Prospectus to the "Company" include McLeodUSA's predecessor, McLeodUSA and
McLeodUSA's wholly owned subsidiaries. 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 integrated communications services to business and residential
customers in the Midwestern and Rocky Mountain regions of the United States.
Our integrated communications services include local, long distance, Internet
access, data, voice mail and paging, all from a single company on a single
bill. We believe we are the first communications provider in most of our
markets to offer "one-stop shopping" for communications services tailored to
customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their telecommunications needs. It also allows businesses
to receive customized services, such as competitive long distance pricing and
enhanced calling features, that might not otherwise be directly available on a
cost-effective basis. As of September 30, 1998, we served over 366,800 local
lines in 267 cities and towns.
In addition to our core business of providing competitive local, long distance
and related communications services, we also derive revenue from:
. the sale of advertising space in telephone directories
. incumbent local exchange services in east central Illinois
. communications network maintenance services
. telephone equipment sales, service and installation
. video services
. special access, private line and data services
. telemarketing services
. other communications services, including cellular, operator, payphone and
paging services
In most of our markets, we compete with the incumbent local phone company by
leasing their lines and switches. This allows customers to select our local
service without changing their existing telephone numbers. In other markets,
primarily in east central Illinois, we operate our own lines and switches. We
provide long distance services by using our own facilities and leasing capacity
from long-haul and local providers. We are constructing fiber optic networks in
Iowa, Illinois, Wisconsin, Indiana, Missouri, Minnesota, South Dakota and North
Dakota to carry additional communications traffic on our own network.
Our Strategy
We want to be the leading and most admired provider of integrated
communications services in our markets. We are:
. aggressively capturing customer share and generating revenue using leased
network capacity
. concurrently constructing our own network
. migrating customers to our network to provide enhanced services and reduce
operating costs
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The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly penetrate
our target markets and build customer loyalty by providing a "bundled" product
offering. We intend to add personal communications services ("PCS") to our
current array of integrated communications services over the next several
years.
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.
Focus on small and mid-sized markets. We primarily target small and mid-sized
markets because we believe we can rapidly capture customer share by providing
face-to-face business sales and strong service support to our customers before
intense competition develops.
Expand our fiber optic network. We are building a state-of-the-art digital
fiber optic network to deliver multiple services and reduce operating costs.
Expand intra-city fiber network build. Within selected cities, 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 facilities from the
local exchange carrier.
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 September 30, 1998, we estimated, based on our current business plan and
projections, our aggregate capital requirements through 2001 would be $1.1
billion. Our estimated capital requirements include the projected cost of:
. building our fiber optic network, including intra-city fiber optic networks
. expanding operations in existing and new markets
. developing a PCS system
. funding general corporate expenses
We expect to fund these capital requirements with:
. approximately $291.9 million in net proceeds from the Outstanding Notes
. approximately $402.4 million of cash on hand and short-term investments at
September 30, 1998
. a proposed $100.0 million revolving credit facility
. projected operating cash flow of the Company
The actual amount and timing of our future capital requirements is subject to
risks and uncertainties and may differ materially from our estimates. See "Risk
Factors--Significant Capital Requirements."
----------------
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.
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SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer.......... We are offering to exchange (the "Exchange
Offer") $1,000 principal amount of our 9 1/2%
Senior Notes due November 1, 2008 (the "Exchange
Notes"), which have been registered under the
Securities Act, for each $1,000 principal amount
of our outstanding unregistered 9 1/2% Senior
Notes due November 1, 2008 which were issued by
us on October 22, 1998 in a private offering (the
"Outstanding Notes" and, together with the
Exchange Notes, the "October 1998 Senior Notes").
In order for your Outstanding Notes to be
exchanged, you must properly tender them prior to
the expiration of the Exchange Offer. All
Outstanding Notes that are validly tendered and
not validly withdrawn will be exchanged. We will
issue the Exchange Notes on or promptly after the
expiration of the Exchange Offer.
Outstanding Notes may be tendered for exchange in
whole or in part in integral multiples of $1,000
principal amount.
Registration Rights
Agreement................... We sold the Outstanding Notes on October 22, 1998
to Salomon Smith Barney Inc., Bear, Stearns & Co.
Inc., Morgan Stanley & Co. Incorporated and Chase
Securities Inc. (the "Initial Purchasers").
Simultaneously with that sale we signed a
registration rights agreement with the Initial
Purchasers (the "Registration Rights Agreement")
which requires us to conduct this Exchange Offer.
You have the right pursuant to 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 pursuant to the Exchange Offer,
you will continue to be subject to the
restrictions on transfer provided in the
Outstanding Notes and the indenture governing the
October 1998 Senior Notes. In general, the
Outstanding Notes may not be offered or sold,
unless registered under the Securities Act,
except pursuant to an
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exemption from, or in a transaction not subject
to, the Securities Act and applicable state
securities laws. We do not currently 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 March 3, 1999 unless extended
by us (in which case the term "Expiration Date"
shall 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 certain
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 certain
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 in
accordance with 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 to be tendered or in
compliance with the specified procedures for
guaranteed delivery of such Outstanding Notes.
Certain brokers, dealers, commercial banks, trust
companies and other nominees may also effect
tenders by book-entry transfer.
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Please do not send your Letter of Transmittal or
certificates representing your Outstanding Notes
to us. Those documents should only be sent to the
Exchange Agent. Questions regarding how to tender
and requests for information should be directed
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 prior to the Expiration Date by
delivering a written notice of your withdrawal to
the Exchange Agent in accordance with the
withdrawal procedures as 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.
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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
such 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
"Exchange Agent"). 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 hereby.
See "Use of Proceeds."
Certain 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--Certain United States
Federal Income Tax Consequences."
See "The Exchange Offer" for more detailed information concerning the
Exchange Offer.
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SUMMARY OF TERMS OF THE EXCHANGE NOTES
The Exchange Offer relates to the exchange of up to $300,000,000 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) and both the
Outstanding Notes and the Exchange Notes are governed by the same indenture
(the "October 1998 Indenture").
Securities Offered.......... $300 million principal amount of 9 1/2% Senior
Notes due November 1, 2008.
Interest.................... Interest on the Exchange Notes will accrue at the
rate of 9 1/2% per year and will be payable in
cash semi-annually in arrears on May 1 and
November 1, commencing May 1, 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 (as defined herein) or
Qualified Receivable Facility (as defined
herein)
. 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 September 30, 1998:
. we had total secured indebtedness of $28.4
million
. our subsidiaries had total liabilities of
$246.3 million
. we had $877.7 million 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......... The Exchange Notes will be subject to redemption
at our option, in whole or in part, at any time
on or after November 1, 2003 at the redemption
prices set forth herein, 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
herein) on or before November 1, 2001, we may, at
our option, use all or a portion of the net
proceeds from such sale to redeem up to
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33 1/3% of the originally issued principal amount
of the Exchange Notes at a redemption price equal
to 111.50% 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 herein), 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."
Certain Covenants........... The October 1998 Indenture contains certain
covenants which, among other things, restrict our
ability and the ability of certain 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
. create liens
. 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--Certain Covenants."
RISK FACTORS
You should consider carefully certain factors set forth under the caption
"Risk Factors" before tendering your Outstanding Notes for Exchange Notes. See
"Risk Factors."
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RECENT DEVELOPMENTS
The DTG Merger Agreement
On October 27, 1998, we entered into an Agreement and Plan of Merger (the
"DTG Merger Agreement") with Dakota Telecommunications Group, Inc., a Delaware
corporation ("DTG"), pursuant to which a newly formed wholly owned subsidiary
of ours will be merged with and into DTG (the "DTG Merger"). As a result of the
DTG Merger, each share of DTG's common stock will be converted into the right
to receive 0.4328 of a share of our Class A Common Stock (the "DTG Exchange
Ratio"). The maximum number of shares of our Class A Common Stock issuable
pursuant to the DTG Merger (assuming the exercise of all outstanding options to
purchase DTG common stock) is expected to be approximately 1,375,000. We have
filed a registration statement under the Securities Act to register shares of
our Class A Common Stock to be issued in the DTG Merger.
DTG is a diversified communications services company serving business and
residential customers in southeastern South Dakota and neighboring areas. DTG
provides wireline local and network access services, competitive local exchange
telephone services, incumbent local exchange telephone services, long distance
telephone services, operator assisted calling services, telecommunications
equipment sale and leasing services, cable television services, computer
networking services, Internet access and related services and mobile radio and
paging services. As of September 30, 1998, DTG served approximately 7,350 local
lines, 5,930 cable television subscribers, 7,200 Internet users, and over 2,000
active computer networking business customers located primarily in South
Dakota, northwestern Iowa and southwestern Minnesota. DTG currently operates 13
telephone exchanges in southeastern South Dakota, four of which were built in
1997, and 26 cable television systems in South Dakota, Iowa and Minnesota
incorporating over 2,240 miles of copper plant, 300 miles of coaxial cable and
approximately 9,100 miles of fiber optic lines. DTG has 188 employees with
offices in Irene, Sioux Falls, Canton, Viborg and Yankton, South Dakota, and in
Marshall, Minnesota. For the nine months ended September 30, 1998, DTG recorded
revenues of approximately $25 million.
The Ovation Merger Agreement
On January 7, 1999, we entered into an Agreement and Plan of Merger (the
"Ovation Merger Agreement") with Ovation Communications, Inc., a Delaware
corporation ("Ovation"), and certain stockholders of Ovation pursuant to which
Ovation will be merged with and into a newly formed wholly owned subsidiary of
ours (the "Ovation Merger"). As a result of the Ovation Merger, (i) each share
of Ovation's preferred stock will be converted into the right to receive cash,
and (ii) each share of Ovation's common stock will be converted, at the
election of the holder thereof, into the right to receive cash or shares of our
Class A Common Stock. The amount of cash into which each share of Ovation's
preferred stock will be converted and the amount of cash or number of shares of
our Class A Common Stock into which each share of Ovation's common stock will
be converted will be determined immediately prior to consummation of the
Ovation Merger in accordance with formulas specified in the Ovation Merger
Agreement. We estimate that we will be required to issue approximately
5.1 million shares of our Class A Common Stock and to pay approximately $141
million cash to effect the Ovation Merger. We also will assume approximately
$83 million in Ovation debt. We have agreed to register under the Securities
Act the shares of our Class A Common Stock to be issued in the Ovation Merger.
In connection with the execution of the Ovation Merger Agreement, we entered
into a Revolving Credit Agreement (the "Revolving Credit Agreement") with
Ovation pursuant to which we agreed to lend to Ovation up to $20 million on a
senior subordinated unsecured basis. In addition, certain stockholders of
Ovation entered into a stockholders' agreement
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with us and certain of our stockholders pursuant to which, among other things,
such Ovation stockholders agreed through December 31, 2001 to certain
restrictions on their ability to transfer the shares of our Class A Common
Stock that they will receive in the Ovation Merger.
Ovation is a facilities-based competitive local exchange carrier
headquartered in Minneapolis, Minnesota. Ovation offers local, long distance,
Integrated Services Digital Network (ISDN), voice mail, teleconferencing,
calling card and other telecommunications services to business and residential
customers primarily in urban areas in the upper Midwestern region of the United
States. As of December 31, 1998, Ovation served approximately 32,650 business
local lines and 12,900 residential local lines to approximately 2,900 business
customers and 11,750 residential customers in 135 cities and towns, generating
estimated 1998 revenues of $34.6 million. Ovation has four switches and
approximately 564 miles of fiber optic network. As of December 31, 1998,
Ovation had 384 employees.
The TDI and Info America Merger Agreements
On January 7, 1999, we and our indirect wholly owned subsidiary, McLeodUSA
Publishing Company ("Pubco"), entered into an Agreement and Plan of Merger (the
"TDI Merger Agreement") with Talking Directories, Inc., a Michigan corporation
("TDI"), and the stockholders of TDI pursuant to which TDI will be acquired by
merger (the "TDI Merger"). As a result of the TDI Merger, each share of TDI
common stock will be converted into the right to receive a number of shares of
our Class A Common Stock determined in accordance with a formula contained in
the TDI Merger Agreement. We estimate that we will be required to issue
approximately 2.6 million shares of our Class A Common Stock to effect the TDI
Merger. We will also assume approximately $15.6 million of TDI debt.
In a related transaction, on January 7, 1999, we entered into an Agreement
and Plan of Merger (the "Info America Merger Agreement") with Pubco, Info
America Phone Books, Inc., a Michigan corporation ("Info America"), and certain
stockholders of Info America pursuant to which Info America will be acquired by
merger (the "Info America Merger"). As a result of the Info America Merger,
each share of Info America's common stock will be converted into the right to
receive a number of shares of our Class A Common Stock determined in accordance
with a formula contained in the Info America Merger Agreement. We estimate that
we will be required to issue approximately 1.2 million shares of our Class A
Common Stock to effect the Info America Merger.
TDI and Info America are related companies that together publish and
distribute proprietary "white page" and "yellow page" telephone directories
primarily in Michigan and northwestern Ohio. In 1998, TDI and Info America
collectively published and distributed approximately 2.6 million copies of 19
telephone directories. As of December 31, 1998, TDI had 257 employees and Info
America had no employees.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands, except per share and operating data)
The following table sets forth our selected consolidated financial and
operating data and should be read in conjunction with and is qualified by
reference to "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our Consolidated Financial Statements, the notes
thereto and the other financial data contained elsewhere, or incorporated by
reference, in this Prospectus.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------------------------------ ---------------------------------------
Pro Forma Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5)(8) 1997(6)(7)(16) 1997(1)(8) 1998(9) 1998(7)(10)(16)
------- -------- ---------- ---------- ---------------- -------------- ----------- ----------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operations
Statement Data:
Revenue......... $ 1,550 $ 8,014 $ 28,998 $ 81,323 $267,886 $ 462,191 $131,595 $438,642 $ 438,642
------- -------- -------- -------- -------- --------- -------- -------- ---------
Operating
expenses:
Cost of
service........ 1,528 6,212 19,667 52,624 155,430 255,794 77,745 239,195 239,195
Selling, general
and
administrative.. 2,390 12,373 18,054 46,044 143,918 208,981 86,363 189,579 189,579
Depreciation and
amortization... 235 772 1,835 8,485 33,275 61,916 15,708 63,663 63,663
Other........... -- -- -- 2,380 4,632 10,191 2,689 5,575 5,575
------- -------- -------- -------- -------- --------- -------- -------- ---------
Total operating
expenses....... 4,153 19,357 39,556 109,533 337,255 536,882 182,505 498,012 498,012
------- -------- -------- -------- -------- --------- -------- -------- ---------
Operating loss.. (2,603) (11,343) (10,558) (28,210) (69,369) (74,691) (50,910) (59,370) $ (59,370)
Interest income
(expense),
net............ 163 (73) (771) 5,369 (11,967) (48,984) (2,686) (35,519) (48,893)
Other income.... -- -- -- 495 1,426 2,508 40 1,789 1,789
Income taxes.... -- -- -- -- -- -- -- -- --
------- -------- -------- -------- -------- --------- -------- -------- ---------
Net loss........ $(2,440) $(11,416) $(11,329) $(22,346) $(79,910) $(121,167) $(53,556) $(93,100) $(106,474)
======= ======== ======== ======== ======== ========= ======== ======== =========
Loss per common
share.......... $ (.17) $ (.53) $ (.40) $ (.55) $ (1.45) $ (1.98) $ (1.02) $ (1.49) $ (1.70)
======= ======== ======== ======== ======== ========= ======== ======== =========
Weighted average
common shares
outstanding.... 14,761 21,464 28,004 40,506 54,974 61,184 52,752 62,620 62,620
======= ======== ======== ======== ======== ========= ======== ======== =========
Ratio of
earnings to
fixed
charges(11).... -- -- -- -- -- -- -- -- --
======= ======== ======== ======== ======== ========= ======== ======== =========
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1998
-------------------------------------------------- ------------------------
As
Actual Adjusted(14)
1993 1994 1995(1) 1996(1)(12) 1997(1)(5)(13) Actual(9) (16)
------ ------- ------- ----------- -------------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets......... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869 $ 570,784 $ 862,659
Working capital
(deficit)............. $5,962 $ 1,659 $(1,208) $185,968 $ 378,617 $ 409,266 $ 701,141
Property and equipment,
net................... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804 $ 559,317 $ 559,317
Total assets........... $9,051 $10,687 $28,986 $452,994 $1,345,652 $1,621,564 $1,921,564
Long-term debt......... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384 $ 939,102 $1,239,102
Stockholders' equity... $7,936 $ 3,291 $14,958 $403,429 $ 559,379 $ 483,745 $ 483,745
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
--------------------------------------------------------------------- -----------------------------------
Pro Forma Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7)(16) 1997(1) 1998(9) 1998(7)(16)
------- -------- ---------- ---------- ------------- -------------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Financial
Data:
Capital
expenditures,
including
business
acquisitions... $ 2,052 $ 3,393 $14,697 $173,782 $601,137 $617,463 $547,345 $251,253 $251,253
EBITDA(15)...... $(2,368) $(10,571) $(8,723) $(17,345) $(31,462) $ (2,584) $(32,513) $ 9,868 $ 9,868
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------
September 30,
1995 1996 1997 1998
------ ------ ------- -------------
<S> <C> <C> <C> <C>
Other Operating Data:
Local lines................................ 35,800 65,400 282,600 366,800
Cities and towns served.................... 77 120 227 267
Route miles................................ 218 2,352 4,908 6,329
Employees.................................. 419 2,077 4,941 5,370
</TABLE>
- -------
(1) The acquisitions of MWR Telecom, Inc. ("MWR") (now part of McLeodUSA
Network Services, Inc. ("McLeodUSA Network Services")), Ruffalo, Cody &
Associates, Inc. ("Ruffalo Cody"), McLeodUSA Media Group, Inc. ("McLeodUSA
Publishing") and Consolidated Communications Inc. ("CCI") in April 1995,
July 1996, September 1996 and September 1997, respectively, affect the
comparability of the historical data presented to the historical data for
prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) Includes operations of Ruffalo Cody from July 16, 1996 to December 31,
1996 and operations of McLeodUSA Publishing from September 21, 1996 to
December 31, 1996.
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the issuance of $500 million aggregate principal amount at
maturity of 10 1/2% Senior Discount Notes due March 1, 2007 (the "1997
Senior Discount Notes") yielding net proceeds of approximately $288.9
million on March 4, 1997 (the "1997 Senior Discount Note Offering") and
the issuance of $225 million principal amount at maturity of 9 1/4% Senior
Notes due July 15, 2007 (the "1997 Senior Notes") yielding net proceeds of
approximately $217.6 million on July 21, 1997 (the "1997 Senior Note
Offering").
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997 and
certain adjustments attributable to the acquisition of CCI by the Company.
Also reflects certain adjustments attributable to the 1997 Senior Discount
Notes, the 1997 Senior Notes, the issuance of $300 million principal
amount at maturity of 8 3/8% Senior Notes due March 15, 2008 (the "March
1998 Senior Notes") yielding net proceeds of approximately $291.9 million
on March 10, 1998 (the "March 1998 Senior Note Offering") and the issuance
of $300 million principal amount at maturity of 9 1/2% Senior Notes due
November 1, 2008 (the "October 1998 Senior Notes") yielding net proceeds
of approximately $291.9 million on October 30, 1998 (the "Offering")
computed as if the 1997 Senior Discount Notes, the 1997 Senior Notes, the
March 1998 Senior Notes and the October 1998 Senior Notes had been issued
on January 1, 1997.
(7) The issuance of the 1997 Senior Discount Notes in March 1997, the issuance
of the 1997 Senior Notes in July 1997, the acquisition of CCI in September
1997 (the "CCI Acquisition"), the issuance of the March 1998 Senior Notes
in March 1998 and the issuance of the October 1998 Senior Notes in October
1998 affect the comparability of the pro forma data presented to the data
for prior periods shown.
(8) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997.
(9) Reflects the issuance of the March 1998 Senior Notes on March 16, 1998.
(10) Reflects certain adjustments attributable to the March 1998 Senior Notes
and the October 1998 Senior Notes computed as if each had occurred on
January 1, 1998.
12
<PAGE>
(11) For the purpose of calculating the ratio of earnings to fixed charges,
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, 1993, 1994, 1995, 1996 and 1997, earnings were insufficient
to cover fixed charges by $2.4 million, $11.4 million, $11.4 million,
$22.6 million and $84.4 million, respectively. For the nine months ended
September 30, 1997 and 1998, earnings were insufficient to cover fixed
charges by $50.7 million and $86.6 million, respectively. On a pro forma
basis computed as if the CCI Acquisition, the 1997 Senior Discount Note
Offering, the 1997 Senior Note Offering, the March 1998 Senior Note
Offering and the Offering were consummated at the beginning of the period
presented, earnings would not have been sufficient to cover fixed charges
by $116.7 million and $99.9 million for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively.
(12) Includes Ruffalo Cody and McLeodUSA Publishing, which we acquired on July
15, 1996 and September 20, 1996, respectively.
(13) Includes CCI, which we acquired on September 24, 1997.
(14) Adjusted to reflect the application of the net proceeds from the Offering.
(15) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. The Company has included EBITDA
data because it is a measure commonly used in the industry. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
(16) Pending acquisitions described in "Recent Developments" on page 33 are not
reflected in pro forma data.
13
<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.
Limited Operating History; Recent and Anticipated Losses.
We began operations in 1992. Our limited operating history and rapid growth
may make it more difficult for you to evaluate our performance. As a result of
expenses related to the expansion of our existing businesses and strategic
acquisitions, we have incurred significant losses. Since January 1, 1995, our
net losses have been as follows:
Net Losses
<TABLE>
<CAPTION>
Period Amount
------ -------------
<S> <C>
1995.................. $11.3 million
1996.................. $22.3 million
1997.................. $79.9 million
1998 (through Sept.
30).................. $93.1 million
</TABLE>
We expect to incur significant operating losses during the next several years
while we develop our businesses, expand our fiber optic network and develop a
PCS system. If we do not become profitable in the future, we could have
difficulty obtaining funds to continue our operations or to pay amounts due on
the Exchange Notes. See "--Significant Capital Requirements."
Significant Capital Requirements.
We need significant capital to continue to expand our operations, facilities,
network and services. As of September 30, 1998, based on our current business
plan and projections, we estimated that we would require approximately $1.1
billion through 2001. This estimate includes the projected costs of:
. building our fiber optic network, including intra-city fiber optic
networks
. expanding operations in existing and new markets
. developing a PCS system
. funding general corporate expenses
We expect to fund these capital requirements with:
. approximately $291.9 million in net proceeds from the Outstanding Notes
. approximately $402.4 million of cash on hand and short-term investments
at September 30, 1998
. a proposed $100.0 million revolving credit facility
. projected operating cash flow
We cannot assure you that our capital resources will permit us to fund our
planned network deployment and operations or achieve operating profitability.
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 acquisitions such as the DTG Merger and the Ovation Merger
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological, or competitive developments
. new opportunities
We have received a non-binding commitment from The Chase Manhattan Bank to
lead a syndication to provide a $100 million senior secured revolving credit
facility (the "Proposed Revolving Credit Facility"). We cannot assure you that
we will complete the Proposed Revolving Credit Facility on acceptable terms.
We also expect to evaluate potential acquisitions, joint ventures and
strategic
14
<PAGE>
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. Failure to generate or raise sufficient funds may require us to delay or
abandon some of our expansion plans or expenditures, which could have a
material adverse effect on our business, results of operations, financial
condition and ability to repay the Exchange Notes.
Variability of Operating Results.
Our revenues and operating results may fluctuate significantly from period to
period for many reasons, including:
. competition
. availability or announcement of alternative technologies
. fluctuations in the results of operations of existing business units,
recently acquired subsidiaries, or newly established business units
. changes in market growth rates for different products and services
. general economic conditions
. significant expenses associated with the construction and expansion of
our network and services, including the development, construction and
operation of a PCS system
These factors and any resulting fluctuations in our operating results will
make period to period comparisons of our financial condition less meaningful
and could have a material adverse effect on our business, results of
operations, financial condition and ability to repay the Exchange Notes.
Uncertainties of Expansion.
We have rapidly expanded and developed our network and services. Further
expansion and development will depend on a number of factors, including:
. cooperation of the incumbent local exchange carriers
. regulatory and governmental developments
. changes in the competitive climate in which we operate
. development of customer billing, order processing and network management
systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
We will need to continue to improve our operational and financial systems and
our procedures and controls. We must also grow, train and manage our employees.
Failure to manage our anticipated growth effectively could have a material
adverse effect on our business, results of operations, financial condition and
ability to repay the Exchange Notes.
Risks Associated With Acquisitions.
As part of our strategy, we have acquired other companies. We will continue
to evaluate additional strategic acquisitions and alliances principally
relating to our current operations. These transactions commonly involve a
number of risks, including:
. difficulty assimilating acquired operations and personnel
. diversion of management attention
. disruption of ongoing business
. inability to retain key personnel
. inability to successfully incorporate acquired assets and rights into our
service offerings
. inability to maintain uniform standards, controls, procedures and
policies
15
<PAGE>
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in these
transactions could have a material adverse effect on our business, results of
operations, financial condition and ability to repay the Exchange Notes. In
connection with these transactions, we may also issue additional equity
securities, incur additional debt or incur significant amortization expenses
related to goodwill and other intangible assets.
Dependence on Regional Bell Operating Companies.
We depend on the Regional Bell Operating Companies ("RBOCs") to provide most
of our core local and some of our long distance services. U S WEST
Communications, Inc. ("U S WEST"), Ameritech Corporation ("Ameritech") and
Southwestern Bell Telephone Company ("SBC") are our primary suppliers of local
central office switching and local access lines. Their facilities allow us to
provide (1) local service, (2) long distance service and (3) interexchange
private lines. Today, without using these facilities, we could not provide
bundled local and long distance services to most of our customers, although we
could provide stand-alone long distance service to some customers.
Our plans to provide additional local services using our own switches also
depend on the RBOCs. In order to interconnect our switches and other facilities
to network elements controlled by the RBOCs, we must first negotiate and enter
into interconnection agreements with them. In August 1996, the Federal
Communications Commission ("FCC") released a decision (the "Interconnection
Decision") implementing the portions of the Telecommunications Act of 1996 (the
"Telecommunications Act") that impose interconnection obligations on the RBOCs.
The U.S. Eighth Circuit Court of Appeals vacated certain provisions of the
Interconnection Decision. In January 1999, the U.S. Supreme Court reversed
major portions of the Eighth Circuit Court decision and remanded the case for
further proceedings. These further proceedings could affect our ability to
obtain interconnection agreements on favorable terms. We cannot assure you that
we will succeed in obtaining interconnection agreements on terms that would
permit us to offer local services at profitable and competitive rates.
Any successful effort by U S WEST, Ameritech, SBC or other local exchange
carriers to deny or limit our access to their network elements or wholesale
services would have a material adverse effect on our business, results of
operations, financial condition and ability to repay the Exchange Notes.
U S WEST Centrex Action and Other Actions by U S WEST.
On February 5, 1996, U S WEST filed tariffs and other notices with the public
utilities commissions in its fourteen-state service region to limit future
Centrex access to its switches (the "U S WEST Centrex Action"). Centrex access
allows a large customer to aggregate lines, have control over certain
characteristics of those lines and provide a set of standard features on those
lines. Under the terms of the U S WEST Centrex Action, U S WEST would permit us
to use its central office switches until April 2005, but would not allow us to
expand to new cities and would severely limit the number of new lines we could
partition onto its switches in the cities we serve.
We have challenged, or are challenging, the U S WEST Centrex Action in many
of the states where we do business or plan to do business. We have succeeded in
blocking the U S WEST Centrex Action in Iowa, Minnesota, South Dakota, North
Dakota and Colorado, although U S WEST could take further action in some of
these states. In Montana, Nebraska and Idaho, however, similar challenges to
the U S WEST Centrex Action have not succeeded. In Wyoming and Utah, challenges
to the U S WEST Centrex Action remain pending before state regulators.
U S WEST has introduced other measures that may make it more difficult or
expensive for
16
<PAGE>
us to use Centrex service. In January 1997, U S WEST proposed certain
interconnection surcharges in several of the states in its service region. In
February 1997, we joined other parties in filing a petition with the FCC
objecting to this proposal based on our belief that it violates certain
provisions of the Telecommunications Act. The matter remains pending before the
FCC and various state public utilities commissions.
We anticipate that U S WEST will also pursue legislative initiatives in
states within our target market area to reduce state regulatory oversight over
its rates and operations. If adopted, these initiatives could make it more
difficult for us to challenge U S WEST's actions in the future.
We cannot assure you that we will succeed in our challenges to the U S WEST
Centrex Action or other actions by U S WEST that would prevent or deter us from
using U S WEST's Centrex service or network elements. If U S WEST prevails in
any jurisdiction, we may not be able to offer integrated telecommunications
services in that jurisdiction, which could have a material adverse effect on
our business, results of operations, financial condition and ability to repay
the Exchange Notes.
PCS System Implementation Risks.
We do not own or operate any facilities for providing PCS services to the
public. Developing a PCS system involves a high degree of risk and will impose
significant demands on our management and financial resources. We may not
succeed in developing a PCS system. Even if we spend substantial amounts to
develop such a system, we may not make a profit from PCS operations. To
implement a PCS system successfully, we must, among other things:
. Select a digital protocol. We must choose from among several competing
and potentially incompatible digital protocol technologies. If the
digital protocol technology we choose does not become widely employed,
our future offering of PCS service could fail.
. Build out our wireless infrastructure. FCC rules impose minimum PCS
buildout and population coverage requirements. If we do not comply with
these requirements, the FCC could fine us or revoke our PCS licenses,
even after we have spent substantial amounts to develop a PCS system.
. Enter into "roaming" arrangements. The success of our PCS system will
depend on our ability to enter into "roaming" arrangements with other PCS
operators throughout the United States. We have not entered into any such
arrangements and cannot assure you that we will be able to do so.
. Relocate fixed microwave licensees. To secure a sufficient unencumbered
spectrum for the PCS service, we estimate that we may need to pay 19
microwave licensees to move to a different portion of the spectrum. The
time and expense of negotiating with and relocating these microwave
licensees could adversely affect our proposed PCS system.
Our success in implementing and operating a PCS system 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 PCS 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 PCS systems
. changes in PCS or competing wireless technologies that could render
obsolete the technology and equipment we choose for our PCS system
Dependence on Key Personnel.
Our future success depends on the continued employment of our senior
management team, particularly Clark E.
17
<PAGE>
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.
We believe our success also depends in large part on our ability to attract,
develop, motivate and retain experienced and innovative management. The loss of
the services of key personnel, or the inability to attract additional qualified
personnel, could have a material adverse effect on our business, results of
operations, financial condition and ability to repay the Exchange Notes.
Need to Obtain and Maintain Permits and Rights-of-Way.
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 exchange carriers, other utilities, railroads,
interexchange carriers and other parties. The loss of any of our rights-of-way
could have a material adverse effect on our business, results of operations,
financial condition and ability to repay the Exchange Notes. For example, we
may need to spend significant sums to remove and relocate our facilities.
Rapid Technological Changes.
Communications technology is changing quickly. Unexpected developments, or
our failure to adapt to them, could have a material adverse effect on our
business, results of operations, financial condition and ability to repay the
Exchange Notes.
Control by Management and Principal Stockholders; Potential Conflicts of
Interest With Holders of the Exchange Notes.
As of September 30, 1998, IES Investments Inc. ("IES"), MHC Investment
Company ("MHC"), Richard A. Lumpkin and various trusts for the benefit of his
family, Clark and Mary McLeod, and our directors and executive officers
beneficially owned approximately 60.4% of our outstanding Class A Common Stock.
These stockholders can collectively control management policy and all corporate
actions requiring a stockholder vote, including election of the Board of
Directors. IES, MHC, Mr. Lumpkin and various trusts for the benefit of his
family, and Mr. and Mrs. McLeod have entered into a voting agreement for the
election of directors and other matters. The fact that these stockholders hold
so much of the Class A Common Stock could make it more difficult for a third
party to acquire us. Our certificate of incorporation contains provisions that
may have the same effect.
Certain decisions concerning our operations or financial structure may
present conflicts of interest between you and our stockholders. For example,
our 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 pay you. Since our
stockholders control our management policy and all fundamental corporate
actions, you should expect them to resolve any such conflict of interest in
their favor.
Dependence on Payments from Subsidiaries; Subordination of the October 1998
Senior Notes.
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 October 1998 Indenture contains covenants
that restrict the ability of our subsidiaries to enter into any agreement
limiting dividends and other transfers to us.
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
18
<PAGE>
creditors in full before we could use their assets to pay you. As of September
30, 1998, our subsidiaries had total liabilities (after the elimination of
loans and advances from us to our subsidiaries) of approximately $246.3
million. In addition, the October 1998 Indenture and the indentures governing
1997 Senior Discount Notes, the 1997 Senior Notes, and the March 1998 Senior
Notes (collectively, the "Indentures") permit us and our subsidiaries to incur
additional debt.
The Exchange Notes also 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 September 30,
1998, we had total secured debt (not including our subsidiaries) of
approximately $28.4 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.
Significant Debt.
We have substantial debt. As of September 30, 1998, as adjusted to reflect
the issuance of the Outstanding Notes as if it had occurred on that date, we
had $1.2 billion of long-term debt outstanding and $483.7 million of
stockholders' equity. As a result, we expect our fixed charges to exceed our
earnings for the foreseeable future. This amount of debt could adversely affect
us in a number of ways, including:
. limiting our ability to obtain necessary financing in the future
. limiting our flexibility to plan for, or react to, changes in our
business
. requiring us to use a substantial portion of our cash flow from
operations to pay debt rather than for other purposes, such as working
capital or capital expenditures
. making us more leveraged than some of our competitors, which may place us
at a competitive disadvantage
. making us more vulnerable to a downturn in our business
Restrictive Covenants Imposed by the Indentures.
The Indentures impose operating and financial restrictions that limit our
discretion on certain business matters. 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
. create liens
. enter into transactions with affiliates or related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
These restrictions could make it more difficult for us to expand, finance our
operations or engage in other business activities that may be in our interest.
Competition.
Wireline Competition. We face intense competition from incumbent local
exchange carriers, including U S WEST, Ameritech, SBC and GTE. These companies
currently dominate their local telecommunications markets.
Our long distance services compete with hundreds of other companies in the
long distance marketplace. Three major competitors, AT&T, MCI WorldCom and
Sprint, dominate the long distance market. AT&T, MCI WorldCom and Sprint have
also indicated their intention to offer local telecommunications services,
either directly or in conjunction with competitive access providers or cable
television operators.
Other competitors may include cable television companies, competitive access
providers, microwave and satellite carriers, wireless telecommunications
providers, teleports, private networks owned by large
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end-users, and telecommunications management companies.
These and other firms may enter the markets where we focus our sales efforts.
Many of our existing and potential competitors have financial and other
resources far greater than our own.
The trend toward business combinations and strategic alliances may strengthen
certain of our competitors. For example, WorldCom acquired MCI in September
1998 and AT&T acquired Teleport Communications Group Inc. in July 1998. In
addition, merger plans have been announced by:
. AT&T and Tele-Communications, Inc.
. SBC and Ameritech
. Bell Atlantic and GTE
U S WEST and Ameritech also announced in May 1998 that each had entered into
a marketing arrangement with Qwest Communications, a long distance company. The
FCC ruled these marketing arrangements violate the Telecommunications Act, but
both U S WEST and Ameritech have appealed this ruling. If these or other
competitors enter into alliances or combinations it could put us at a
significant disadvantage.
The Telecommunications Act provides the incumbent local exchange carriers
with new competitive opportunities. It will permit the RBOCs, upon the
satisfaction of certain conditions, to offer additional long distance services
to customers. In December 1997, the U.S. District Court for the Northern
District of Texas ruled certain of these conditions unconstitutional. In
September 1998, the U.S. Fifth Circuit Court of Appeals reversed the District
Court decision and the U.S. Supreme Court has denied all petitions for
certiorari.
Wireless Competition. The wireless telecommunications industry is
experiencing significant technological change. We believe the market for
wireless services will expand significantly as:
. equipment costs decline
. equipment becomes more convenient and functional
. wireless services become more diverse
. technology improves
. new competitors enter the market
We also believe wireless service providers will offer wireline replacement
products that may result in wireless services becoming the customer's primary
means of communication. We expect up to eight wireless competitors in each of
our proposed PCS markets. We could face additional competition from mobile
satellite services currently under development.
Competition with these or other providers of wireless telecommunications
services may be intense. Many of our potential wireless competitors have
financial and other resources far greater than our own and have more experience
testing new or improved products and services. In addition, several wireless
competitors operate or plan to operate, through joint ventures and affiliation
arrangements, wireless telecommunications systems that encompass most of the
United States.
Significant Government Regulation.
Our facilities and services are subject to federal, state and local
regulation. The FCC has jurisdiction over our facilities and services when they
are used to provide interstate or international communications. State
regulatory commissions retain jurisdiction to regulate state specific aspects
of our facilities and services when they are used to provide intrastate
communications. Local governments generally require us to obtain licenses or
permits to install and operate our networks in public rights-of-way. Our
proposed PCS system will be subject to varying degrees of regulation by the
FCC, state regulatory commissions and local governments. Our direct marketing,
telemarketing and fund-raising activities are also subject to federal and state
regulatory requirements. Any of the following could have a material adverse
effect on our business, results of operations, financial condition and ability
to repay the Exchange Notes:
. failure to maintain proper federal and state tariffs
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. 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
Certain Transfer Restrictions; Absence of a Public Market for the Exchange
Notes.
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 or another available
exemption. The broker-dealers described above must deliver a prospectus in
connection with any resale of Exchange Notes.
The Exchange Notes constitute a new issue of securities for which no
established trading market exists. 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 and
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.
Consequences of a Failure to Exchange the Outstanding Notes.
We have not registered nor do we intend to register the Outstanding Notes
under the Securities Act. Outstanding Notes that remain outstanding after
consummation of the Exchange Offer will therefore 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. We cannot assure you
of the liquidity, or even the continuation, of the trading market for the
Outstanding Notes following the Exchange Offer.
Risks of Not Complying With Exchange Offer Procedures.
You are responsible for complying with all Exchange Offer procedures. You
will only receive Exchange Notes in exchange for your Outstanding Notes if,
prior to 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 ("DTC")
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. 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 expiration of the Exchange Offer. 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."
Year 2000 Date Conversion.
We are currently verifying system readiness for the processing of date-
sensitive information by our computerized information systems. The Year 2000
problem impacts computer programs and hardware timers using two digits (rather
than four) to define the applicable year. Some of our programs and timers that
have time-sensitive functions may recognize a date using "00" as the year 1900
rather than 2000, which could result in miscalculations or system failures.
We are reviewing our information technology ("IT") and non-IT computer
systems and programs to determine which are not capable of recognizing the Year
2000 and to verify system readiness for the millennium date. The review covers
all of our operations and is centrally managed. The review includes the
following steps:
1. increasing employee awareness and communication of Year 2000 issues
2. inventorying hardware, software and data interfaces and confirming Year
2000 readiness of key vendors
3. identifying mission-critical components for internal systems, vendor
relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. remediating any identified problems by correcting or replacing systems
or components
7. testing and verifying systems
8. implementing the remediation plan
9. developing contingency plans
10. training for contingency plans
We have completed more than 90% of the activities required for the first
three of these steps, more than 60% of the activities required for the fourth
and fifth steps and more than 25% of the activities required for the sixth
step. We are in the initial stages of performing the activities required to
complete the remaining steps and have begun to develop contingency plans to
handle our most reasonably likely worst case Year 2000 scenarios. The
completion percentages do not include information for pending and recently
completed acquisitions. The review and related Year 2000 activities have not
caused us to defer or forego, to any material degree, any other critical IT
projects.
We estimate that our Year 2000 readiness costs will not exceed $11.5 million.
We generally expense these costs as incurred. While certain costs have been
incurred, we have not incurred any material historical costs for remediation.
We do not expect these costs to have a material adverse effect on our business,
results of operations, financial condition and ability to repay the Exchange
Notes.
Our estimate of our Year 2000 readiness costs and our worst case scenarios
contain "forward-looking statements" within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Costs,
results, performance and effects of Year 2000 activities described in those
forward-looking statements may differ materially from actual costs, results,
performance and effects in the future due to the interrelationship and
interdependence of our computer systems and those of our vendors, material
service providers, customers and other third parties.
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We have not yet fully identified our most reasonably likely worst case Year
2000 scenarios. We continue to contact our vendors, suppliers and third parties
with which we have material relationships, regarding their state of readiness.
This activity is focused primarily on mission critical systems and key business
suppliers. Until we have received and analyzed substantial responses from these
entities we will have difficulty determining our worst case scenarios.
We have begun to develop contingency plans to handle worst case scenarios, to
the extent they can be identified fully. We intend to complete our contingency
planning after completing our determination of worst case scenarios. Completion
of these activities depends upon the responses to the inquiries we have made of
our major vendors, material service providers and third parties with which we
have material relationships. We have also begun work on contingency plans for
certain systems identified as critical to our operations.
If we, our major vendors, our material service providers or our customers
fail to address Year 2000 issues in a timely manner, such failure could have a
material adverse effect on our business, results of operations, financial
condition and ability to repay the Exchange Notes. We depend on local exchange
carriers, primarily the RBOCs, to provide most of our local and some of our
long distance services. To the extent U S WEST, Ameritech or SBC fail to
address Year 2000 issues which might interfere with their ability to fulfill
their obligations to us, such interference could have a material adverse effect
on our future operations. If other telecommunications carriers are unable to
resolve Year 2000 issues, it is likely we will be affected to a similar degree
as others in the telecommunications industry.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
In connection with the sale of the Outstanding Notes, the Company entered
into the Registration Rights Agreement with the Initial Purchasers pursuant to
which the Company agreed to file and to use its best efforts to cause to
become effective with the Commission 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. The Exchange Offer is being made
to satisfy the contractual obligations of the Company under the Registration
Rights Agreement.
By tendering Outstanding Notes in exchange for Exchange Notes, each holder
will represent to the Company that: (i) any Exchange Notes to be received by
such holder are being acquired in the ordinary course of such holder's
business; (ii) such holder has no arrangement or understanding with any person
to participate in a distribution (within the meaning of the Securities Act) of
Exchange Notes; (iii) such holder is not an "affiliate" of the Company (within
the meaning of Rule 405 under the Securities Act), or if such holder is an
affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv)
such holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Outstanding Notes, (v) the Company will acquire good,
marketable and unencumbered title to the tendered Outstanding Notes, free and
clear of all liens, restrictions, charges and encumbrances; and (vi) the
Outstanding Notes tendered for exchange are not subject to any adverse claims
or proxies. Each tendering holder also will warrant and agree that such holder
will, upon request, execute and deliver any additional documents deemed by the
Company or the Exchange Agent to be necessary or desirable to complete the
exchange, sale, assignment, and transfer of the Outstanding Notes tendered
pursuant to the Exchange Offer. Each broker-dealer that receives Exchange
Notes for its own account in exchange for Outstanding Notes pursuant to 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 the Company 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 the books of the Company 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).
Terms of the Exchange Offer
The Company hereby offers, 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 in accordance with the procedures described below.
Holders may tender their Outstanding Notes in whole or in part in integral
multiples of $1,000 principal amount.
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The form and terms of the Exchange Notes are the same as the form and terms
of the Outstanding Notes except that (i) the Exchange Notes have been
registered under the Securities Act and therefore are not subject to certain
restrictions on transfer applicable to the Outstanding Notes and (ii) holders
of the Exchange Notes will not be entitled to certain 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 October
1998 Indenture.
The Exchange Offer is not conditioned upon any minimum principal amount of
Outstanding Notes being tendered for exchange. The Company reserves the right
in its 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, $300 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. See "Risk Factors--Consequences of a
Failure to Exchange Outstanding Notes."
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering holder thereof 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. The
Company will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
THE BOARD OF DIRECTORS OF THE COMPANY 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 PURSUANT TO THE EXCHANGE OFFER. IN
ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS
OF OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT
TO 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.
Expiration Date; Extensions; Amendments
The term "Expiration Date" means 5:00 p.m., New York City time, on March 3,
1999 unless the Exchange Offer is extended by the Company (in which case the
term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i)
to delay the acceptance of the Outstanding Notes for exchange, (ii) to
terminate the Exchange Offer (whether or not any Outstanding Notes have
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theretofore been accepted for exchange) if the Company determines, in its 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, (iii) to extend the Expiration Date of the Exchange Offer and
retain all Outstanding Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Outstanding Notes to withdraw their
tendered Outstanding Notes as described under "--Withdrawal Rights," and (iv)
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 determined by the
Company to constitute a material change, or if the Company waives a material
condition of the Exchange Offer, the Company will promptly disclose such
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the Outstanding Notes, and the Company will extend the
Exchange Offer to the extent required by Rule 14e-1 under the Exchange Act.
Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by making a public
announcement thereof, and such 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 the Company may choose to make any public announcement, and subject to
applicable laws, the Company 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, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes
for Outstanding Notes validly tendered and not withdrawn (pursuant to the
withdrawal rights described under "--Withdrawal Rights") promptly after the
Expiration Date.
In all cases, delivery of Exchange Notes in exchange for Outstanding Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) Outstanding Notes or a
book-entry confirmation of a book-entry transfer of Outstanding Notes into the
Exchange Agent's account at DTC, (ii) the Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, and (iii) 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.
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, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Outstanding
Notes validly tendered and not withdrawn as, if and when the Company gives
oral or written notice to the Exchange Agent (any such oral notice to be
promptly confirmed in writing) of the Company's acceptance of such Outstanding
Notes for exchange pursuant to the Exchange Offer. The Company's acceptance
for exchange of Outstanding Notes tendered pursuant to any of the procedures
described above will constitute a binding agreement between the tendering
holder and the Company upon the terms and subject to the conditions of the
Exchange Offer. The Exchange Agent will act as agent for the Company 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
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Notes. Such 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 pursuant to the Exchange Offer is delayed (whether
before or after the Company's acceptance for exchange of Outstanding Notes),
or the Company extends the Exchange Offer or is unable to accept for exchange
or exchange Outstanding Notes tendered pursuant to the Exchange Offer, then,
without prejudice to the Company's rights set forth herein, the Exchange Agent
may, nevertheless, on behalf of the Company and subject to Rule 14e-1(c) under
the Exchange Act, 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 pursuant to the Exchange Offer, either (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), 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" prior to the Expiration Date and (b) tendered Outstanding Notes must be
received by the Exchange Agent, or such Outstanding Notes must be tendered
pursuant to the procedures for book-entry transfer set forth below and a book-
entry confirmation must be received by the Exchange Agent, in each case prior
to the Expiration Date, or (ii) 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 the Company,
evidence satisfactory to the Company, in its 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
holder wishes to participate in the Exchange Offer.
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, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR OUTSTANDING NOTES SHOULD BE SENT TO THE
COMPANY. 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
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<PAGE>
transfer facility system may make a book-entry delivery of the Outstanding
Notes by causing DTC to transfer such Outstanding Notes into the Exchange
Agent's account at DTC in accordance with 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 thereof), 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" prior to 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. Certificates for Outstanding Notes need not be
endorsed and signature guarantees on a Letter of Transmittal or a notice of
withdrawal, as the case may be, are unnecessary unless (a) a certificate for
Outstanding Notes is registered in a name other than that of the person
surrendering the certificate or (b) a registered holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such 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
Exchange Act as an "eligible guarantor institution," including (as such terms
are defined therein) (i) a bank, (ii) a broker, dealer, municipal securities
broker or dealer or government securities broker or dealer, (iii) a credit
union, (iv) a national securities exchange, registered securities association
or clearing agency, or (v) a savings association that is a participant in a
Securities Transfer Association (each an "Eligible Institution"), 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
pursuant to the Exchange Offer and the certificates for such 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, such Outstanding
Notes may nevertheless be tendered, provided that all of the following
guaranteed delivery procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter of
Transmittal, setting forth the name and address of the holder of
Outstanding Notes and the amount of Outstanding Notes tendered, stating
that the tender is being made thereby 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; and
(iii) 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.
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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 the Company, in its
sole discretion, which determination shall be final and binding on all
parties. The Company reserves the absolute right, in its sole and absolute
discretion, to reject any and all tenders determined by it not to be in proper
form or the acceptance for exchange of which may, in the view of counsel to
the Company, be unlawful. The Company also reserves 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 similar defects or irregularities are waived in the case of
other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) 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 the Company, any
affiliates of the Company, 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 Commission, as set forth in no-
action letters issued to third parties unrelated to the Company, the Company
believes that holders of Outstanding Notes (other than any holder that is (i)
a broker-dealer that acquired Outstanding Notes as a result of market-making
activities or other trading activities, or (ii) a broker-dealer that acquired
Outstanding Notes directly from the Company for resale pursuant to Rule 144A
or another available exemption under the Securities Act) who exchange their
Outstanding Notes for Exchange Notes pursuant to 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 and such holders are not "affiliates" of the Company (within
the meaning of Rule 405 under the Securities Act). However, the staff of the
Commission has not considered the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the staff of the Commission 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 pursuant to 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 prior to 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" prior to
the Expiration Date. Any such 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 such Outstanding Notes. If certificates for
Outstanding Notes have been delivered or otherwise identified to the Exchange
Agent, the notice of
29
<PAGE>
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 pursuant to 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 prior to 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 the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, 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 thereof 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 May 1 and November 1 of each year at a rate of 9
1/2% per annum, commencing May 1, 1999.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company 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 theretofore been accepted for exchange) or may waive any conditions to or
amend the Exchange Offer, if any of the following conditions have occurred or
exists or have not been satisfied prior to the Expiration Date:
(a) there shall occur a change in the current interpretation by the staff
of the Commission which permits the Exchange Notes issued in exchange for
Outstanding Notes pursuant to the Exchange Offer to be offered for resale,
resold and otherwise transferred by holders thereof (other than (i) broker-
dealers that acquired Outstanding Notes as a result of market-making or
other trading activities or (ii) broker-dealers that acquired Outstanding
Notes directly from the Company for resale pursuant to 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 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
and such holders are not "affiliates" of the Company (within the meaning of
Rule 405 under the Securities Act);
(b) 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 the Company's judgment, would reasonably be
expected to impair the ability of the Company to proceed with the Exchange
Offer;
(c) any law, statute, rule or regulation shall have been adopted or
enacted which, in the Company's judgment, would reasonably be expected to
impair the ability of the Company to proceed with the Exchange Offer;
30
<PAGE>
(d) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Registration
Statement, or proceedings shall have been initiated or, to the knowledge of
the Company, threatened for that purpose;
(e) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby; or
(f) any change, or any development involving a prospective change, in the
business or financial affairs of the Company has occurred which, in the
sole judgment of the Company, might materially impair the ability of the
Company to proceed with the Exchange Offer.
If the Company determines in its 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, the Company may, subject
to applicable law, terminate the Exchange Offer (whether or not any
Outstanding Notes have theretofore 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, the Company 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 the Company will extend the Exchange
Offer to the extent required by Rule 14e-1 under the Exchange Act.
Certain 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
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, 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
31
<PAGE>
DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
Fees and Expenses
The expenses of soliciting tenders will be borne by the Company. 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 the Company.
The Company has 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. The Company
has agreed to pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company 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 therewith, 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.
32
<PAGE>
RECENT DEVELOPMENTS
The DTG Merger Agreement
On October 27, 1998, the Company entered into the DTG Merger Agreement with
DTG pursuant to which a newly formed wholly owned subsidiary of the Company
will be merged with and into DTG. As a result of the DTG Merger, each share of
DTG's common stock will be converted into the right to receive 0.4328 of a
share of the Company's Class A Common Stock. The maximum number of shares of
the Company's Class A Common Stock issuable pursuant to the DTG Merger
(assuming the exercise of all outstanding options to purchase DTG common
stock) is expected to be approximately 1,375,000. In addition, under the terms
of the DTG Merger Agreement, each option to purchase DTG common stock will
become or be replaced by an option to purchase a number of shares of the
Company's Class A Common Stock equal to the number of shares of DTG common
stock that could have been purchased (assuming full vesting) under the DTG
stock option multiplied by the DTG Exchange Ratio. The Company has agreed to
register under the Securities Act the shares of its Class A Common Stock to be
issued in the DTG Merger.
Consummation of the DTG Merger is subject to the satisfaction of certain
conditions, including (i) approval of the DTG Merger Agreement and the DTG
Merger by the stockholders of DTG, (ii) receipt of required regulatory
approvals and (iii) certain other customary conditions. Each director and
certain executive officers of DTG have entered into voting agreements pursuant
to which, among other things, they have agreed to vote their shares of DTG
common stock in favor of the DTG Merger at a meeting of the stockholders of
DTG.
DTG is a diversified communications services company serving business and
residential customers in southeastern South Dakota and neighboring areas. DTG
provides wireline local and network access services, competitive local
exchange telephone services, incumbent local exchange telephone services, long
distance telephone services, operator assisted calling services,
telecommunications equipment sale and leasing services, cable television
services, computer networking services, Internet access and related services
and mobile radio and paging services. As of September 30, 1998, DTG served
approximately 7,350 local lines, 5,930 cable television subscribers, 7,200
Internet users, and over 2,000 active computer networking business customers
located primarily in South Dakota, northwestern Iowa and southwestern
Minnesota. DTG currently operates 13 telephone exchanges in southeastern South
Dakota, four of which were built in 1997, and 26 cable television systems in
South Dakota, Iowa and Minnesota incorporating over 2,240 miles of copper
plant, 300 miles of coaxial cable and approximately 9,100 miles of fiber optic
lines. DTG has 188 employees with offices in Irene, Sioux Falls, Canton,
Viborg and Yankton, South Dakota, and in Marshall, Minnesota. For the nine
months ended September 30, 1998, DTG recorded revenues of approximately $25
million.
The Ovation Merger Agreement
On January 7, 1999, the Company entered into the Ovation Merger Agreement
with Ovation and certain stockholders of Ovation pursuant to which Ovation
will be merged with and into a newly formed wholly owned subsidiary of the
Company. As a result of the Ovation Merger, (i) each share of Ovation's
preferred stock will be converted into the right to receive cash, and (ii)
each share of Ovation's common stock will be converted, at the election of the
holder thereof, into the right to receive cash or shares of the Company's
Class A Common Stock. The amount of cash into which each share of Ovation's
preferred stock will be converted and the amount of cash or number of shares
of the Company's Class A Common Stock into which each share of Ovation's
common stock will be converted will be determined immediately prior to
consummation of the Ovation Merger in accordance with formulas specified in
the Ovation Merger Agreement. The Company estimates that it will be required
to issue approximately 5.1 million shares of the Company's Class A Common
Stock and to pay approximately $141 million cash to effect the Ovation Merger.
33
<PAGE>
The Company also will assume approximately $83 million in Ovation debt. In
addition, under the terms of the Ovation Merger Agreement, each option to
purchase Ovation common stock issued under Ovation's stock option plan will
become or be replaced by an option to purchase a number of shares of the
Company's Class A Common Stock equal to the number of shares of Ovation common
stock that could have been purchased (assuming full vesting) under the Ovation
stock option multiplied by the exchange ratio used to convert Ovation common
stock into the Company's Class A Common Stock. The Company has agreed to
register under the Securities Act the shares of its Class A Common Stock to be
issued in the Ovation Merger.
Consummation of the Ovation Merger is subject to the satisfaction of certain
conditions, including (i) approval of the Ovation Merger Agreement and the
Ovation Merger by the stockholders of Ovation, (ii) effectiveness of the
registration statement registering the shares of the Company's Class A Common
Stock to be issued in the Ovation Merger, (iii) compliance with all applicable
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
expiration of all applicable waiting periods thereunder, (iv) receipt of
specified regulatory approvals, and (v) certain other customary conditions.
Both the Company and Ovation may terminate the Ovation Merger Agreement if the
Ovation Merger has not been consummated by May 1, 1999.
In connection with the execution of the Ovation Merger Agreement, the
Company entered into a Revolving Credit Agreement with Ovation pursuant to
which the Company agreed to lend to Ovation up to $20 million on a senior
subordinated unsecured basis. In addition, pursuant to a stockholders'
agreement, certain Ovation stockholders agreed through December 31, 2001 to
certain restrictions on their ability to transfer the shares of the Company's
Class A Common Stock that they will receive in the Ovation Merger.
Ovation is a facilities-based competitive local exchange carrier
headquartered in Minneapolis, Minnesota. Ovation offers local, long distance,
ISDN, voice mail, teleconferencing, calling card and other telecommunications
services to business and residential customers primarily in urban areas in the
upper Midwestern region of the United States. As of December 31, 1998, Ovation
served approximately 32,650 business local lines and 12,900 residential local
lines to approximately 2,900 business customers and 11,750 residential
customers in 135 cities and towns, generating estimated 1998 revenues of $34.6
million. Ovation has four switches and approximately 564 miles of fiber optic
network. As of December 31, 1998, Ovation had 384 employees.
The TDI and Info America Merger Agreements
On January 7, 1999, the Company and Pubco entered into the TDI Merger
Agreement with TDI and the stockholders of TDI pursuant to which TDI will be
acquired by merger. As a result of the TDI Merger, each share of TDI common
stock will be converted into the right to receive a number of shares of the
Company's Class A Common Stock determined in accordance with a formula
contained in the TDI Merger Agreement. The Company estimates that it will be
required to issue approximately 2.6 million shares of the Company's Class A
Common Stock to effect the TDI Merger. The Company will also assume
approximately $15.6 million of TDI debt.
Consummation of the TDI Merger is subject to the satisfaction of certain
conditions, including (i) approval of the TDI Merger Agreement and the TDI
Merger by the stockholders of TDI, (ii) compliance with all applicable
provisions of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the
expiration of all applicable waiting periods thereunder, (iii) receipt of
required regulatory approvals, and (iv) certain other customary conditions.
Both Pubco and TDI may terminate the TDI Merger Agreement if the TDI Merger
has not been consummated by February 15, 1999.
In a related transaction, on January 7, 1999, the Company and Pubco entered
into the Info America Merger Agreement with Info America, and certain
stockholders of Info America pursuant to
34
<PAGE>
which Info America will be acquired by merger. As a result of the Info America
Merger, each share of Info America's common stock will be converted into the
right to receive a number of shares of the Company's Class A Common Stock
determined in accordance with a formula contained in the Info America Merger
Agreement. The Company estimates that it will be required to issue
approximately 1.2 million shares of the Company's Class A Common Stock to
effect the Info America Merger.
Consummation of the Info America Merger is subject to the satisfaction of
certain conditions, including (i) approval of the Info America Merger
Agreement and the Info America Merger by the stockholders of Info America,
(ii) compliance with all applicable provisions of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the expiration of all applicable
waiting periods thereunder, (iii) receipt of required regulatory approvals,
and (iv) certain other customary conditions. Both Pubco and Info America may
terminate the Info America Merger Agreement if the Info America Merger has not
been consummated by February 15, 1999.
TDI and Info America are related companies that together publish and
distribute proprietary "white page" and "yellow page" telephone directories
primarily in Michigan and northwestern Ohio. In 1998, TDI and Info America
collectively published and distributed approximately 2.6 million copies of 19
telephone directories. As of December 31, 1998, TDI had 257 employees and Info
America had no employees.
35
<PAGE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain obligations of the Company
under the Registration Rights Agreement. The Company will not receive any cash
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company 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 herein under "The Exchange
Offer--Terms of the Exchange Offer." The Outstanding Notes surrendered in
exchange for Exchange Notes will be retired and canceled and cannot be
reissued.
36
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1998, the capitalization
of the Company, including the application of the net proceeds to the Company
from the Offering. This table should be read in conjunction with the Selected
Consolidated Financial Data, the Consolidated Financial Statements of the
Company, the notes thereto and the other financial data contained elsewhere or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
September 30, 1998
-----------------------
Actual As Adjusted
---------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Short-term debt........................................ $ 19,933 $ 19,933
Long-term debt......................................... 939,102 1,239,102
---------- ----------
Stockholders' equity:
Class A Common Stock, $.01 par value, 250,000,000
shares authorized; 63,135,843 shares issued and
outstanding......................................... 631 631
Class B Common Stock, convertible, $.01 par value,
22,000,000 shares authorized; none issued or
outstanding......................................... -- --
Additional paid-in capital........................... 707,022 707,022
Accumulated deficit.................................. (220,835) (220,835)
Accumulated other comprehensive income............... (3,073) (3,073)
---------- ----------
Total stockholders' equity......................... 483,745 483,745
---------- ----------
Total capitalization............................... $1,442,780 $1,742,780
========== ==========
</TABLE>
37
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(In thousands, except per share data)
The following table sets forth selected consolidated financial data of the
Company and should be read in conjunction with and is qualified by reference
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements of the Company, the notes
thereto and the other financial data contained elsewhere or incorporated by
reference in this Prospectus.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5)(6) 1997(6)(7)(16)
------- -------- ---------- ---------- ---------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operations
Statement Data:
Revenue.......... $ 1,550 $ 8,014 $ 28,998 $ 81,323 $267,886 $ 462,191
------- -------- -------- -------- -------- ---------
Operating
expenses:
Cost of
service........ 1,528 6,212 19,667 52,624 155,430 255,794
Selling, general
and
administrative.. 2,390 12,373 18,054 46,044 143,918 208,981
Depreciation and
amortization... 235 772 1,835 8,485 33,275 61,916
Other........... -- -- -- 2,380 4,632 10,191
------- -------- -------- -------- -------- ---------
Total operating
expenses....... 4,153 19,357 39,556 109,533 337,255 536,882
------- -------- -------- -------- -------- ---------
Operating loss... (2,603) (11,343) (10,558) (28,210) (69,369) (74,691)
Interest income
(expense), net.. 163 (73) (771) 5,369 (11,967) (48,984)
Other income..... -- -- -- 495 1,426 2,508
Income taxes..... -- -- -- -- -- --
------- -------- -------- -------- -------- ---------
Net loss......... $(2,440) $(11,416) $(11,329) $(22,346) $(79,910) $(121,167)
------- -------- -------- -------- -------- ---------
Loss per common
share........... $ (.17) $ (.53) $ (.40) $ (.55) $ (1.45) $ (1.98)
------- -------- -------- -------- -------- ---------
Weighted average
common shares
outstanding..... 14,761 21,464 28,004 40,506 54,974 61,184
------- -------- -------- -------- -------- ---------
Ratio of earnings
to fixed
charges(11)..... -- -- -- -- -- --
======= ======== ======== ======== ======== =========
<CAPTION>
Nine Months
Ended September 30,
---------------------------------------
Pro Forma
1997(1)(8) 1998(9) 1998(7)(10)(16)
----------- ----------- ---------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operations
Statement Data:
Revenue.......... $131,595 $438,642 $ 438,642
----------- ----------- ---------------
Operating
expenses:
Cost of
service........ 77,745 239,195 239,195
Selling, general
and
administrative.. 86,363 189,579 189,579
Depreciation and
amortization... 15,708 63,663 63,663
Other........... 2,689 5,575 5,575
----------- ----------- ---------------
Total operating
expenses....... 182,505 498,012 498,012
----------- ----------- ---------------
Operating loss... (50,910) (59,370) $ (59,370)
Interest income
(expense), net.. (2,686) (35,519) (48,893)
Other income..... 40 1,789 1,789
Income taxes..... -- -- --
----------- ----------- ---------------
Net loss......... $(53,556) $(93,100) $(106,474)
----------- ----------- ---------------
Loss per common
share........... $ (1.02) $ (1.49) $ (1.70)
----------- ----------- ---------------
Weighted average
common shares
outstanding..... 52,752 62,620 62,620
----------- ----------- ---------------
Ratio of earnings
to fixed
charges(11)..... -- -- --
=========== =========== ===============
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30, 1998
-------------------------------------------------- -------------------------------
Actual
1993 1994 1995(1) 1996(1)(12) 1997(1)(5)(13) Actual(9) As Adjusted(14)(16)
------ ------- ------- ----------- -------------- ----------- -------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $7,077 $ 4,862 $ 8,507 $224,401 $ 517,869 $ 570,784 $ 862,659
Working capital
(deficit).............. $5,962 $ 1,659 $(1,208) $185,968 $ 378,617 $ 409,266 $ 701,141
Property and equipment,
net.................... $1,958 $ 4,716 $16,119 $ 92,123 $ 373,804 $ 559,317 $ 559,317
Total assets............ $9,051 $10,687 $28,986 $452,994 $1,345,652 $1,621,564 $1,921,564
Long-term debt.......... -- $ 3,500 $ 3,600 $ 2,573 $ 613,384 $ 939,102 $1,239,102
Stockholders' equity.... $7,936 $ 3,291 $14,958 $403,429 $ 559,379 $ 483,745 $ 483,745
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------------------------------------------------- -----------------------------------
Pro Forma Pro Forma
1993 1994 1995(1)(2) 1996(1)(3) 1997(1)(4)(5) 1997(6)(7)(16) 1997(1) 1998(9) 1998(7)(16)
------- -------- ---------- ---------- ------------- -------------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Financial
Data:
Capital
expenditures,
including
business
acquisitions... $ 2,052 $ 3,393 $14,697 $173,782 $601,137 $617,463 $547,345 $251,253 $251,253
EBITDA(15)...... $(2,368) $(10,571) $(8,723) $(17,345) $(31,462) $ (2,584) $(32,513) $ 9,868 $ 9,868
</TABLE>
(Footnotes on next page)
38
<PAGE>
- --------
(1) The acquisitions of MWR, Ruffalo Cody, McLeodUSA Publishing and CCI in
April 1995, July 1996, September 1996 and September 1997, respectively,
affect the comparability of the historical data presented to the
historical data for prior periods shown.
(2) Includes operations of MWR from April 29, 1995 to December 31, 1995.
(3) Includes operations of Ruffalo Cody from July 16, 1996 to December 31,
1996 and operations of McLeodUSA Publishing from September 21, 1996 to
December 31, 1996.
(4) Includes operations of CCI from September 25, 1997 to December 31, 1997.
(5) Reflects the 1997 Senior Discount Note Offering and the 1997 Senior Note
Offering.
(6) Includes operations of CCI from January 1, 1997 to December 31, 1997and
certain adjustments attributable to the acquisition of CCI by the Company.
Also reflects certain adjustments attributable to the 1997 Senior Discount
Notes, the 1997 Senior Notes, the March 1998 Senior Notes and the October
1998 Senior Notes computed as if the 1997 Senior Discount Notes, the 1997
Senior Notes, the March 1998 Senior Notes and the October 1998 Senior
Notes had been issued on January 1, 1997.
(7) The issuance of the 1997 Senior Discount Notes in March 1997, the issuance
of the 1997 Senior Notes in July 1997, the CCI Acquisition, the issuance
of the March 1998 Senior Notes in March 1998 and the issuance of the
October 1998 Senior Notes in October 1998 affect the comparability of the
pro forma data presented to the data for prior periods shown.
(8) Reflects the issuance of the 1997 Senior Discount Notes on March 4, 1997.
(9) Reflects the issuance of the March 1998 Senior Notes on March 16, 1998.
(10) Reflects certain adjustments attributable to the March 1998 Senior Notes
and the October 1998 Senior Notes computed as if each had occurred on
January 1, 1998.
(11) For the purpose of calculating the ratio of earnings to fixed charges,
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, 1993, 1994, 1995, 1996 and 1997, earnings were insufficient
to cover fixed charges by $2.4 million, $11.4 million, $11.4 million,
$22.6 million and $84.4 million, respectively. For the nine months ended
September 30, 1997 and 1998, earnings were insufficient to cover fixed
charges by $50.7 million and $86.6 million, respectively. On a pro forma
basis computed as if the CCI Acquisition, the 1997 Senior Discount Note
Offering, the 1997 Senior Note Offering, the March 1998 Senior Note
Offering and the Offering were consummated at the beginning of the period
presented, earnings would not have been sufficient to cover fixed charges
by $116.7 million and $99.9 million for the year ended December 31, 1997
and the nine months ended September 30, 1998, respectively.
(12) Includes Ruffalo Cody and McLeodUSA Publishing, which we acquired on July
15, 1996 and September 20, 1996, respectively.
(13) Includes CCI, which we acquired on September 24, 1997.
(14) Adjusted to reflect the application of the net proceeds from the
Offering.
(15) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. The Company has included EBITDA
data because it is a measure commonly used in the industry. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
(16) Pending acquisitions described in "Recent Developments" on page 33 are
not reflected in pro forma data.
39
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to (i) the CCI Acquisition in September 1997, (ii) the issuance of
the 1997 Senior Discount Notes in March 1997, (iii) the issuance of the 1997
Senior Notes in July 1997, (iv) the issuance of the March 1998 Senior Notes in
March 1998, and (v) the issuance of the Outstanding Notes in October 1998. The
Unaudited Pro Forma Condensed Consolidated Statements of Operations reflects
the CCI Acquisition using the purchase method of accounting, and assumes that
the CCI Acquisition, the issuance of the 1997 Senior Discount Notes, the
issuance of the 1997 Senior Notes, the issuance of the March 1998 Senior
Notes, and the issuance of the Outstanding Notes were consummated at the
beginning of the periods presented. The unaudited pro forma financial
information is derived from and should be read in conjunction with the
Consolidated Financial Statements of the Company and CCI and the related notes
thereto contained elsewhere or incorporated by reference in this Prospectus.
The pro forma adjustments are based upon available information and certain
assumptions that management believes to be reasonable.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the CCI Acquisition been consummated at the beginning
of the periods presented, nor is it necessarily indicative of future operating
results or financial position.
40
<PAGE>
McLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------------------------------------------------------
Adjustments Pro Forma
for 1997 for 1997 Adjustments Pro Forma Adjustments Pro Forma
Senior Senior Consolidated for for for 1997 for 1997
McLeodUSA Discount Discount Communi- CCI CCI Senior Senior
Incorporated Notes Notes cations Inc.(1) Acquisition Acquisition Notes Notes
------------ ----------- --------- --------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations
Statement Data:
Revenue.......... $267,886 $ -- $267,886 $194,305 $ -- $462,191 $ -- $462,191
-------- ------- -------- -------- -------- -------- ------- --------
Operating
expenses:
Cost of service.. 155,430 -- 155,430 100,364 -- 255,794 -- 255,794
Selling, general
and
administrative... 143,918 -- 143,918 65,063 -- 208,981 -- 208,981
Depreciation and
amortization..... 33,275 -- 33,275 17,913 10,728(2) 61,916 -- 61,916
Other............ 4,632 -- 4,632 -- 5,559(3) 10,191 -- 10,191
-------- ------- -------- -------- -------- -------- ------- --------
Total operating
expenses........ 337,255 -- 337,255 183,340 16,287 536,882 -- 536,882
-------- ------- -------- -------- -------- -------- ------- --------
Operating income
(loss)........... (69,369) -- (69,369) 10,965 (16,287) (74,691) -- (74,691)
Interest income
(expense), net... (11,967) (2,246)(4) (14,213) (2,972) -- (17,185) (5,718)(5) (22,903)
Other non-
operating
income........... 1,426 -- 1,426 1,082 -- 2,508 -- 2,508
Income taxes..... -- -- -- (3,477) 3,477(8) -- -- --
-------- ------- -------- -------- -------- -------- ------- --------
Net income
(loss)........... $(79,910) $(2,246) $(82,156) $ 5,598 $(12,810) $(89,368) $(5,718) $(95,086)
======== ======= ======== ======== ======== ======== ======= ========
Loss per common
and common
equivalent
share............ $ (1.45) $ (1.49) $ (1.46) $ (1.55)
======== ======== ======== ========
Weighted average
common and common
equivalent shares
outstanding...... 54,974 54,974 61,184 61,184
======== ======== ======== ========
Other Financial
Data:
EBITDA(9)........ $(31,462) $ -- $(31,462) $ 28,878 $ -- $ (2,584) $ -- $ (2,584)
<CAPTION>
Year ended December 31, 1997
--------------------------------------------------------
Adjustments Pro Forma
for March 1998 for March 1998 Adjustments Pro Forma
Senior Senior for the for the
Notes Notes Offering Offering
--------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Operations
Statement Data:
Revenue.......... $ -- $ 462,191 $ -- $ 462,191
--------------- -------------- -------------- ----------
Operating
expenses:
Cost of service.. -- 255,794 -- 255,794
Selling, general
and
administrative... -- 208,981 -- 208,981
Depreciation and
amortization..... -- 61,916 -- 61,916
Other............ -- 10,191 -- 10,191
--------------- -------------- -------------- ----------
Total operating
expenses........ -- 536,882 -- 536,882
--------------- -------------- -------------- ----------
Operating income
(loss)........... -- (74,691) -- (74,691)
Interest income
(expense), net... (11,362)(6) (34,265) (14,719)(7) (48,984)
Other non-
operating
income........... -- 2,508 -- 2,508
Income taxes..... -- -- -- --
--------------- -------------- -------------- ----------
Net income
(loss)........... $(11,362) $(106,448) $(14,719) $(121,167)
=============== ============== ============== ==========
Loss per common
and common
equivalent
share............ $ (1.74) $ (1.98)
============== ==========
Weighted average
common and common
equivalent shares
outstanding...... 61,184 61,184
============== ==========
Other Financial
Data:
EBITDA(9)........ $ -- $ (2,584) $ -- $ (2,584)
</TABLE>
(Table continued on following page.)
41
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1998
-----------------------------------------------------------------
Pro
Adjustments Forma
for the for the Adjustments Pro Forma
McLeodUSA March 1998 March 1998 for the for the
Incorporated Senior Notes Senior Notes Offering Offering
------------ ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $438,642 $ -- $438,642 $ -- $ 438,642
-------- ------- -------- -------- ---------
Operating expenses:
Cost of service....... 239,195 -- 239,195 -- 239,195
Selling, general and
administrative....... 189,579 -- 189,579 -- 189,579
Depreciation and
amortization......... 63,663 -- 63,663 -- 63,663
Other................. 5,575 -- 5,575 -- 5,575
-------- ------- -------- -------- ---------
Total operating
expenses........... 498,012 -- 498,012 -- 498,012
-------- ------- -------- -------- ---------
Operating loss........ (59,370) -- (59,370) (59,370)
Interest expense,
net.................. (35,519) (2,335)(6) (37,854) (11,039)(7) (48,893)
Other non-operating
income............... 1,789 -- 1,789 -- 1,789
Income taxes.......... -- -- -- -- --
-------- ------- -------- -------- ---------
Net loss.............. $(93,100) $(2,335) $(95,435) $(11,039) $(106,474)
======== ======= ======== ======== =========
Loss per common
share................ $ (1.49) $ (1.52) $ (1.70)
======== ======== =========
Weighted average
common shares
outstanding.......... 62,620 62,620 62,620
======== ======== =========
Other Financial Data:
EBITDA(9)............. $ 9,868 $ -- $ 9,868 $ -- $ 9,868
</TABLE>
- --------
(1) Includes operations of CCI from January 1, 1997 to September 24, 1997.
(2) To adjust depreciation and amortization to include amortization of
intangibles acquired in the CCI Acquisition. The intangibles acquired in
the CCI Acquisition will be amortized over periods ranging from 3 to 30
years.
(3) To recognize the costs associated with the directories in progress at the
time of the Company's acquisition of McLeodUSA Publishing and CCI.
(4) To record the interest expense on the 1997 Senior Discount Notes at 10
1/2% compounded semi-annually, reduced by an estimated annual yield of 5%
on the net proceeds from the issuance of the 1997 Senior Discount Notes
and estimated additional interest capitalization for the year ended
December 31, 1997.
(5) To record the interest expense on the 1997 Senior Notes at 9 1/4% reduced
by an estimated annual yield of approximately 5% on the net proceeds from
the issuance of the 1997 Senior Notes.
(6) To record the interest expense on the 1998 Senior Notes at 8 3/8% reduced
by an estimated annual yield of approximately 5% on the net proceeds from
the issuance of the 1998 Senior Notes.
(7) To record interest expense on the Notes at 9 1/2% reduced by an estimated
annual yield of approximately 5% on the net proceeds from the Offering.
(8) Net income (loss) includes pro forma adjustments for income taxes due to
the availability of net operating loss carryforwards and a valuation
allowance.
(9) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. The Company has included EBITDA
data because it is a measure commonly used in the industry. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto and the
other financial data contained elsewhere or incorporated by reference in this
Prospectus.
Overview
The Company derives its revenue from (i) its core business of providing
local, long distance and related communications services to end users,
typically in a "bundled" package, (ii) communications network maintenance
services and telephone equipment sales, service and installation, (iii)
special access, private line and data services, (iv) the sale of advertising
space in telephone directories, (v) incumbent local exchange services in east
central Illinois through the operation of Illinois Consolidated Telephone
Company ("ICTC"), acquired as part of the CCI Acquisition, (vi) telemarketing
services and (vii) other communications services, including video, cellular,
operator, payphone and paging services. The Company began providing incumbent
local exchange services and other telecommunications services as a result of
the CCI Acquisition in September 1997, telephone directory advertising as a
result of its acquisition of McLeodUSA Publishing in September 1996, and
telemarketing services as a result of its acquisition of Ruffalo Cody in July
1996. The table set forth below summarizes the Company's percentage of
revenues from these sources:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
------------------- ---------------
1995 1996 1997(1) 1997 1998
---- ---- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Local and long distance
telecommunications services............. 74% 51% 41% 46% 44%
Network maintenance and equipment
services................................ 17 7 8 9 6
Special access, private line and data
services................................ 9 13 6 6 7
Telephone directory advertising.......... -- 19 30 34 24
Local exchange services (ICTC)........... -- -- 6 -- 11
Telemarketing services................... -- 10 5 5 3
Other telecommunications services........ -- -- 4 -- 5
--- --- --- ------ ------
100% 100% 100% 100% 100%
=== === === ====== ======
</TABLE>
- --------
(1) Includes revenues from CCI from September 25, 1997 through December 31,
1997.
The Company began offering "bundled" local and long distance services to
business customers in January 1994. At the end of 1995, the Company began
offering, on a test basis, long distance services to residential customers. In
June 1996, the Company began marketing and providing to residential customers
in Cedar Rapids, Iowa and Iowa City, Iowa an integrated package of
telecommunications services, marketed under the name PrimeLine(R), that
includes local and long distance service, voice mail, Internet access and
travel card services. Since June 1996 the Company has expanded the states in
which it offers service to business customers to include Iowa, Illinois,
Indiana, Minnesota, Wisconsin, North Dakota, South Dakota, Colorado, Missouri
and Wyoming. The Company has also expanded its PrimeLine(R) service to certain
additional cities in Iowa and Illinois and began offering the service to
customers in North Dakota, South Dakota, Wisconsin, Wyoming and Colorado. The
Company plans to continue its efforts to market and provide local, long
distance and other telecommunications services to business customers and
market its PrimeLine(R) service to residential customers. The Company believes
its efforts to market its integrated telecommunications services have been
enhanced by its July 1996 acquisition of Ruffalo Cody, which specializes in
direct marketing and telemarketing services, including telecommunications
sales, its September 1996 acquisition of
43
<PAGE>
McLeodUSA Publishing, which publishes and distributes proprietary "white page"
and "yellow page" telephone directories in 20 states in the Midwestern and
Rocky Mountain regions of the United States, including most of the Company's
target markets, and its September 1997 acquisition of CCI, including its
subsidiary Consolidated Communications Directories Inc. ("CCD"), which
publishes and distributes "white page" and "yellow page" telephone directories
for third parties in 38 states and the United States Virgin Islands.
In September 1997, the Company completed the CCI Acquisition. For the period
beginning January 1, 1997 through September 24, 1997, CCI had revenues of
$194.3 million and net income of $5.6 million. As a result of the CCI
Acquisition, the Company acquired all of the former CCI subsidiaries,
including ICTC, an independent local exchange carrier which serves customers
in east-central Illinois; Consolidated Communications Telecom Services Inc.
("CCTS"), a competitive local exchange carrier which offers integrated local,
long distance and other telecommunications services to customers in central
and southern Illinois and in Indiana; CCD, a telephone directory company; an
operator service company; an inmate pay-phone company; a full service
telemarketing agency; a majority interest in a cable television company
serving customers in Greene, Sangamon and Menard counties in Illinois and
Benton Harbor, Michigan; and a minority interest in a cellular telephone
partnership serving parts of east-central Illinois. The Company believes the
CCI Acquisition has enhanced its efforts to offer its telecommunications
services in adjoining target markets including expansion into Indiana and
Missouri, states where CCI provided telecommunications services.
The Company's principal operating expenses consist of cost of service;
selling, general and administrative expenses ("SG&A"); and depreciation and
amortization. Cost of service primarily includes local services purchased from
RBOCs, costs to terminate the long distance calls of the Company's customers
through interexchange carriers, costs of printing and distributing the
telephone directories published by McLeodUSA Publishing and CCD, costs
associated with maintaining the Iowa Communications Network and costs
associated with operating the Company's network. The Iowa Communications
Network is a fiber optic network that links certain of the State of Iowa's
schools, libraries and other public buildings. SG&A consists of sales and
marketing, customer service and administrative expenses. Depreciation and
amortization include depreciation of the Company's telecommunications network
and equipment; amortization of goodwill, and other intangibles related to the
Company's acquisitions, amortization expense related to the excess of
estimated fair market value in aggregate of certain options over the aggregate
exercise price of such options granted to certain officers, other employees
and directors; and amortization of one-time installation costs associated with
transferring customers' local line service from the RBOCs to the Company's
local telecommunications service.
As the Company expands into new markets, both cost of service and SG&A will
increase. The Company expects to incur cost of service and SG&A expenses prior
to achieving significant revenues in new markets. Fixed costs related to
leasing of central office facilities needed to provide telephone services must
be incurred prior to generating revenue in new markets, while significant
levels of marketing activity may be necessary in the new markets in order for
the Company to build a customer base large enough to generate sufficient
revenue to offset such fixed costs and marketing expenses.
In January and February 1996, the Company granted options to purchase an
aggregate of 965,166 and 688,502 shares of its Class A Common Stock,
respectively, at an exercise price of $2.67 per share, to certain directors,
officers and other employees. The estimated fair market value of these
options, in the aggregate, at the date of grant was later determined to exceed
the aggregate exercise price by approximately $9.2 million. Additionally, in
September 1997, the Company granted options to purchase an aggregate of
1,468,945 shares of its Class A Common Stock at an exercise price of $24.50 to
certain employees of CCI. The fair market value of these options, in the
aggregate, at the date of grant exceeded the aggregate exercise price by
approximately $15.8 million. These amounts are being amortized on a monthly
basis over the four-year vesting period of the options.
44
<PAGE>
The Company has experienced operating losses since its inception as a result
of efforts to build its customer base, develop and construct its network
infrastructure, build its internal staffing, develop its systems and expand
into new markets. The Company expects to continue to focus on increasing its
customer base and geographic coverage. Accordingly, the Company expects that
its cost of service, SG&A and capital expenditures will continue to increase
significantly, all of which may have a negative impact on operating results.
As a result of the CCI Acquisition, the Company anticipates a reduction in
operating losses and the generation of positive cash flows from operations in
the future. The anticipated financial benefits from the CCI Acquisition are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. The financial benefits the Company will
actually derive from the CCI Acquisition may differ materially as a result of
a variety of factors, including technological, regulatory or other
developments in the Company's business, the difficulty of assimilating CCI's
operations and personnel, the possible inability of management to maximize the
financial and strategic position of the Company through successful
incorporation of CCI into the Company's operations, and the risks of entering
markets in which the Company has little or no direct prior experience. In
addition, the projected increases in capital expenditures will continue to
generate negative cash flows from construction activities during the next
several years while the Company installs and expands its fiber optic network
and develops and constructs its proposed PCS system. The Company may also be
forced to change its pricing policies to respond to a changing competitive
environment, and there can be no assurance that the Company will be able to
maintain its operating margin. There can be no assurance that growth in the
Company's revenue or customer base will continue or that the Company will be
able to achieve or sustain profitability or positive cash flows.
The Company has generated net operating losses since its inception and,
accordingly, has incurred no income tax expense. The Company has reduced the
net deferred tax assets generated by these losses by a valuation allowance
which offsets the net deferred tax asset due to the uncertainty of realizing
the benefit of the tax loss carryforwards. The Company will reduce the
valuation allowance when, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
be realized.
Nine Months Ended September 30, 1998 Compared with Nine Months Ended September
30, 1997
Total revenue increased from $131.6 million for the nine months ended
September 30, 1997 to $438.6 million for the nine months ended September 30,
1998, representing an increase of $307 million or 233%. Revenue from the sale
of local and long distance telecommunications services accounted for $134
million of this increase, including $52.2 million contributed by CCI. Local
exchange services generated by ICTC represented $49.3 million for the period,
for which there were no corresponding 1997 revenues. Private line and data
revenues accounted for $23.6 million of increased revenues over 1997, which
was primarily attributable to the CCI Acquisition. Network maintenance and
equipment revenue increased $12.2 million over 1997 due primarily to the
acquisitions of Digital Communications of Iowa, Inc. ("Digital
Communications"), ESI Communications, Inc. ("ESI Communications"), CCI and
NewCom Technologies, Inc. and NewCom OSP Services, Inc. (collectively,
"NewCom"). Other telecommunications revenue, which was due almost entirely to
the CCI Acquisition, represented $20.9 million of the revenues for the first
nine months of 1998 with no corresponding 1997 amount. Directory revenues
increased $58.5 million from the first nine months of 1997 to the first nine
months of 1998 due to revenues from new directories acquired in 1998 and the
acquisition of CCD. The $8.5 million increase in telemarketing revenues from
the first nine months of 1997 to the first nine months of 1998 was due almost
entirely to the CCI Acquisition.
Cost of service increased from $77.7 million for the nine months ended
September 30, 1997, to $239.2 million for the nine months ended September 30,
1998, representing an increase of $161.5 million or 208%. This increase in
cost of service was due primarily to the growth in the Company's local and
long distance telecommunications services and to the acquisitions of Digital
Communications, ESI Communications, CCI and NewCom, which contributed an
aggregate of $106.7 million to the increase.
45
<PAGE>
Cost of service as a percentage of revenue decreased from 59% for the nine
months ended September 30, 1997 to 55% for the nine months ended September 30,
1998, as a result of these acquisitions and as a result of reductions in the
cost of providing local and long distance services as a percentage of local
and long distance telecommunications revenue, which decreased from 77% to 71%
for those same periods. This decrease was primarily due to the realization of
benefits associated with new wholesale line cost rate agreements with the
RBOCs and reduced long distance costs resulting from migration of over 60% of
customer long distance traffic to the Company's fiber optic network.
SG&A increased from $86.4 million for the nine months ended September 30,
1997 to $189.6 million for the nine months ended September 30, 1998, an
increase of $103.2 million or 120%. The acquisitions of Digital
Communications, ESI Communications, CCI and NewCom contributed an aggregate of
$66.8 million to the increase. Also contributing to this increase were
increased costs of $36.4 million primarily related to expansion of selling,
customer support and administration activities to support the Company's
growth.
Depreciation and amortization expenses increased from $15.7 million for the
nine months ended September 30, 1997 to $63.7 million for the nine months
ended September 30, 1998, representing an increase of $48.0 million or 305%.
This increase consisted of $32.8 million related to the acquisitions of
Digital Communications, ESI Communications, CCI and NewCom, and $15.2 million
due primarily to the growth of the Company's network.
Other operating expenses represented the amortization of capitalized costs
associated with CCD directories in progress at the time the Company acquired
CCI.
Interest income increased from $18.1 million for the nine-month period ended
September 30, 1997, to $19.1 million for the same period in 1998. This
increase resulted from increased earnings on investments made with the
remaining proceeds from the 1997 Senior Discount Note Offering and the 1997
Senior Note Offering in March and July 1997, respectively, and the proceeds
from the March 1998 Senior Note Offering in March 1998.
Gross interest expense increased from $23.6 million for the first nine
months of 1997 to $61.1 million for the first nine months of 1998. This
increase was primarily a result of an increase in the accretion of interest on
the 1997 Senior Discount Notes of $7.5 million and an increase of interest of
$24.9 million as the result of the issuance of the 1997 Senior Notes and the
March 1998 Senior Notes. Interest expense of approximately $5.6 million and
$2.9 million was capitalized as part of the Company's construction of fiber
optic network during the nine months of 1998 and the first nine months of
1997, respectively. In addition, interest expense of approximately $899,000
was capitalized as part of the Company's operating facilities building
construction and the Company's software development in 1998 with no
corresponding amount in 1997.
Net loss increased from $53.6 million for the nine months ended September
30, 1997 to $93.1 million for the nine months ended September 30, 1998, an
increase of $39.5 million. This increase resulted primarily from the following
three factors: the expansion of the Company's local and long distance
services, which requires significant expenditures, a substantial portion of
which is incurred before the realization of revenues; the increased
depreciation expense related to the construction and expansion of the
Company's networks and amortization of intangibles related to acquisitions;
and net interest expense on indebtedness to fund market expansion, network
development and acquisitions.
Year Ended 1997 Compared with Year Ended 1996
Revenue was $267.9 million for the year ended December 31, 1997, an increase
of $186.6 million or 229% from $81.3 million for 1996. This increase was due
to the many acquisitions completed in 1997 and 1996 as well as the increase in
local and long distance customers. Revenue from the sale of local
46
<PAGE>
and long distance telecommunications services accounted for $68.6 million of
the increase, including $23.1 million contributed by CCI from September 25,
1997 to December 31, 1997. Local exchange services generated by ICTC
represented $16.1 million for the period from September 25, 1997 to December
31, 1997, for which there were no corresponding 1996 revenues. Private line
and data revenues accounted for $6.9 million of increased revenues over 1996
which was primarily attributable to the CCI Acquisition. Network maintenance
and equipment revenue increased $15.0 million over 1996 due to the
acquisitions of Digital Communications, ESI Communications and CCI. Other
telecommunications revenue that was due entirely to the CCI Acquisition
represented $9.9 million of 1997 revenues with no corresponding 1996 amount.
Directory revenues increased $65.9 million from 1996 to 1997 and were due to a
full year of McLeodUSA Publishing revenues in 1997 and the acquisition of CCD
on September 24, 1997. The increase in telemarketing revenues from 1996 to
1997 of $4.1 million was due almost entirely to the CCI Acquisition.
Cost of service increased from $52.6 million for the year ended December 31,
1996 to $155.4 million for the year ended December 31, 1997, representing an
increase of $102.8 million or 195%. This increase in cost of service was due
primarily to the growth in the Company's local and long distance
telecommunications services and to the acquisitions of Ruffalo Cody, McLeodUSA
Publishing, Digital Communications, ESI Communications and CCI, which
contributed an aggregate of $62.2 million to the increase. Cost of service as
a percentage of revenue decreased from 65% for the year ended December 31,
1996 to 58% for the year ended December 31, 1997, primarily as a result of the
effect of these acquisitions. The cost of providing local and long distance
services as a percentage of local and long distance telecommunications revenue
increased from 70% for the year ended December 31, 1996 to 73% for the year
ended December 31, 1997, primarily as a result of increased line costs
associated with the Company's accelerated expansion into new markets.
SG&A increased from $46 million for the year ended December 31, 1996 to
$143.9 million for the year ended December 31, 1997, an increase of $97.9
million or 213%. The acquisitions of Ruffalo Cody, McLeodUSA Publishing,
Digital Communications, ESI Communications and CCI contributed an aggregate of
$54.3 million to the increase. Also contributing to this increase were
increased costs of $43.6 million primarily related to expansion of selling,
customer support and administration activities to support the Company's
growth.
Depreciation and amortization expenses increased from $8.5 million for the
year ended December 31, 1996 to $33.3 million for the year ended December 31,
1997, representing an increase of $24.8 million or 292%. The increase was
primarily due to $14.3 million related to the acquisitions of Ruffalo Cody,
McLeodUSA Publishing, Digital Communications, ESI Communications and CCI, and
$3.8 million due primarily to the growth of the Company's network in 1997.
Other operating expenses in 1997 represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
McLeodUSA Publishing and CCD directories in progress at the time of the
acquisitions.
Interest income increased from $6 million for the year ended December 31,
1996 to $22.7 million for the year ended December 31, 1997. This increase
resulted from increased earnings on investments made with a portion of the
proceeds from the Company's offerings of Class A Common Stock in June and
November 1996 and from the offerings of the 1997 Senior Discount Notes and the
1997 Senior Notes in March 1997 and July 1997, respectively.
Gross interest expense increased from $869,000 for the year ended December
31, 1996 to $39.1 million for the year ended December 31, 1997. This increase
was primarily a result of accretion of interest on the 1997 Senior Discount
Notes of $26.8 million and accrual of interest on the 1997 Senior Notes of
$9.5 million. Interest expense of approximately $4.4 million and $204,000 was
capitalized as
47
<PAGE>
part of the Company's construction of its fiber optic network during the years
ended December 31, 1997 and 1996, respectively.
Net loss increased from $22.3 million for the year ended December 31, 1996
to $79.9 million for the year ended December 31, 1997, an increase of $57.6
million. This increase resulted primarily from the following three factors:
the construction and expansion of the Company's network which require
significant expenditures, a substantial portion of which is incurred before
the realization of revenues; the increased depreciation expense related to
those networks and amortization of intangibles related to acquisitions; and
net interest expense on indebtedness to fund market expansion, network
development and acquisitions.
Operating loss before depreciation, amortization and other non-recurring
operating expenses increased from a negative $17.3 million for the year ended
December 31, 1996 to a negative $31.5 million for the year ended December 31,
1997, an increase of $14.2 million. The change reflected the increase in the
operating loss incurred in 1997 due primarily to the expansion of the
Company's local, long distance and other telecommunications services as
described above.
Year Ended 1996 Compared with Year Ended 1995
Revenue increased from $29 million for the year ended December 31, 1995 to
$81.3 million for the year ended December 31, 1996, representing an increase
of $52.3 million or 180%. Revenue from the sale of local and long distance
telecommunications services accounted for $19.9 million of this increase.
Included in the year ended December 31, 1996 revenue was $8.6 million of
revenue from Ruffalo Cody, which was acquired on July 15, 1996, and $15.1
million in revenue from McLeodUSA Publishing, which was acquired on September
20, 1996. Excluding these acquisitions, 1996 revenue would have been $57.6
million.
Cost of service increased from $19.7 million for the year ended December 31,
1995 to $52.6 million for the year ended December 31, 1996, an increase of
$32.9 million or 168%. This increase in cost of service was due primarily to
the growth in the Company's local and long distance telecommunications
services and to the acquisitions of Ruffalo Cody and McLeodUSA Publishing,
which contributed $4.5 million and $6.7 million, respectively, to the
increase. Cost of service as a percentage of revenue decreased from 68% to
65%, primarily as a result of the effect of these acquisitions. The cost of
providing local and long-distance services as a percentage of local and long
distance telecommunications revenue increased from 68% for the year ended
December 31, 1995 to 70% for the year ended December 31, 1996, primarily as a
result of an increased number of higher volume, price-sensitive customers and
increased local line costs associated with expansion into new markets.
SG&A increased from $18.1 million for the year ended December 31, 1995 to
$46 million for the year ended December 31, 1996, an increase of $27.9 million
or 155%. The acquisitions of Ruffalo Cody and McLeodUSA Publishing contributed
$3.3 million and $7.3 million, respectively, to the increase. Increased costs
of $17.3 million related to expansion of selling, customer support and
administration activities to support the Company's growth also contributed to
this increase.
Depreciation and amortization expenses increased from $1.8 million for the
year ended December 31, 1995 to $8.5 million for the year ended December 31,
1996, an increase of $6.7 million or 362%. This increase consisted of $2.1
million related to the acquisitions of Ruffalo Cody and McLeodUSA Publishing;
amortization expense of $2 million related to the excess of estimated
aggregate fair market value of certain options over the aggregate exercise
price of such options granted to certain officers, other employees, and
directors; and $2.6 million due primarily to the growth of the Company's
network in 1996.
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Other operating expense in 1996 represented the realization of a purchase
accounting adjustment related to the capitalization of costs associated with
directories in progress at the time the Company acquired McLeodUSA Publishing.
The Company had net interest income of $5.4 million for the year ended
December 31, 1996 compared to net interest expense of $771,000 for the year
ended December 31, 1995 as a result of earnings on investments made with a
portion of the proceeds of the Company's public offerings of Class A Common
Stock during 1996 and decreased interest expense on reduced borrowings as a
result of the Company's repayment of all amounts outstanding under a bank
credit facility maintained by the Company from May 1994 until June 1996 (the
"Credit Facility") with a portion of the net proceeds from the Company's
initial public offering of Class A Common Stock. The Company also had other
non-operating income of $495,000 for the year ended December 31, 1996.
Net loss increased from $11.3 million for the year ended December 31, 1995
to $22.3 million for the year ended December 31, 1996, an increase of $11
million. This increase resulted primarily from the expansion of the local and
long distance businesses, amortization and other operating expenses related to
the acquisitions of Ruffalo Cody and McLeodUSA Publishing and amortization
expense related to stock options granted to certain officers, other employees
and directors. The development of the Company's business and the construction
and expansion of its network require significant expenditures, a substantial
portion of which is incurred before the realization of revenues.
Operating loss before depreciation, amortization and other non-recurring
operating expenses increased from a negative $8.7 million for the year ended
December 31, 1995 to a negative $17.3 million for the year ended December 31,
1996, an increase of $8.6 million. The change reflected the increase in the
operating loss incurred in 1996 due primarily to the expansion of the
Company's local, long distance and other telecommunications services and the
factors described above.
Year Ended 1995 Compared with Year Ended 1994
Revenue increased from $8 million in 1994 to $29 million in 1995,
representing an increase of $21 million or 262%. Revenue from the increase in
the sale of local and long distance telecommunications services accounted for
$16.9 million of this increase. Revenue from telecommunications network
maintenance services was $4.9 million in 1995. The Company acquired MWR, a
competitive access provider that offers most of the Company's special access
and private line services, in April 1995 in an acquisition accounted for as a
purchase. MWR represented $1.6 million of the Company's revenue in 1995.
Cost of service increased from $6.2 million in 1994 to $19.7 million in
1995, an increase of $13.5 million or 217%. This increase in cost of service
resulted primarily from costs for providing local and long distance services.
Cost of service as a percentage of revenue decreased from 78% in 1994 to 68%
in 1995, principally as a result of certain economies of scale.
SG&A increased from $12.4 million in 1994 to $18.1 million in 1995, an
increase of $5.7 million or 46%. This increase was due to increased
compensation resulting from selling and customer support activities of $2.8
million, additional administrative personnel expense of $1.6 million and
associated costs of $1.3 million required to handle the growth experienced
primarily in local and long distance revenues.
Depreciation and amortization expenses increased from $772,000 in 1994 to
$1.8 million in 1995, an increase of $1 million or 138%. This increase
consisted of depreciation of $362,000 related to the additional fiber optic
network purchased and built during 1995; $304,000 of depreciation related to
capital costs associated with the growth of the Company; $266,000 resulting
from the amortization of one-time installation costs primarily associated with
transferring customers' local line service from the
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RBOCs to the Company's telemanagement service; and amortization of goodwill of
$117,000 related to the Company's acquisition of MWR in 1995.
Net interest expense increased from $73,000 in 1994 to $771,000 in 1995.
This net increase resulted from an increase in interest expense of $692,000
due to the need for additional secured debt in 1995 to fund the Company's
growth and operating losses and a decrease in interest income of $6,000
resulting from reduced investment of funds due to the use of funds needed to
satisfy working capital needs.
The Company's net loss decreased from $11.4 million in 1994 to $11.3 million
in 1995, a decrease of $87,000. This decrease resulted from the ability of the
Company to generate additional service income while reducing customer
acquisition and support costs as a percentage of service income.
Operating loss before depreciation, amortization and other non-recurring
operating expenses improved from a negative $10.6 million in 1994 to a
negative $8.7 million in 1995, an improvement of $1.9 million. The improvement
reflected the decrease in the net loss and the increase in depreciation and
amortization in 1995 resulting from the capital expenditures necessary to
support the Company's revenue growth.
Liquidity and Capital Resources
The Company's total assets increased to $1.9 billion at September 30, 1998,
as adjusted to give effect to the Offering as if it had occurred on that date,
from $1.3 billion at December 31, 1997 and $453 million at December 31, 1996,
primarily due to the net proceeds of approximately $291.9 million from the
Offering, the net proceeds of approximately $288.9 million from the March 1998
Senior Note Offering, the net proceeds of approximately $506.5 million from
the 1997 Senior Discount Note Offering and the 1997 Senior Note Offering in
March 1997 and July 1997, respectively, and the acquisition of CCI in
September 1997. At September 30, 1998, the Company's current assets of $570.9
million exceeded its current liabilities of $161.5 million, providing working
capital of $409.4 million, which represents an increase of $30.9 million
compared to December 31, 1997 primarily attributable to the net proceeds from
the March 1998 Senior Note Offering. At December 31, 1997, the Company's
current assets of $517.8 million exceeded its current liabilities of $139.3
million, providing working capital of $378.5 million, which represents an
increase of $192.5 million compared to December 31, 1996 primarily
attributable to the net proceeds from the 1997 Senior Discount Note Offering
and the 1997 Senior Note Offering. At December 31, 1996, the Company's current
assets of $224.4 million exceeded current liabilities of $38.4 million,
providing working capital of $186 million.
Net cash used in operating activities totaled $10.9 million, $8.8 million
and $11.8 million for the nine months ended September 30, 1998, and the years
ended December 31, 1997 and 1996, respectively. During the nine months ended
September 30, 1998 cash for operating activities was used primarily to fund
the Company's net loss of $93.1 million for such period. The Company also
required cash to fund the growth in trade receivables and deferred line
installation costs of $10.1 million and $9.0 million, respectively, primarily
as a result of the expansion of the Company's local and long distance
telecommunications services. These uses of cash for operating activities
during the nine months ended September 30, 1998 were offset by an increase in
accounts payable and accrued expenses of $10.7 million and cumulative non-cash
expenses of $89.6 million. During the year ended December 31, 1997, cash for
operating activities was used primarily to fund the Company's net loss of
$79.9 million for such period. The Company also required cash to fund the
growth in trade receivables and deferred line installation costs of $15.9
million and $9.7 million, respectively, offset by increases in accounts
payable and accrued expenses of $27.1 million, deferred revenues of $7.2
million and customer deposits of $3 million. During the year ended December
31, 1996, cash for operating activities was used primarily to fund the
Company's net loss of $22.3 million for such period. The Company also required
cash to fund the growth in trade receivables of $9.3 million offset by an
increase in deferred revenue of $9.5 million.
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Net cash used in investing activities totaled $373.2 million, $242.8 million
and $283.1 million during the nine months ended September 30, 1998 and the
years ended December 31, 1997 and 1996, respectively. The expansion of the
Company's local and long distance telecommunications services, development and
construction of the Company's fiber optic network and other capital
expenditures resulted in purchases of equipment and fiber optic cable and
other property and equipment totaling $204.7 million, $151.3 million and $70.3
million during the nine months ended September 30, 1998 and the years ended
December 31, 1997 and 1996, respectively. The Company also used cash of $516.3
million to acquire available-for-sale securities during the first nine months
of 1998, offset by proceeds from sales and maturities of available-for-sale
securities of $246.1 million during the period. During the year ended December
31, 1997, the cash used in investing activities was partially offset by net
proceeds of $120.2 million from the sales and maturities of available-for-sale
securities.
In April and June 1997, the FCC granted the Company 26 "D" and "E" block
frequency PCS licenses and in September 1997 the Company acquired one
additional "E" block frequency license as a result of the CCI Acquisition (the
"CCI PCS License"), giving the Company 27 PCS licenses in a total of 25
markets covering areas of Iowa, Illinois, Minnesota, Nebraska and South
Dakota. The Company paid the FCC an aggregate of approximately $32.8 million
for the 26 PCS licenses granted to the Company by the FCC. The Company made a
deposit of $4.8 million with the FCC at the beginning of the bidding process
in 1996 and paid approximately $28 million during 1997 for the 26 PCS
licenses. CCI paid the FCC for the CCI PCS License prior to the CCI
Acquisition. The Company will be required to make significant additional
expenditures to develop, construct and operate a PCS system.
During the nine months ended September 30, 1998, the Company used an
aggregate of $27.6 million cash to acquire directories from F.D.S.D. Rapid
City Directories, Inc., Bi-Rite Directories, Inc., Smart Pages, Inc. and
Yellow Pages Publishers, Inc., and ADCO Publishing Co., Inc. on March 17,
1998, March 20, 1998, April 8, 1998, and September 15, 1998 respectively, and
in its acquisitions of NewCom capital stock, Communications Cable-Laying
Company, Inc. assets, and QST Communications Inc. capital stock in April, June
and August 1998, respectively.
During the nine months ended September 30, 1997, the Company used an
aggregate of $180.4 million cash to acquire Digital Communications, Fronteer
Financial Holdings, Ltd., Indiana Directories, Inc., ESI Communications and
CCI in January 1997, February 1997, March 1997, June 1997 and September 1997,
respectively.
On October 27, 1998, the Company entered into an Agreement and Plan of
Reorganization with Dakota Telecommunications Group, Inc. ("DTG") pursuant to
which the Company agreed, subject to certain conditions, to acquire DTG for an
aggregate of 1,375,000 shares of Class A Common Stock and the assumption of
$30.9 million in debt (the "DTG Acquisition").
Consummation of the DTG Acquisition is subject to the satisfaction or waiver
of certain conditions, including receipt of required regulatory approvals and
other customary conditions. There can be no assurance that the DTG Acquisition
will be consummated.
On September 24, 1997, the Company issued an aggregate of 8,488,586 shares
of Class A Common Stock and paid approximately $155 million in cash to the
shareholders of CCI in exchange for all of the outstanding shares of CCI in a
transaction accounted for using the purchase method of accounting. The total
purchase price was approximately $382.1 million, which includes approximately
$3.4 million of estimated direct acquisition costs.
Net cash received from financing activities was $283.2 million during the
nine months ended September 30, 1998, primarily as a result of the March 1998
Senior Note Offering. Net cash received from financing activities was $487
million during the year ended December 31, 1997 primarily as a result of the
1997 Senior Discount Note Offering in March 1997 and the 1997 Senior Note
Offering in
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July 1997. Cash received from financing activities during the year ended
December 31, 1996 was $391.4 million and was primarily obtained from the
Company's public offerings of Class A Common Stock in June and November 1996.
The Company paid off and canceled the Credit Facility in June 1996 with a
portion of the proceeds from its initial public offering.
On March 4, 1997, the Company completed the 1997 Senior Discount Note
Offering. The 1997 Senior Discount Notes were issued at an original issue
discount in which the Company received approximately $288.9 million in net
proceeds. The 1997 Senior Discount Notes accrete from March 4, 1997 at a rate
of 10 1/2% per year, compounded semi-annually to an aggregate principal amount
of $500 million by March 1, 2002. As of September 30, 1998, the accreted
balance of the 1997 Senior Discount Notes was $352.7 million. Interest will
not accrue on the 1997 Senior Discount Notes prior to March 1, 2002.
Thereafter, interest will accrue at a rate of 10 1/2% per annum and will be
payable in cash semi-annually in arrears on March 1 and September 1 of each
year, commencing September 1, 2002. The 1997 Senior Discount Notes are
redeemable, at the option of the Company, in whole or in part, at any time on
or after March 1, 2002 at 105.25% of their principal amount at maturity, plus
accrued and unpaid interest, declining to 100% of their principal amount at
maturity, plus accrued and unpaid interest, on or after March 1, 2005. In the
event of certain equity investments in the Company by certain strategic
investors on or before March 1, 2000, the Company may, at its option, use all
or a portion of the net proceeds therefrom to redeem up to a maximum of 33
1/3% of the original principal amount of the 1997 Senior Discount Notes at a
redemption price of 110.5% of the accreted value thereof, provided that at
least 66 2/3% of the original principal amount of the 1997 Senior Discount
Notes would remain outstanding after giving effect to such redemption. In
addition, in the event of a Change of Control (as defined in the 1997 Senior
Discount Note Indenture) of the Company, each holder of 1997 Senior Discount
Notes will have the right to require the Company to repurchase all or any part
of such holder's 1997 Senior Discount Notes at a purchase price equal to 101%
of the accreted value thereof prior to March 1, 2002, or 101% of the principal
amount thereof plus accrued and unpaid interest, if any, on or after March 1,
2002. The 1997 Senior Discount Notes will mature on March 1, 2007.
On July 21, 1997, the Company completed the 1997 Senior Note Offering in
which the Company received net proceeds of approximately $217.6 million.
Interest on the 1997 Senior Notes accrues at the rate of 9 1/4% per annum and
is payable in cash semi-annually in arrears on July 15 and January 15,
commencing January 15, 1998. The 1997 Senior Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after July 15,
2002 at 104.625% of their principal amount at maturity, plus accrued and
unpaid interest, declining to 100.000% of their principal amount at maturity,
plus accrued and unpaid interest, on or after July 15, 2005. In the event of
certain equity investments in the Company by certain strategic investors on or
before July 15, 2000, the Company may, at its option, use all or a portion of
the of the net proceeds from such sale to redeem up to 33 1/3% of the original
principal amount of the 1997 Senior Notes at a redemption price equal to
109.25% of the principal amount of the 1997 Senior Notes plus accrued and
unpaid interest thereon, if any, to but excluding the redemption date,
provided that at least 66 2/3% of the original principal amount of the 1997
Senior Notes would remain outstanding immediately after giving effect to such
redemption. In addition, in the event of a Change of Control (as defined in
the 1997 Senior Note Indenture) of the Company, each holder of 1997 Senior
Notes shall have the right to require the Company to repurchase all or any
part of such holder's 1997 Senior Notes at a purchase price equal to 101% of
the principal amount of the 1997 Senior Notes tendered by such holder plus
accrued and unpaid interest, if any, to any Change of Control Payment Date (as
defined in the 1997 Senior Note Indenture). The 1997 Senior Notes will mature
on July 15, 2007.
On March 16, 1998, the Company completed the March 1998 Senior Note Offering
in which the Company received net proceeds of approximately $291.9 million.
Interest on the March 1998 Senior Notes accrues at the rate of 8 3/8% per
annum and is payable in cash semi-annually in arrears on
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March 15 and September 15, commencing September 15, 1998. The March 1998
Senior Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after March 15, 2003 at 104.188% of their principal amount
at maturity, plus accrued and unpaid interest, declining to 100.000% of their
principal amount at maturity, plus accrued and unpaid interest, on or after
March 15, 2006. In the event of certain equity investments in the Company by
certain strategic investors on or before March 15, 2001, the Company may, at
its option, use all or a portion of the net proceeds from such sale to redeem
up to 33 1/3% of the original principal amount of the March 1998 Senior Notes
at a redemption price equal to 108.375% of the principal amount of the March
1998 Senior Notes plus accrued and unpaid interest thereon, if any, to but
excluding the redemption date, provided that at least 66 2/3% of the original
principal amount of the March 1998 Senior Notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event
of a Change of Control (as defined in the March 1998 Senior Note Indenture) of
the Company, each holder of March 1998 Senior Notes shall have the right to
require the Company to repurchase all or any part of such holder's March 1998
Senior Notes at a purchase price equal to 101% of the principal amount of the
March 1998 Senior Notes tendered by such holder plus accrued and unpaid
interest, if any, to any Change of Control Payment Date (as defined in the
March 1998 Senior Note Indenture). The March 1998 Senior Notes will mature on
March 15, 2008.
On October 30, 1998, the Company completed a private offering of the
Outstanding Notes in which the Company received net proceeds of approximately
$291.9 million. Interest on the October 1998 Senior Notes accrues at the rate
of 9 1/2% per annum and is payable in cash semi-annually in arrears on
November 1 and May 1, commencing May 1, 1999. The October 1998 Senior Notes
are redeemable at the option of the Company, in whole or in part, at any time
on or after November 1, 2003 at 106.75% of their principal amount at maturity,
plus accrued and unpaid interest, declining to 100.000% of their principal
amount at maturity, plus accrued and unpaid interest, on or after November 1,
2008. In the event of certain equity investments in the Company by certain
strategic investors on or before November 1, 2001, the Company may, at its
option, use all or a portion of the net proceeds from such sale to redeem up
to 33 1/3% of the original principal amount of the October 1998 Senior Notes
at a redemption price equal to 111.5% of the principal amount of the October
1998 Senior Notes plus accrued and unpaid interest thereon, if any, to but
excluding the redemption date, provided that at least 66 2/3% of the original
principal amount of the October 1998 Senior Notes would remain outstanding
immediately after giving effect to such redemption. In addition, in the event
of a Change of Control (as defined in the October 1998 Indenture) of the
Company, each holder of October 1998 Senior Notes shall have the right to
require the Company to repurchase all or any part of such holder's October
1998 Senior Notes at a purchase price equal to 101% of the principal amount of
the October 1998 Senior Notes tendered by such holder plus accrued and unpaid
interest, if any, to any Change of Control Payment Date (as defined in the
October 1998 Indenture). The October 1998 Senior Notes will mature on November
1, 2008.
The 1997 Senior Discount Notes, the 1997 Senior Notes, the March 1998 Senior
Notes and the October 1998 Senior Notes are senior unsecured obligations of
the Company ranking pari passu in right of payment with all other existing and
future senior unsecured obligations of the Company and senior to all existing
and future subordinated debt of the Company. The 1997 Senior Discount Notes,
the 1997 Senior Notes, the March 1998 Senior Notes and the October 1998 Senior
Notes are effectively subordinated to all existing and future secured
indebtedness of the Company and its subsidiaries to the extent of the value of
the assets securing such indebtedness. The 1997 Senior Discount Notes, the
1997 Senior Notes, the March 1998 Senior Notes and the October 1998 Senior
Notes also are effectively subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's subsidiaries.
The Indentures impose operating and financial restrictions on the Company
and its subsidiaries. These restrictions affect, and in certain cases
significantly limit or prohibit, among other things, the
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ability of the Company and its subsidiaries to incur additional indebtedness,
pay dividends or make distributions in respect of the Company's or such
subsidiaries' capital stock, redeem capital stock, make other restricted
payments, enter into sale and leaseback transactions, create liens upon
assets, enter into transactions with affiliates or related persons, sell
assets, or consolidate, merge or sell all or substantially all of their
assets. There can be no assurance that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interests of the
Company.
Continued expansion of the Company's operations, facilities, network and
services will require significant capital expenditures. As of September 30,
1998, the Company estimated, based on its current business plan and
projections, that its aggregate capital requirements through 2001 will be
approximately $1.1 billion. The Company's estimated capital requirements
include the estimated cost of (i) building the Company's fiber optic network,
including intra-city fiber optic networks, (ii) expanding operations in
existing and new markets, (iii) developing a PCS system and (iv) funding
general corporate expenses. These capital requirements are expected to be
funded, in large part, out of the (i) approximately $291.9 million in net
proceeds from the Offering; (ii) approximately $402.4 million of cash on hand
and short-term investments at September 30, 1998; (iii) a proposed $100.0
million revolving credit facility; and (iv) projected operating cash flows of
the Company.
The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimates, and additional financing
may be required in the event of changes in or expansion of the Company's
business plan and projections, including those that may be caused by
unforeseen delays, cost overruns, engineering design changes, demand for the
Company's services that varies from that expected by the Company, regulatory,
technological, or competitive developments and new opportunities. The Company
may also require additional capital, or require financing sooner than
anticipated, if it changes the schedule or scope of its business plan in
response to such developments or otherwise. The Company expects to evaluate
potential acquisitions, joint ventures and strategic alliances on an ongoing
basis, and may require additional financing if it elects to pursue any such
opportunities. There can be no assurance that the Company will be able to fund
its planned network deployment and operations or achieve operating
profitability with its anticipated capital resources. Furthermore, there can
be no assurance that any additional financing will be available on terms
acceptable to the Company or at all.
The Company's estimate of its 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 Company's actual capital
requirements may differ materially as a result of regulatory, technological
and competitive developments (including new opportunities) in the Company's
industry.
The Company expects to meet its additional capital needs with the proceeds
from credit facilities and other borrowings, and additional debt and equity
issuances. The Company has received a non-binding commitment from The Chase
Manhattan Bank to lead a syndication to provide a senior secured revolving
credit facility. There can be no assurance, however, that the Company will be
successful in obtaining such credit facility on terms acceptable to the
Company or at all, or that the Company will otherwise be successful in
producing sufficient cash flows. Failure to generate or raise sufficient funds
may require the Company to delay or abandon some of its future expansion plans
or expenditures, which could have a material adverse effect on the Company.
See "Risk Factors--Significant Capital Requirements."
Market Risk
At September 30, 1998, marketable equity securities of the Company are
recorded at a fair value of $28.2 million. A hypothetical ten percent adverse
change in quoted market prices would amount to a decrease in the recorded
value of investments of approximately $3 million. The Company believes
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its exposure to market rate fluctuations on all other investments is nominal
due to the short-term nature of its investment portfolio.
The Company has no material future earnings or cash flow exposures from
changes in interest rates on its long-term debt obligations, as substantially
all of the Company's long-term debt obligations are fixed rate obligations.
Year 2000 Date Conversion
The Company is currently verifying system readiness for the processing of
date-sensitive information by the Company's computerized information systems.
The Year 2000 problem impacts computer programs and hardware timers using two
digits (rather than four) to define the applicable year. Some of the Company's
programs and timers that have time-sensitive functions may recognize a date
using "00" as the year 1900 rather than 2000, which could result in
miscalculations or system failures.
The Company is reviewing its IT and non-IT computer systems and programs to
determine which are not capable of recognizing the Year 2000 and to verify
system readiness for the millennium date. The review covers all of the
Company's operations and is centrally managed. The review includes the
following steps:
1. increasing employee awareness and communication of Year 2000 issues
2. inventorying hardware, software and data interfaces and confirming Year
2000 readiness of key vendors
3. identifying mission-critical components for internal systems, vendor
relations and other third parties
4. estimating costs for remediation
5. estimating completion dates
6. remediating any identified problems by correcting or replacing systems
or components
7. testing and verifying systems
8. implementing the remediation plan
9. developing contingency plans
10. training for contingency plans
The Company has completed more than 90% of the activities required for the
completion of the first three of these steps of this review, more than 60% of
the activities required for the fourth and fifth steps and more than 25% of
the activities required for the sixth step. The Company is in the initial
stages of performing the activities required to complete the remaining steps
and has begun to develop contingency plans to handle its most reasonably
likely worst case Year 2000 scenarios.
The Company estimates that its Year 2000 readiness costs will not exceed
$11.5 million. The Company generally expenses these costs as incurred. While
certain costs have been incurred, the Company has not incurred any material
historical costs for remediation. The Company does not expect these costs to
have a material adverse effect on its financial position, results of
operations or cash flows.
The Company's estimate of its Year 2000 readiness costs is a "forward-
looking statement" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Costs, results, performance
and effects of Year 2000 activities described in those forward-looking
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statements may differ materially from actual costs, results, performance and
effects in the future due to the interrelationship and interdependence of the
Company's computer systems and those of its vendors, material service
providers, customers and other third parties.
The Company has not yet fully identified its most reasonably likely worst
case Year 2000 scenarios. The Company continues to contact its vendors,
suppliers and third parties with which it has material relationships,
regarding their state of readiness. This activity is focused primarily on
mission critical systems and key business suppliers. Until the Company has
received and analyzed substantial responses from them it will have difficulty
determining its worst case scenarios.
The Company has begun to develop contingency plans to handle worst case
scenarios, to the extent they can be identified fully. The Company intends to
complete its contingency planning after completing its determination of worst
case scenarios. Completion of these activities depends upon the responses to
the inquiries the Company has made of its major vendors, material service
providers and third parties with which it has material relationships. The
Company has also begun work on contingency plans for certain systems
identified as critical to its operations.
If the Company, its major vendors, its material service providers or its
customers fail to address Year 2000 issues in a timely manner, such failure
could have a material adverse effect on the Company's business, results of
operations and financial condition. The Company depends on local exchange
carriers, primarily the RBOCs, to provide most of its local and some of its
long distance services. To the extent U S WEST, Ameritech or SBC fail to
address Year 2000 issues which might interfere with their ability to fulfill
their obligations to the Company, such interference could have a material
adverse effect on the Company's future operations. If other telecommunications
carriers are unable to resolve Year 2000 issues, it is likely that we will be
affected to a similar degree as others in the telecommunications industry.
Effects of New Accounting Standard
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This
pronouncement is effective for calendar year 1998 financial statements and
requires reporting segment information consistent with the way executive
management of an entity disaggregates its operations internally to assess
performance and make decisions regarding resource allocations. Among
information to be disclosed, SFAS 131 requires an entity to report a measure
of segment profit or loss, certain specific revenue and expense items and
segment assets. SFAS 131 also requires reconciliations of total segment
revenues, total segment profit or loss and total segment assets to the
corresponding amounts shown in the entity's consolidated financial statements.
The Company is in the process of identifying reportable segments and has not
yet determined the effect of implementing SFAS 131.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use and is required to be adopted no later than the Company's 1999
fiscal year. The Company plans to modify its method of capitalization of such
costs by adopting this statement prospectively on January 1, 1999. The Company
is currently evaluating this statement but does not expect it to have a
material impact on its financial condition or results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments embedded
in other contracts) be recorded in the balance sheet as either an
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asset or liability measured at its fair value. SFAS 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for qualifying
hedges allows a derivative's gains and losses to offset related results on the
hedged item in the income statement, and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting.
SFAS 133 is effective for fiscal years beginning after June 15, 1999. A
company may also implement SFAS 133 as of the beginning of any fiscal quarter
after issuance (that is, fiscal quarters beginning June 16, 1998 and
thereafter). SFAS 133 cannot be applied retroactively. SFAS 133 must be
applied to (a) derivative instruments and (b) certain derivative instruments
embedded in hybrid contracts that were issued, acquired or substantively
modified after December 31, 1997 (and, at the company's election, before
January 1, 1998).
The Company does not expect the impact of the adoption of SFAS 133 to be
material to the Company's results of operations as the Company does not
currently hold any derivative instruments or engage in hedging activities.
Inflation
The Company does not believe that inflation has had a significant impact on
the Company's consolidated operations.
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DESCRIPTION OF THE EXCHANGE NOTES
General
The Outstanding Notes were, and the Exchange Notes will be, issued under an
indenture dated as of October 30, 1998 between the Company and United States
Trust Company of New York, as trustee under the October 1998 Indenture (the
"Trustee"). For purposes of this Description of the Exchange Notes, the term
"Company" 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 (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Outstanding Notes and (ii)
Holders of the Exchange Notes will not be entitled to certain rights of
Holders of Outstanding Notes under the Registration Rights Agreement. The
terms of the Exchange Notes include those stated in the October 1998 Indenture
and those made a part of the October 1998 Indenture by reference to the Trust
Indenture Act of 1939 as in effect on the date of the October 1998 Indenture
(the "Trust Indenture Act"). The Exchange Notes are subject to all such terms,
and Holders of the Exchange Notes are referred to the October 1998 Indenture
and the Trust Indenture Act for a complete statement of such terms. A copy of
the October 1998 Indenture is available from the Company on request. The
statements and definitions of terms under this caption relating to the
Exchange Notes and the October 1998 Indenture are summaries and do not purport
to be complete. Such summaries make use of certain terms defined in the
October 1998 Indenture and are qualified in their entirety by express
reference to the October 1998 Indenture. Certain terms used herein are defined
below under "--Certain Definitions."
The Exchange Notes will rank pari passu in right of payment with the 1997
Senior Discount Notes, the 1997 Senior Notes, the March 1998 Senior Notes, the
Outstanding Notes and all other existing and future senior unsecured
indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. As of September
30, 1998, the Company had no outstanding subordinated indebtedness and, other
than the 1997 Senior Discount Notes, the 1997 Senior Notes and the March 1998
Senior Notes, had no outstanding indebtedness that would rank pari passu with
the Exchange Notes. The Exchange Notes will not be secured by any assets and
will be effectively subordinated to any existing and future secured
indebtedness of the Company 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 September 30, 1998, the total secured
indebtedness of the Company and its subsidiaries was approximately $28.4
million.
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company'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 the Company's subsidiaries (including trade payables). As of
September 30, 1998, the total liabilities of the Company's subsidiaries (after
the elimination of loans and advances by the Company to its subsidiaries) were
approximately $246.3 million. Any rights of the Company and its creditors,
including the Holders of Exchange Notes, to participate in the assets of any
of the Company'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).
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Principal, Maturity and Interest
The Exchange Notes will be limited in principal amount to $300 million and
will mature on November 1, 2008. Interest on the Exchange Notes will accrue at
the rate of 9 1/2% per annum and will be payable in cash semi-annually in
arrears on May 1 and November 1 of each year, commencing May 1, 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 the Company, 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 the Company, the Company'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
certain circumstances if certain 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 October 1998 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
October 1998 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
certain 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 under the October
1998 Indenture. None of the Company, the Trustee, any agent of the Company or
the Initial Purchasers will have any responsibility or liability for (i) any
aspect of the Depository's
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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 (ii) any other matter relating to
the actions and practices of the Depository or any of its participants.
The Company 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. The Company 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 October 1998
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 October 1998 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 October 1998 Indenture. The Company understands
that, under existing industry practices, in the event that the Company
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 October 1998 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 the Company 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 the Company 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 of 1934, as amended (the
"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
Purchasers), banks, trust companies, clearing corporations and certain other
organizations some of whom (and/or their representatives) own the Depository.
Access to the Depository's book-
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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 the Company
believes to be reliable, but the Company 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 (i) the Depository notifies the Company
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 Exchange Act, and a successor depository is not appointed
by the Company within 90 days, (ii) the Company executes and delivers to the
Trustee a notice that such Global Security shall be so transferable,
registrable and exchangeable, and such transfer shall be registrable or (iii)
there shall have occurred and be continuing an Event of Default with respect
to the 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, (i) certificated Exchange Notes
will be issued only in fully registered form in denominations of $1,000 or
integral multiples thereof, (ii) 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 the Company maintained for such purposes and (iii) no service
charge will be made for any issuance of the certificated Exchange Notes,
although the Company 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 the
Company, in whole or in part, at any time on or after November 1, 2003 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 November 1 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003.............................................................. 106.750%
2004.............................................................. 105.400%
2005.............................................................. 104.050%
2006.............................................................. 102.700%
2007.............................................................. 101.350%
2008.............................................................. 100.000%
</TABLE>
The Exchange Notes will be redeemable prior to November 1, 2001 only in the
event that the Company receives net proceeds from the sale of its Common Stock
in a Strategic Equity Investment
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on or before November 1, 2001, in which case the Company 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 October 1998 Senior Notes; provided,
that at least 66 2/3% of the originally issued principal amount of the October
1998 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
October 1998 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 111.5% of the principal amount of the October 1998
Senior Notes so redeemed, plus accrued and unpaid interest thereon (if any) to
but excluding the Redemption Date.
If less than all of the October 1998 Senior Notes are to be redeemed, the
Trustee shall select, in such manner as it shall deem fair and appropriate,
the particular October 1998 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," the Company 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 the Company 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, the Company or the Trustee
(at the request and expense of the Company) shall mail a notice to each Holder
stating: (i) 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; (ii) 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; (iii) that any
Exchange Notes or portions thereof not tendered or accepted for payment will
continue to accrue interest; (iv) that, unless the Company defaults in the
payment of the Change of Control Purchase Price, 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; (v) that Holders electing to have any Exchange Notes or portions thereof
purchased pursuant to a Change of Control Offer will be required to surrender
their Exchange Notes prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (vi) 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; (vii) that
Holders electing to have Exchange Notes purchased pursuant to the Change of
Control Offer must specify the principal amount that is being tendered for
purchase, which principal amount must be $1,000 or an integral multiple
thereof; (viii) that 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 (ix) any other information necessary to enable any
Holder to tender Exchange Notes and to have such Exchange Notes purchased
pursuant to the October 1998 Indenture.
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The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws or regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
Exchange Notes pursuant to a Change of Control Offer.
On the Change of Control Payment Date, the Company will (i) accept for
payment Exchange Notes or portions thereof properly tendered pursuant to the
Change of Control Offer; (ii) 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
(iii) 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 the Company 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 certain
conditions, the Company to repurchase Exchange Notes upon a Change of Control
may deter a third party from acquiring the Company in a transaction that
constitutes a Change of Control. If a Change of Control Offer is made, there
can be no assurance that the Company 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 the Company may prohibit the Company from
purchasing any Exchange Notes prior to their Stated Maturity, including
pursuant to a Change of Control Offer. In the event that a Change of Control
Offer occurs at a time when the Company 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 the Company is prohibited
from purchasing the Exchange Notes (and the Company 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 October 1998
Indenture. In addition, one of the events that constitutes a Change of Control
under the October 1998 Indenture is a sale, conveyance, transfer or lease of
all or substantially all of the property of the Company. The October 1998
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 the Company 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 the Company was required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control, the October
1998 Indenture does not contain any other provisions that permit Holders of
Exchange Notes to require that the Company repurchase or redeem Exchange Notes
in the event of a takeover, recapitalization or similar restructuring.
Asset Sales
The Company will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless (i) the Company or such Restricted Subsidiary,
as the case may be, receives consideration for such Asset Sale at least equal
to the Fair Market Value (as evidenced by a Board Resolution delivered to the
Trustee) of the Property or assets sold or otherwise disposed of; (ii) at
least 75% of the consideration received by the Company 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 the
Company or such Restricted Subsidiary (other
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than Indebtedness that is subordinated to the Exchange Notes) and the release
of the Company or the Restricted Subsidiary, as the case may be, from all
liability on the Indebtedness assumed; and (iii) the Company or such
Restricted Subsidiary, as the case may be, uses the Net Cash Proceeds from
such Asset Sale in the manner set forth in the next paragraph.
Within 360 days after any Asset Sale, the Company or such Restricted
Subsidiary, as the case may be, may at its option (i) reinvest an amount equal
to the Net Cash Proceeds (or any portion thereof) from such Asset Sale in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or (ii) apply an amount equal to such Net Cash
Proceeds (or remaining Net Cash Proceeds) to the permanent reduction of
Indebtedness of the Company (other than Indebtedness to a Restricted
Subsidiary) 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, the
Company 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 the Company 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, the Company 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, October 1998 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 October 1998 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 the
Company may then use such amounts for general corporate purposes.
The Company will comply with the requirements of Section 14(e) under the
Exchange Act and any other securities laws or regulations, to the extent such
laws and regulations are applicable, in connection with the repurchase of
October 1998 Senior Notes pursuant to an Asset Sale Offer.
Certain Covenants
Set forth below are certain covenants that are contained in the October 1998
Indenture:
Limitation on Consolidated Indebtedness
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Indebtedness after the Issue Date unless either (a) the ratio of (i)
the aggregate consolidated principal amount of Indebtedness of the Company
outstanding as of the most recent available quarterly or annual balance sheet,
after giving pro forma effect to the Incurrence of such Indebtedness and any
other Indebtedness Incurred since such balance sheet date and the receipt and
application of the proceeds thereof, to (ii) Consolidated Cash Flow Available
for Fixed Charges for the four full fiscal quarters immediately preceding the
Incurrence of such Indebtedness for which consolidated financial statements of
the Company have been filed with the Commission or have otherwise become
publicly available, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been applied at
the beginning of such four fiscal quarters, would be less than 5.5 to 1.0 for
such four-quarter periods ending prior to December 31, 2000 and 5.0 to 1.0 for
such periods ending thereafter, or (b) the Company's Consolidated Capital
Ratio as of the most recent quarterly or annual balance sheet of the Company
that has been filed with the Commission or has otherwise become publicly
available, after giving pro forma effect to (x) the Incurrence of such
Indebtedness and any
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other Indebtedness Incurred since such balance sheet date and (y) paid-in
capital received since such balance sheet date or concurrently with the
Incurrence of such Indebtedness, and in each case the receipt and application
of the proceeds thereof, is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, the Company and any Restricted
Subsidiary may Incur each and all of the following:
(i) Indebtedness under Senior Credit Facilities in an aggregate principal
amount outstanding or available at any one time not to exceed $100 million,
and any renewal, extension, refinancing or refunding thereof in an amount
which, together with any principal amount remaining outstanding or
available under all Senior Credit Facilities, does not exceed the aggregate
principal amount outstanding or available under all Senior Credit
Facilities immediately prior to such renewal, extension, refinancing or
refunding;
(ii) Indebtedness under Qualified Receivable Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed the
greater of (x) $150 million or (y) an amount equal to 85% of net
Receivables determined in accordance with GAAP, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available under all Qualified
Receivable Facilities, does not exceed the aggregate principal amount
outstanding or available under all Qualified Receivable Facilities
immediately prior to such renewal, extension, refinancing or refunding;
(iii) Purchase Money Indebtedness, provided that the amount of such
Purchase Money Indebtedness does not exceed 90% of the cost of the
construction, acquisition or improvement of the applicable
Telecommunications Assets;
(iv) Indebtedness owed by the Company to any Wholly-Owned Restricted
Subsidiary of the Company or Indebtedness owed by a Restricted Subsidiary
of the Company to the Company or a Wholly-Owned Restricted Subsidiary of
the Company; provided that upon either (x) the transfer or other
disposition by such Wholly-Owned Restricted Subsidiary or the Company of
any Indebtedness so permitted to a Person other than the Company or another
Wholly-Owned Restricted Subsidiary of the Company or (y) the issuance
(other than directors' qualifying shares), sale, lease, transfer or other
disposition of shares of Capital Stock (including by consolidation or
merger) of such Wholly-Owned Restricted Subsidiary to a Person other than
the Company or another such Wholly-Owned Restricted Subsidiary, the
provisions of this clause (iv) shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred at
the time of such transfer or other disposition;
(v) Indebtedness Incurred to renew, extend, refinance or refund (each, a
"refinancing") the October 1998 Senior Notes or Indebtedness outstanding at
the date of the October 1998 Indenture or Purchase Money Indebtedness
Incurred pursuant to clause (iii) of this paragraph in an aggregate
principal amount not to exceed the aggregate principal amount of and
accrued interest on the Indebtedness so refinanced plus the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of the Indebtedness so refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase,
plus the expenses of the Company incurred in connection with such
refinancing; provided that Indebtedness the proceeds of which are used to
refinance the October 1998 Senior Notes or Indebtedness which is pari passu
to the October 1998 Senior Notes or Indebtedness which is subordinate in
right of payment to the October 1998 Senior Notes shall only be permitted
under this clause (v) if (A) in the case of any refinancing of the October
1998 Senior Notes or Indebtedness which is pari passu to the October 1998
Senior Notes, the refinancing Indebtedness is made pari passu to the
October 1998 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
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any agreement or instrument pursuant to which such Indebtedness is issued,
(x) does not provide for payments of principal of such Indebtedness at
stated maturity or by way of a sinking fund applicable thereto or by way of
any mandatory redemption, defeasance, retirement or repurchase thereof by
the Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of the acceleration of any payment with respect to such
Indebtedness upon any event of default thereunder), in each case prior to
the time the same are required by the terms of the Indebtedness being
refinanced and (y) does not permit redemption or other retirement
(including pursuant to an offer to purchase made by the Company) of such
Indebtedness at the option of the holder thereof prior to the time the same
are required by the terms of the Indebtedness being refinanced, other than
a redemption or other retirement at the option of the holder of such
Indebtedness (including pursuant to an offer to purchase made by the
Company) which is conditioned upon a change of control pursuant to
provisions substantially similar to those described under "--Repurchase at
the Option of Holders upon a Change of Control;"
(vi) Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
(vii) Indebtedness (A) in respect of performance, surety or appeal bonds
provided in the ordinary course of business or (B) arising from customary
agreements providing for indemnification, adjustment of purchase price for
closing balance sheet changes within 90 days after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred
by any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of the Company for the purpose of financing such
acquisition) and in an aggregate principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; and
(viii) Indebtedness not otherwise permitted to be Incurred pursuant to
clauses (i) through (vii) above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause (viii), has an aggregate
principal amount not in excess of $10 million at any time outstanding.
Notwithstanding any other provision of this "--Certain Covenants--Limitation
on Consolidated Indebtedness" covenant, the maximum amount of Indebtedness
that the Company or a Restricted Subsidiary may Incur pursuant to this "--
Certain 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
"--Certain 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 "--Certain Covenants--Limitation on
Liens" covenant described below shall not be treated as Indebtedness. For
purposes of determining compliance with this "--Certain 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, the Company, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
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Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries
The Company will not permit any Restricted Subsidiary of the Company to
Incur any Indebtedness or issue any Preferred Stock except:
(i) Indebtedness or Preferred Stock outstanding on the date of the
October 1998 Indenture after giving effect to the application of the
proceeds of the October 1998 Senior Notes;
(ii) Indebtedness Incurred or Preferred Stock issued to and held by the
Company or a Wholly-Owned Restricted Subsidiary of the Company (provided
that such Indebtedness or Preferred Stock is at all times held by the
Company or a Wholly-Owned Restricted Subsidiary of the Company);
(iii) Indebtedness Incurred or Preferred Stock issued by a Person prior
to the time (A) such Person became a Restricted Subsidiary of the Company,
(B) such Person merges into or consolidates with a Restricted Subsidiary of
the Company or (C) another Restricted Subsidiary of the Company merges into
or consolidates with such Person (in a transaction in which such Person
becomes a Restricted Subsidiary of the Company), which Indebtedness or
Preferred Stock was not Incurred or issued in anticipation of such
transaction and was outstanding prior to such transaction;
(iv) Indebtedness under a Senior Credit Facility which is permitted to be
outstanding under clause (i) of the second paragraph of "--Certain
Covenants--Limitation on Consolidated Indebtedness;"
(v) in the case of a Restricted Subsidiary that is a Qualified Receivable
Subsidiary, Indebtedness under a Qualified Receivable Facility which is
permitted to be outstanding under clause (ii) of the second paragraph of
"--Certain Covenants--Limitation on Consolidated Indebtedness;"
(vi) Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
(vii) Indebtedness (A) in respect of performance, surety and appeal bonds
provided in the ordinary course of business or (B) arising from customary
agreements providing for indemnification, adjustment of purchase price for
closing balance sheet changes within 90 days after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligation of such Restricted Subsidiary
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of such
Restricted Subsidiary (other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary for the purpose of financing such acquisition) and in
an aggregate principal amount not to exceed the gross proceeds actually
received by such Restricted Subsidiary in connection with such disposition;
(viii) Indebtedness or Preferred Stock which is exchanged for, or the
proceeds of which are used to refinance, refund or redeem, any Indebtedness
or Preferred Stock permitted to be outstanding pursuant to clauses (i) and
(iii) hereof or any extension or renewal thereof (for purposes hereof, a
"refinancing"), in an aggregate principal amount, in the case of
Indebtedness, or with an aggregate liquidation preference in the case of
Preferred Stock, not to exceed the aggregate principal amount of the
Indebtedness so refinanced or the aggregate liquidation preference of the
Preferred Stock so refinanced, plus the amount of any premium required to
be paid in connection with such refinancing pursuant to the terms of the
Indebtedness or Preferred Stock so refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase,
plus the amount of expenses of the Company and the applicable Restricted
Subsidiary Incurred in connection therewith and provided the Indebtedness
or Preferred Stock Incurred or issued upon such refinancing by its terms,
or by the terms of any agreement or instrument
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pursuant to which such Indebtedness or Preferred Stock is Incurred or
issued, (x) does not provide for payments of principal or liquidation value
at the stated maturity of such Indebtedness or Preferred Stock or by way of
a sinking fund applicable to such Indebtedness or Preferred Stock or by way
of any mandatory redemption, defeasance, retirement or repurchase of such
Indebtedness or Preferred Stock by the Company or any Restricted Subsidiary
of the Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement
required by virtue of acceleration of such Indebtedness upon an event of
default thereunder), in each case prior to the time the same are required
by the terms of the Indebtedness or Preferred Stock being refinanced and
(y) does not permit redemption or other retirement (including pursuant to
an offer to purchase made by the Company or a Restricted Subsidiary of the
Company) of such Indebtedness or Preferred Stock at the option of the
holder thereof prior to the stated maturity of the Indebtedness or
Preferred Stock being refinanced, other than a redemption or other
retirement at the option of the holder of such Indebtedness or Preferred
Stock (including pursuant to an offer to purchase made by the Company or a
Restricted Subsidiary of the Company) which is conditioned upon the change
of control of the Company pursuant to provisions substantially similar to
those described 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 the Company,
such Preferred Stock may only be exchanged for or redeemed with Preferred
Stock of such Restricted Subsidiary; and
(ix) Indebtedness Incurred or Preferred Stock issued by a Restricted
Subsidiary, provided that the Fair Market Value of the Company's Investment
in all Restricted Subsidiaries which Incur Indebtedness or issue Preferred
Stock pursuant to this clause (ix) shall not exceed, at any time, $30
million in the aggregate, provided further, that such Indebtedness Incurred
is otherwise permitted pursuant to the covenant described under "--Certain
Covenants--Limitation on Consolidated Indebtedness."
Limitation on Restricted Payments
The Company 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 (i) no Default or
Event of Default shall have occurred and be continuing or shall occur as a
consequence thereof; (ii) after giving effect, on a pro forma basis, to such
Restricted Payment and the incurrence of any Indebtedness the net proceeds of
which are used to finance such Restricted Payment, the Company could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of "--
Certain Covenants--Limitation on Consolidated Indebtedness"; and (iii) after
giving effect to such Restricted Payment on a pro forma basis, the aggregate
amount expended (the amount so expended, if other than cash, to be determined
in good faith by a majority of the disinterested members of the Board of
Directors, whose determination shall be conclusive and evidenced by a
resolution thereof) or declared for all Restricted Payments after the Issue
Date does not exceed the sum of (A) 50% of the Consolidated Net Income of the
Company (or, if Consolidated Net Income shall be a deficit, minus 100% of such
deficit) for the period (taken as one accounting period) beginning on the last
day of the fiscal quarter immediately preceding the Issue Date and ending on
the last day of the fiscal quarter for which the Company's financial
statements have been filed with the Commission or otherwise become publicly
available immediately preceding the date of such Restricted Payment, plus (B)
100% of the net reduction in Investments, subsequent to the Issue Date, in any
Person, resulting from payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of Property (but only to
the extent such interest, dividends, repayments or other transfers of Property
are not included in the calculation of Consolidated Net Income), in each case
to the Company or any Restricted Subsidiary from any Person (including,
without limitation, from Unrestricted Subsidiaries) or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of
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"Investments"), not to exceed in the case of any Person the amount of
Investments previously made subsequent to the Issue Date by the Company or any
Restricted Subsidiary in such Person and which was treated as a Restricted
Payment; provided that the Company or a Restricted Subsidiary of the Company
may make any Restricted Payment with the aggregate net proceeds received after
the date of the October 1998 Indenture, including the fair value of property
other than cash (determined in good faith by the Board of Directors as
evidenced by a resolution of the Board of Directors filed with the Trustee),
(x) as capital contributions to the Company, (y) from the issuance (other than
to a Restricted Subsidiary) of Capital Stock (other than Disqualified Stock)
of the Company and warrants, rights or options on Capital Stock (other than
Disqualified Stock) of the Company, or (z) from the conversion of Indebtedness
of the Company into Capital Stock (other than Disqualified Stock and other
than by a Restricted Subsidiary) of the Company after the date of the October
1998 Indenture.
The foregoing limitations shall not prevent the Company from (i) paying a
dividend on its Capital Stock at any time within 60 days after the declaration
thereof if, on the declaration date, the Company could have paid such dividend
in compliance with the preceding paragraph; (ii) retiring (A) any Capital
Stock of the Company or any Restricted Subsidiary of the Company, (B)
Indebtedness of the Company that is subordinate to the October 1998 Senior
Notes, or (C) Indebtedness of a Restricted Subsidiary of the Company, in
exchange for, or out of the proceeds of the substantially concurrent sale of
Qualified Stock of the Company; (iii) retiring any Indebtedness of the Company
subordinated in right of payment to the October 1998 Senior Notes in exchange
for, or out of the proceeds of, the substantially concurrent incurrence of
Indebtedness of the Company (other than Indebtedness to a Subsidiary of the
Company), provided that such new Indebtedness (A) is subordinated in right of
payment to the October 1998 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; (iv) retiring any Indebtedness of a
Restricted Subsidiary of the Company in exchange for, or out of the proceeds
of, the substantially concurrent incurrence of Indebtedness of the Company or
any Restricted Subsidiary that is permitted under the covenant described under
"--Certain Covenants--Limitation on Consolidated Indebtedness" (in the case of
Indebtedness of the Company) and "--Certain 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 the Company or any Restricted Subsidiary to a greater extent than
the retired Indebtedness was so secured, (B) has an Average Life at least as
long as the retired Indebtedness, and (C) is subordinated in right of payment
to the October 1998 Senior Notes at least to the same extent as the retired
Indebtedness; (v) retiring any Capital Stock or options to acquire Capital
Stock of the Company or any Restricted Subsidiary of the Company held by any
directors, officers or employees of the Company or any Restricted Subsidiary,
provided that the aggregate price paid for all such retired Capital Stock
shall not exceed, in the aggregate, the sum of $2 million plus the aggregate
cash proceeds received by the Company subsequent to the Issue Date from
issuances of Capital Stock or options to acquire Capital Stock by the Company
to directors, officers or employees of the Company and its Subsidiaries; (vi)
making payments or distributions to dissenting stockholders pursuant to
applicable law in connection with a consolidation, merger or transfer of
assets permitted under "--Consolidation, Merger, Conveyance, Lease or
Transfer"; (vii) retiring any Capital Stock of the Company to the extent
necessary (as determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be conclusive and
evidenced by a resolution thereof) to prevent the loss, or to secure the
renewal or reinstatement, of any license or franchise held by the Company or
any Restricted Subsidiary from any governmental agency; (viii) making
Investments in any Person primarily engaged in the Telecommunications
Business; provided, that the aggregate amount of such Investments does not
exceed at any time the sum of (A) $30 million plus (B) the amount of Net Cash
Proceeds received by the Company after the Issue Date as a capital
contribution or from the sale of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the Company, except to the
extent such Net Cash Proceeds are used to make Restricted Payments permitted
pursuant to clauses (x), (y)
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and (z) of the first paragraph, or clause (ii) or this clause (viii) of this
paragraph, of this "Limitation on Restricted Payments" covenant, plus (C) the
net reduction in Investments made pursuant to this clause (viii) resulting
from distributions on or repayments of such Investments or from the Net Cash
Proceeds from the sale of any such Investment (except in each case to the
extent any such payment or proceeds are included in the calculation of
Consolidated Net Income) or from such Person becoming a Restricted Subsidiary
(valued in each case as provided in the definition of "Investment"), provided
that the net reduction in any Investment shall not exceed the amount of such
Investment; and (ix) 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 (ii), (iii) and (iv) of the
foregoing paragraph shall not be included as Restricted Payments.
Not later than the date of making any Restricted Payment (including any
Restricted Payment permitted to be made pursuant to the two previous
paragraphs), the Company shall deliver to the Trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon the Company's latest available financial statements.
Limitation on Liens
The Company may not, and may not permit any Restricted Subsidiary of the
Company to, Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or hereafter acquired to secure any Indebtedness
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the October 1998 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
the Company which is subordinate in right of payment to the October 1998
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: (i) Liens existing on the
date of the October 1998 Indenture and securing Indebtedness outstanding on
the date of the October 1998 Indenture or Incurred on or after the Issue Date
pursuant to any Senior Credit Facility or Qualified Receivable Facility; (ii)
Liens securing Indebtedness in an amount which, together with the aggregate
amount of Indebtedness then outstanding or available under all Senior Credit
Facilities (or under refinancings or amendments of such Senior Credit
Facilities), does not exceed 1.5 times the Company's Consolidated Cash Flow
Available for Fixed Charges for the four full fiscal quarters preceding the
Incurrence of such Lien for which the Company's consolidated financial
statements have been filed with the Commission or become publicly available,
determined on a pro forma basis as if such Indebtedness had been Incurred and
the proceeds thereof had been applied at the beginning of such four fiscal
quarters; (iii) Liens in favor of the Company or any Wholly-Owned Restricted
Subsidiary of the Company; (iv) Liens on Property of the Company or a
Restricted Subsidiary acquired, constructed or constituting improvements made
after the Issue Date of the October 1998 Senior Notes to secure Purchase Money
Indebtedness which is otherwise permitted under the October 1998 Indenture,
provided that (a) the principal amount of any Indebtedness secured by any such
Lien does not exceed 100% of such purchase price or cost of construction or
improvement of the Property subject to such Lien, (b) such Lien attaches to
such property prior to, at the time of or within 180 days after the
acquisition, completion of construction or commencement of operation of such
Property and (c) such Lien does not extend to or cover any Property other than
the specific item of Property (or portion thereof) acquired, constructed or
constituting the improvements made with the proceeds of such Purchase Money
Indebtedness; (v) Liens to secure Acquired Indebtedness, provided that (a)
such Lien attaches to the acquired asset prior to the time of the acquisition
of such asset and (b) such Lien does
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not extend to or cover any other Property; (vi) Liens to secure Indebtedness
Incurred to extend, renew, refinance or refund (or successive extensions,
renewals, refinancings or refundings), in whole or in part, Indebtedness
secured by any Lien referred to in the foregoing clauses (i), (ii), (iv) and
(v) so long as such Lien does not extend to any other Property and the
principal amount of Indebtedness so secured is not increased except as
otherwise permitted under clause (v) of the second paragraph of "--Certain
Covenants--Limitation on Consolidated Indebtedness" (in the case of
Indebtedness of the Company) or clause (viii) of "--Certain Covenants--
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries" (in
the case of Indebtedness of Restricted Subsidiaries); (vii) Liens not
otherwise permitted by the foregoing clauses (i) through (vi) in an aggregate
amount not to exceed 5% of the Company's Consolidated Tangible Assets; (viii)
Liens granted after the Issue Date pursuant to the immediately preceding
paragraph to secure the October 1998 Senior Notes; and (ix) Permitted Liens.
Limitation on Sale and Leaseback Transactions
The Company 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 the Company or a Restricted Subsidiary on
the one hand and a Restricted Subsidiary or the Company on the other hand),
unless (i) the Company or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value (as evidenced by a Board Resolution
delivered to the Trustee) of the Property subject to such transaction; (ii)
the Attributable Indebtedness of the Company or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted by the
covenant described under "--Certain Covenants--Limitation on Consolidated
Indebtedness" or "--Certain Covenants--Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries", as the case may be; (iii) the
Company or such Restricted Subsidiary would be permitted to create a Lien on
such Property without securing the October 1998 Senior Notes by the covenant
described under "--Certain Covenants--Limitation on Liens"; and (iv) the Net
Cash Proceeds from such transaction are applied in accordance with the
covenant described under "--Asset Sales"; provided that the Company shall be
permitted to enter into Sale and Leaseback Transactions for up to $30 million
with respect to construction of the Company's headquarters buildings located
in Cedar Rapids, Iowa, provided that any such transaction is entered into
within 180 days of the earlier of (x) substantial completion or (y) occupation
of the applicable phase of such headquarters building.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
The Company 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 pursuant to law or
regulation) on the ability of any Restricted Subsidiary (i) to pay dividends
or make any other distributions in respect of its Capital Stock or pay any
Indebtedness or other obligation owed to the Company or any Restricted
Subsidiary; (ii) to make loans or advances to the Company or any Restricted
Subsidiary; or (iii) to transfer any of its Property to the Company or any
other Restricted Subsidiary, except: (a) any encumbrance or restriction
existing as of the Issue Date pursuant to the October 1998 Indenture or any
other agreement relating to any Existing Indebtedness or any Indebtedness
under a Qualified Receivable Facility otherwise permitted under the October
1998 Indenture; (b) any encumbrance or restriction pursuant to an agreement
relating to an acquisition of Property, so long as the encumbrances or
restrictions in any such agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted Subsidiary
is acquired by the Company or another Restricted Subsidiary (other than any
such Indebtedness Incurred by such Restricted Subsidiary in connection with or
in anticipation of such acquisition); (d) any encumbrance or restriction
pursuant to an agreement effecting a permitted refinancing of Indebtedness
issued
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pursuant to an agreement referred to in the foregoing clauses (a) through (c),
so long as the encumbrances and restrictions contained in any such refinancing
agreement are not materially more restrictive than the encumbrances and
restrictions contained in such agreements; (e) customary provisions (A) that
restrict the subletting, assignment or transfer of any property or asset that
is a lease, license, conveyance or contract or similar property or asset; (B)
existing by virtue of any transfer of, agreement to transfer, option or right
with respect to, or Lien on, any property or assets of the Company or any
Restricted Subsidiary not otherwise prohibited by the October 1998 Indenture
or (C) arising or agreed to in the ordinary course of business, not relating
to any Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of the Company or any Restricted
Subsidiary in any manner material to the Company or any Restricted Subsidiary;
(f) in the case of clause (iii) above, restrictions contained in any security
agreement (including a Capital Lease Obligation) securing Indebtedness of the
Company or a Restricted Subsidiary otherwise permitted under the October 1998
Indenture, but only to the extent such restrictions restrict the transfer of
the property subject to such security agreement; and (g) any restriction with
respect to a Restricted Subsidiary of the Company imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted
Subsidiary, provided that the consummation of such transaction would not
result in an Event of Default or an event that, with the passing of time or
the giving of notice or both, would constitute an Event of Default, that such
restriction terminates if such transaction is not consummated and that the
consummation or abandonment of such transaction occurs within one year of the
date such agreement was entered into.
Nothing contained in this "--Certain Covenants--Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent the Company or any other Restricted Subsidiary from (1) creating,
incurring, assuming or suffering to exist any Liens otherwise permitted under
the "--Certain Covenants--Limitation on Liens" covenant or (2) restricting the
sale or other disposition of property or assets of the Company or any of its
Restricted Subsidiaries that secure Indebtedness of the Company or any of its
Restricted Subsidiaries otherwise permitted under "--Certain Covenants--
Limitation on Consolidated Indebtedness" or "--Certain 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
The Company (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to the Company or a Wholly-Owned Restricted
Subsidiary unless immediately after giving effect thereto such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any
Investment of the Company or any other Restricted Subsidiary in such
Restricted Subsidiary would have been permitted under "--Certain Covenants--
Limitation on Restricted Payments" if made on the date of such issuance and
(ii) shall not permit any Person other than the Company or a Wholly-Owned
Restricted Subsidiary to own any Capital Stock of any Restricted Subsidiary,
other than directors' qualifying shares and except for: (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 the Company or by a Wholly-Owned Restricted Subsidiary; (c)
Capital Stock of a Restricted Subsidiary issued and outstanding on the Issue
Date and held by Persons other than the Company or any Restricted Subsidiary;
(d) Capital Stock of a Restricted Subsidiary issued and outstanding prior to
the time that such Person becomes a Restricted Subsidiary so long as such
Capital Stock was not issued in anticipation or contemplation of such Person's
becoming a Restricted Subsidiary or otherwise being acquired by the Company;
(e) any Preferred Stock permitted to be issued under "--Certain Covenants--
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries";
and (f) ownership by any Person other than the Company or a Subsidiary
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of less than 50% of the Capital Stock of a Person (A) in which the Company or
a Restricted Subsidiary has made a Permitted Investment pursuant to clause
(iii) of the definition of "Permitted Investments", (B) of which more than 50%
of such Person's Capital Stock is owned, directly or indirectly, by the
Company and (C) as to which the Company has the power to direct the policies,
management and affairs.
Transactions with Affiliates
The Company 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 the Company
or such Restricted Subsidiary than those that would have been obtained in a
comparable arm's-length transaction by the Company or such Restricted
Subsidiary with a Person that is not an Affiliate (or, in the event that there
are no comparable transactions involving Persons who are not Affiliates of the
Company or the relevant Restricted Subsidiary to apply for comparative
purposes, is otherwise on terms that, taken as a whole, the Company has
determined to be fair to the Company or the relevant Restricted Subsidiary)
and (b) the Company delivers to the Trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1 million, a
certificate of the chief executive, operating or financial officer of the
Company evidencing such officer's determination that such Affiliate
Transaction or series of Affiliate Transactions complies with clause (a) above
and is in the best interests of the Company or such Restricted Subsidiary and
(ii) with respect to any Affiliate Transaction or series of Affiliate
Transactions involving aggregate payments in excess of $5 million, a Board
Resolution certifying that such Affiliate Transaction or series of Affiliate
Transactions complies with clause (a) above and that such Affiliate
Transaction or series of Affiliate Transactions has been approved by a
majority of the disinterested members of the Board of Directors who have
determined that such Affiliate Transaction or series of Affiliate Transactions
is in the best interest of the Company or such Restricted Subsidiary; provided
that the following shall not be deemed Affiliate Transactions: (i) any
employment agreement entered into by the Company or any of its Restricted
Subsidiaries in the ordinary course of business and consistent with industry
practice; (ii) any agreement or arrangement with respect to the compensation
of a director or officer of the Company or any Restricted Subsidiary approved
by a majority of the disinterested members of the Board of Directors and
consistent with industry practice; (iii) transactions between or among the
Company and its Restricted Subsidiaries; (iv) transactions permitted by the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments"; (v) transactions pursuant to any agreement or arrangement existing
on the Issue Date; and (vi) transactions with respect to wireline or wireless
transmission capacity, the lease or sharing or other use of cable or
fiberoptic lines, equipment, rights-of-way or other access rights, between the
Company or any Restricted Subsidiary and any other Person; provided, in any
case, that such transaction is on terms that are no less favorable, taken as a
whole, to the Company or the relevant Restricted Subsidiary than those that
could have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with Persons who are not Affiliates of the Company or
the relevant Restricted Subsidiary (or, in the event that there are no
comparable transactions involving Persons who are not Affiliates of the
Company or the relevant Restricted Subsidiary to apply for comparative
purposes, is otherwise on terms that, taken as a whole, the Company has
determined to be fair to the Company or the relevant Restricted Subsidiary).
Restricted and Unrestricted Subsidiaries
(a) The Company may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of the Company or any of its Restricted
Subsidiaries as an Unrestricted Subsidiary if such
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Subsidiary does not have any obligations which, if in Default, would result in
a cross default on Indebtedness of the Company or a Restricted Subsidiary
(other than Indebtedness to the Company or a Wholly-Owned Restricted
Subsidiary), and (i) such Subsidiary has total assets of $1,000 or less, (ii)
such Subsidiary has assets of more than $1,000 and an Investment in such
Subsidiary in an amount equal to the Fair Market Value of such Subsidiary
would then be permitted under the first paragraph of "--Certain 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 the Company
or any of its Restricted Subsidiaries shall be classified as a Restricted
Subsidiary thereof.
(b) The Company 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 the
Company or a Restricted Subsidiary) at the date of determination) becoming a
Restricted Subsidiary (whether through an acquisition, the redesignation of an
Unrestricted Subsidiary or otherwise) unless, after giving effect to such
action, transaction or series of transactions, on a pro forma basis, (i) the
Company could incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of "--Certain 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
The Company has agreed that, for so long as any October 1998 Senior Notes
remain outstanding, it will furnish to the Holders of the October 1998 Senior
Notes and to securities analysts and prospective investors, upon their
request, the information required to be delivered pursuant to Rule 144A(d)(4)
under the Securities Act. The Company will file with the Trustee within 15
days after it files them with the Commission copies of the annual and
quarterly reports and the information, documents, and other reports that the
Company is required to file with the Commission pursuant to Section 13(a) or
15(d) of the Exchange Act ("SEC Reports"). In the event the Company shall
cease to be required to file SEC Reports pursuant to the Exchange Act, the
Company will nevertheless continue to file such reports with the Commission
(unless the Commission will not accept such a filing) and the Trustee. The
Company will furnish copies of the SEC Reports to the Holders of October 1998
Senior Notes at the time the Company is required to file the same with the
Trustee and will make such information available to investors who request it
in writing.
Consolidation, Merger, Conveyance, Lease or Transfer
The Company 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 the Company (other than a merger of a Restricted
Subsidiary into the Company in which the Company is the continuing
corporation), or sell, convey, assign, transfer, lease or otherwise dispose of
all or substantially all of the Property and assets of the Company and the
Restricted Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) the Company shall be the continuing corporation or (b) the
corporation (if other than the Company) formed by such consolidation or
into which the Company is merged, or the
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Person which acquires, by sale, assignment, conveyance, transfer, lease or
disposition, all or substantially all of the Property and assets of the
Company 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 October 1998 Senior Notes and the performance of the Company's
covenants and obligations under the October 1998 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), the Company (or
the Surviving Entity, if the Company is not continuing) would (A) be
permitted to Incur at least $1.00 of additional Indebtedness pursuant to
the first paragraph of "--Certain Covenants--Limitation on Consolidated
Indebtedness" and (B) have a Consolidated Net Worth that is not less than
the Consolidated Net Worth of the Company immediately before such
transaction or series of transactions; and
(iv) if, as a result of any such transaction, Property of the Company
would become subject to a Lien prohibited by the provisions of the October
1998 Indenture described under "--Certain Covenants--Limitation on Liens"
above, the Company or the successor entity to the Company shall have
secured the October 1998 Senior Notes as required thereby.
Events of Default
Each of the following is an "Event of Default" under the October 1998
Indenture:
(a) default in the payment of interest on any October 1998 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 October 1998 Senior Note at its maturity, upon optional redemption,
required repurchase (including pursuant to a Change of Control Offer or an
Asset Sale Offer) or otherwise or the failure to make an offer to purchase
any October 1998 Senior Note as required;
(c) the Company fails 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
the Company in the October 1998 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 the Company by the Trustee or to the Company and the Trustee
by Holders of at least 25% of the aggregate principal amount of the
outstanding October 1998 Senior Notes;
(e) Indebtedness of the Company 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 the Company 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;
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(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of the Company or any Restricted
Subsidiary 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 the Company 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
the Company 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
the Company or any Restricted Subsidiary or of any substantial part of the
Property or assets of the Company or any Restricted Subsidiary, or ordering
the winding up or liquidation of the affairs of the Company 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 the Company 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 the Company or any Restricted Subsidiary to the entry of a decree or
order for relief in respect of the Company 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 the Company or any
Restricted Subsidiary; or (iii) the filing by the Company 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 the Company 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 the Company or any Restricted
Subsidiary or of any substantial part of the Property or assets of the
Company or any Restricted Subsidiary, or the making by the Company or any
Restricted Subsidiary of an assignment for the benefit of creditors; or (v)
the admission by the Company or any Restricted Subsidiary in writing of its
inability to pay its debts generally as they become due; or (vi) the taking
of corporate action by the Company or any Restricted Subsidiary 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 October 1998 Senior Notes may declare the Default Amount
(as defined herein) and any accrued and unpaid interest on all October 1998
Senior Notes then outstanding to be immediately due and payable by a notice in
writing to the Company (and to the Trustee if given by Holders of the October
1998 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 October 1998 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 October 1998 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 October 1998 Senior
Notes has been obtained by the Trustee. The Default Amount shall equal 100% of
the principal amount of the October 1998 Senior Notes. Under certain
circumstances, the Holders of a
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majority in principal amount of the outstanding October 1998 Senior Notes by
notice to the Company and the Trustee may rescind an acceleration and its
consequences.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the October 1998 Indenture, and the Company 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 the Company is taking or proposes
to take with respect thereto. The Trustee may withhold from Holders of the
October 1998 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
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any Holder of October 1998 Senior Notes, enter into
one or more indentures supplemental to the October 1998 Indenture (1) to
evidence the succession of another Person to the Company and the assumption by
such successor of the covenants of the Company in the October 1998 Indenture
and the October 1998 Senior Notes; (2) to add to the covenants of the Company,
for the benefit of the Holders, or to surrender any right or power conferred
upon the Company by the October 1998 Indenture; (3) to add any additional
Events of Default; (4) to provide for uncertificated October 1998 Senior Notes
in addition to or in place of certificated October 1998 Senior Notes; (5) to
evidence and provide for the acceptance of appointment under the October 1998
Indenture of a successor Trustee; (6) to secure the October 1998 Senior Notes;
(7) to cure any ambiguity in the October 1998 Indenture, to correct or
supplement any provision in the October 1998 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 October 1998 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
Commission in order to effect or maintain the qualification of the October
1998 Indenture under the Trust Indenture Act.
With the consent of the Holders of not less than a majority in principal
amount of the outstanding October 1998 Senior Notes, the Company and the
Trustee may enter into one or more indentures supplemental to the October 1998
Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the October 1998 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 October 1998 Senior Note: (1) change the Stated Maturity of the
principal of, or any installment of interest on, any October 1998 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 October 1998 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 October 1998 Senior
Notes, the consent of whose Holders is necessary for any such supplemental
indenture or required for any waiver of compliance with certain provisions of
the October 1998 Indenture or certain Defaults thereunder; (3) subordinate in
right of payment, or otherwise subordinate, the October 1998 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 October 1998 Senior Notes may, on behalf of the Holders of all the
October 1998 Senior Notes, waive any past Default under the October 1998
Indenture and its consequences, except a Default (1) in the payment of the
principal of (or premium, if any) or interest on any October 1998 Senior Note,
or (2) in respect
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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 October 1998 Senior Note affected.
Satisfaction and Discharge of the Indenture; Defeasance
The Company may terminate its obligations under the October 1998 Indenture
when (i) either (A) all outstanding October 1998 Senior Notes have been
delivered to the Trustee for cancellation or (B) all such October 1998 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 the Company, and the Company 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 October
1998 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) the Company has paid or caused to be
paid all sums payable by the Company under the October 1998 Indenture; and
(iii) the Company has delivered an Officers' Certificate and an Opinion of
Counsel relating to compliance with the conditions set forth in the October
1998 Indenture.
The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the October 1998 Senior Notes and the October 1998
Indenture shall cease to be of further effect as to all outstanding October
1998 Senior Notes (except as to (i) rights of registration of transfer,
substitution and exchange of October 1998 Senior Notes and the Company's right
of optional redemption, (ii) rights of Holders to receive payments of
principal of, premium, if any, and interest on the October 1998 Senior Notes
(but not the Change of Control Purchase Price or the Offer Purchase Price) and
any rights of the Holders with respect to such amounts, (iii) the rights,
obligations and immunities of the Trustee under the October 1998 Indenture and
(iv) certain other specified provisions in the October 1998 Indenture) or (b)
cease to be under any obligation to comply with certain restrictive covenants
including those described under "--Certain Covenants," after the irrevocable
deposit by the Company with the Trustee, in trust for the benefit of the
Holders, at any time prior to the maturity of the October 1998 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 October 1998 Senior Notes, money in
an amount, or (C) a combination thereof, sufficient to pay and discharge the
principal of, and interest on, the October 1998 Senior Notes then outstanding
on the dates on which any such payments are due in accordance with the terms
of the October 1998 Indenture and of the October 1998 Senior Notes. Such
defeasance or covenant defeasance shall be deemed to occur only if certain
conditions are satisfied, including, among other things, delivery by the
Company 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) the Company'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 October
1998 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 October 1998 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 certain exceptions. Except during the
continuance of an Event of Default, the Trustee will perform only such duties
as are specifically set forth in the October 1998 Indenture. The October 1998
Indenture provides that in case an Event of
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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 October 1998
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 October
1998 Indenture at the request of any of the Holders of the October 1998 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 the Company, as such, shall have any liability for any
covenant, agreement or other obligations of the Company under the October 1998
Senior Notes or the October 1998 Indenture or for any claim based on, in
respect of, or by reason of, such obligations or their creation, solely by
reason of its past, present or future status as a controlling Person,
director, officer, employee, incorporator or stockholder of the Company. By
accepting a October 1998 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 October 1998 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 Commission that such a waiver is against
public policy.
Transfer and Exchange
The Outstanding Notes are subject to certain restrictions on transfer. A
Holder may transfer or exchange October 1998 Senior Notes in accordance with
the October 1998 Indenture. The Company, the Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the October 1998 Indenture.
Exchange Offer; Registration Rights
The Company entered into the Registration Rights Agreement with the Initial
Purchasers, for the benefit of the holders of Outstanding Notes, pursuant to
which the Company agreed to file the Registration Statement (of which this
Prospectus constitutes a part) with the Commission. The Registration Rights
Agreement provides that the Company 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 the Closing Date (as defined in the Purchase
Agreement among the Company and the Initial Purchasers attached as an exhibit
to the Registration Statement of which this Prospectus is a part). Upon the
effectiveness of the Registration Statement, the Company will offer the
Exchange Notes in exchange for surrender of the Outstanding Notes. The Company
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 the Company 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 Commission interpretations, the Exchange Notes would be freely
transferable by holders other than affiliates of the Company 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 the Company, as such terms
are interpreted by the Commission; provided that broker-dealers that acquired
Outstanding Notes as a result of market-making or other trading activities or
directly from the Company 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
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such Exchange Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to Exchange Notes with this Prospectus under certain circumstances. Under the
Registration Rights Agreement, the Company 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 certain 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 the Company, as defined in Rule 405 of
the Securities Act, or if it is an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
The Company 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 Commission do not permit
the Company 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, the Company has agreed, at its cost, (a) as promptly as
practicable, to file a shelf registration statement (the "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. The Company 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
certain 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 certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations).
If (i) within 150 days after October 30, 1998 (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 certain 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
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occurrence of any Registration Default and shall increase by 0.25% per annum
at the end of each subsequent 90-day period, but in no event shall such rate
exceed 2.00% per annum in the aggregate regardless of the number of
Registration Defaults.
The summary herein of certain provisions of the Registration 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.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
October 1998 Indenture. Reference is made to the October 1998 Indenture for
the full definition of all such terms, as well as any capitalized terms used
herein for which no definition is provided.
"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 the Company and of each other Subsidiary of the Company;
provided, further, that neither the Company nor any of its Restricted
Subsidiaries shall be deemed to be Affiliates of each other. For purposes of
this definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise.
"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
October 1998 Indenture described above under "--Certain 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 October 1998
Indenture applicable to consolidations, mergers, and transfers of all or
substantially all of the assets of the Company; provided that "Asset Sale"
shall not include (i) sales or other dispositions of inventory, receivables
and other current assets in the ordinary course of business, (ii) simultaneous
exchanges by the Company or any Restricted Subsidiary of Telecommunications
Assets for other Telecommunications Assets in the ordinary course of business;
provided that the applicable Telecommunications Assets received by the Company
or such Restricted Subsidiary have at least substantially equal Fair Market
Value to the Company or such Restricted Subsidiary (as determined by the Board
of Directors whose good faith
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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 fund
or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (y) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board of Directors.
"Board Resolution" means a duly adopted resolution of the Board of Directors
in full force and effect at the time of determination.
"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 the Company to
any "Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2)
of the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing
of securities within the meaning of Rule 13d-5(b)(i) under the Exchange Act),
other than any Permitted Holder (as defined below) or any Restricted
Subsidiary of the Company, shall have occurred; (ii) any "Person" or "group"
(within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or
any successor provision to either of the foregoing, including any group acting
for the purpose of acquiring, holding or disposing of securities within the
meaning of Rule 13d-5(b)(i) under the Exchange Act), other than any Permitted
Holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of more than 35% of the total voting power of all classes of the
Voting Stock of the Company (including any warrants, options or rights to
acquire such Voting Stock), calculated on a fully diluted basis, and such
voting power percentage is greater than or equal to the total voting power
percentage then beneficially owned by the Permitted Holders in the aggregate;
or (iii) during any period of two
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consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (together with any directors whose election or
appointment by the Board of Directors or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office.
"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 the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii)
Consolidated Income Tax Expense of the Company and its Restricted Subsidiaries
for such period, plus (iii) the consolidated depreciation and amortization
expense included in the income statement of the Company and its Restricted
Subsidiaries for such period, plus (iv) any non-cash expense related to the
issuance to employees of the Company or any Restricted Subsidiary of the
Company of options to purchase Capital Stock of the Company or such Restricted
Subsidiary, plus (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity; and plus (vi) any non-cash expense related to a purchase accounting
adjustment not requiring an accrual or reserve and separately disclosed in the
Company's Consolidated Income Statement, and decreased by the amount of any
non-cash item that increases such Consolidated Net Income, all as determined
on a consolidated basis in accordance with GAAP; provided that there shall be
excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if
positive) of any Restricted Subsidiary of the Company (calculated separately
for such Restricted Subsidiary in the same manner as provided above for the
Company) that is subject to a restriction which prevents the payment of
dividends or the making of distributions to the Company or another Restricted
Subsidiary of the Company to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate amounts
of the provisions for income taxes of the Company and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of), (i) the amortization of Indebtedness
discount; (ii) any payments or fees with respect to letters of credit,
bankers' acceptances or similar facilities; (iii) fees with respect to
interest rate swap or similar agreements or foreign currency hedge, exchange
or similar agreements; (iv) Preferred Stock dividends of the Company and its
Restricted Subsidiaries (other than dividends paid in shares of Preferred
Stock that is not Disqualified Stock) declared and paid or payable; (v)
accrued Disqualified Stock dividends of the Company and its Restricted
Subsidiaries, whether or not declared or paid; (vi) interest on Indebtedness
guaranteed by the Company and its Restricted Subsidiaries; and (vii) the
portion of any Capital Lease Obligation paid during such period that is
allocable to interest expense in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for
such period on a consolidated basis determined in accordance with GAAP;
provided that there shall be excluded therefrom, without duplication (i) all
items classified as extraordinary, (ii) any net income (or net loss) of any
Person other
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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.
"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 October 1998 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 Exchange Act, or such successor as the Company shall
designate from time to time in an Officers' Certificate delivered to the
Trustee.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, prior to the Stated Maturity of
the October 1998 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,
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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
October 1998 Indenture (other than under any Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
Board of Directors.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the October 1998 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 October 1998 Senior Note,
the Person in whose name such certificated October 1998 Senior Note is
registered in the Note Register and (ii) in the case of any Global October
1998 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 the Company (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 the Company.
"Indebtedness" means, at any time (without duplication), with respect to any
Person, whether recourse as to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for money
borrowed, (ii) any obligation of such Person evidenced by bonds, debentures,
notes, Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with the acquisition of Property,
assets or businesses, excluding trade accounts payable made in the ordinary
course of business, (iii) any reimbursement obligation of such Person with
respect to letters of credit, bankers' acceptances or similar facilities
issued for the
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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
October 1998 Indenture; provided that, if such Disqualified Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Disqualified Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent obligations, the maximum
liability upon the occurrence of the contingency giving rise to the
obligation; provided that the amount outstanding at any time of any
Indebtedness issued with original issue discount (including, without
limitation, the 1997 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 October 1998 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).
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"Maturity" means, when used with respect to a October 1998 Senior Note, the
date on which the principal of such October 1998 Senior Note becomes due and
payable as provided therein or in the October 1998 Indenture, whether on the
date specified in such October 1998 Senior Note as the fixed date on which the
principal of such October 1998 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 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 October 1998
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 the Company and delivered to the Trustee, which shall
comply with the October 1998 Indenture.
"Paying Agent" means any Person authorized by the Company to make payments
of principal, premium or interest with respect to the October 1998 Senior
Notes on behalf of the Company.
"Permitted Holders" means IES Industries Inc. and MidAmerican Energy
Holdings Company and their respective successors and assigns, and Clark E. and
Mary E. McLeod and foundations and trusts controlled by them or either of
them, and Affiliates (other than the Company and the Restricted Subsidiaries)
of each of the foregoing.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the
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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 October 1998 Indenture; (iv)
Investments pursuant to agreements or obligations of the Company or a
Restricted Subsidiary, in effect on the Issue Date, to make such Investments;
(v) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and other
similar deposits; (vi) Permitted Interest Rate or Currency Protection
Agreements with respect to any floating rate Indebtedness that is permitted by
the terms of the October 1998 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 the Company or of any Restricted
Subsidiary.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor; (ii) other Liens incidental to the conduct of the
Company's and its Restricted Subsidiaries' business or the ownership of its
property and assets not securing any Indebtedness, and which do not in the
aggregate materially detract from the value of the Company's and its
Restricted Subsidiaries' property or assets when taken as a whole, or
materially impair the use thereof in the operation of its business; (iii)
Liens with respect to assets of a Restricted Subsidiary granted by such
Restricted Subsidiary to the Company to secure Indebtedness owing to the
Company; (iv) pledges and deposits made in the ordinary course of business in
connection with workers' compensation and unemployment insurance, statutory
Liens of landlords, carriers, warehousemen, mechanics, materialmen, repairmen
and other types of statutory obligations; (v) deposits made to secure the
performance of tenders, bids, leases, and other obligations of like nature
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (vi) zoning restrictions, servitudes, easements,
rights-of-way, restrictions and other similar charges or encumbrances incurred
in the ordinary course of business which, in the aggregate, do not materially
detract from the value of the property subject thereto or interfere with the
ordinary conduct of the business of the Company or its Restricted
Subsidiaries; (vii) Liens arising out of judgments or awards against the
Company or any Restricted Subsidiary with respect to which the Company or such
Restricted Subsidiary is prosecuting an appeal or proceeding for review and
the Company or such Restricted Subsidiary is maintaining adequate reserves in
accordance with GAAP; (viii) any interest or title of a lessor in the property
subject to any lease other than a Capital Lease; (ix) Liens (including
extensions and renewals thereof) upon real or personal property acquired after
the Issue Date; provided that (a) such Lien is created solely for the purpose
of securing Indebtedness Incurred, in accordance with "--Certain 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
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cover any property or assets other than such item of property or assets and
any improvements on such item; (x) leases or subleases granted to others that
do not materially interfere with the ordinary course of business of the
Company and its Restricted Subsidiaries; (xi) Liens encumbering property or
assets under construction arising from progress or partial payments by a
customer of the Company or its Restricted Subsidiaries relating to such
property or assets; (xii) Liens arising from filing precautionary Uniform
Commercial Code financing statements regarding leases; (xiii) Liens on
property of, or on shares of stock or Indebtedness of, any corporation
existing at the time such corporation becomes, or becomes a part of, any
Restricted Subsidiary; provided that such Liens do not extend to or cover any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets acquired; (xiv) Liens in favor of the Company or any
Restricted Subsidiary; (xv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof;
(xvi) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the importation of
goods; (xvii) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are either within the general parameters
customary in the industry and incurred in the ordinary course of business, in
each case, securing Indebtedness under Permitted Interest Rate Agreements and
Currency Agreements; and (xviii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of the Company and
its Restricted Subsidiaries prior to the Issue Date.
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"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 the Company (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
the Company or any Restricted Subsidiary of any Telecommunications Assets of
the Company or any Restricted Subsidiary and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Qualified Receivable Facility" means Indebtedness of the Company or any
Subsidiary Incurred from time to time pursuant to either (x) credit facilities
secured by Receivables or (y) receivable purchase facilities, and including
any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed
solely for the purpose of obtaining a Qualified Receivable Facility and
substantially all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
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"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 the Company or to the Company's stockholders (in
their capacity as such), or declared or paid to any Person other than the
Company or a Restricted Subsidiary of the Company on the Capital Stock of any
Restricted Subsidiary of the Company, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of the Company or
such Restricted Subsidiary, (ii) a payment made by the Company or any of its
Restricted Subsidiaries (other than to the Company or any Restricted
Subsidiary) to purchase, redeem, acquire or retire any Capital Stock of the
Company or of a Restricted Subsidiary, (iii) a payment made by the Company or
any of its Restricted Subsidiaries (other than a payment made solely in
Qualified Stock of the Company) to redeem, repurchase, defease (including an
in-substance or legal defeasance) or otherwise acquire or retire for value
(including pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment, Indebtedness
of the Company or such Restricted Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the
October 1998 Senior Notes and which was scheduled to mature on or after the
maturity of the October 1998 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 the Company in a Wholly-Owned Restricted Subsidiary or (c) an
Investment by a Restricted Subsidiary in the Company or a Wholly-Owned
Restricted Subsidiary of the Company.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated as an "Unrestricted Subsidiary."
"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 the Company and its
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to the
Company and its Subsidiaries, whether or not secured, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"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 the Company in an aggregate amount of not less than $25 million.
"Strategic Investor" means a Person (other than the Permitted Holders)
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial Investment in the Company in excess
of $2 billion.
"Subordinated Indebtedness" means Indebtedness of the Company as to which
the payment of principal of (and premium, if any) and interest and other
payment obligations in respect of such
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Indebtedness shall be subordinate to the prior payment in full of the October
1998 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 October 1998
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 October 1998 Senior Notes, upon notice by
25% or more in principal amount of the October 1998 Senior Notes to the
Trustee, the Trustee shall give notice to the Company and the holders of such
Indebtedness (or trustees or agents therefor) of a payment blockage, and
thereafter no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be made for a period of 179
days from the date of such notice; and (iii) such Indebtedness may not (x)
provide for payments of principal of such Indebtedness at the stated maturity
thereof or by way of a sinking fund applicable thereto or by way of any
mandatory redemption, defeasance, retirement or repurchase thereof by the
Company (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Indebtedness upon an event of default
thereunder), in each case prior to the final Stated Maturity of the October
1998 Senior Notes or (y) permit redemption or other retirement (including
pursuant to an offer to purchase made by the Company) of such other
Indebtedness at the option of the holder thereof prior to the final Stated
Maturity of the October 1998 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 the Company) which is conditioned
upon a change of control of the Company 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 the Company's repurchase of
the October 1998 Senior Notes required to be repurchased by the Company
pursuant to the provisions described under "--Repurchase at the Option of
Holders upon a Change of Control").
"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 the Company's manner of business on the Issue Date), and
shall, in any event, include all businesses in which the Company or any of its
Subsidiaries are engaged on the Issue Date; provided that the determination of
what constitutes a Telecommunications Business shall be made in good faith by
the Board of Directors.
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"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 the Company that the
Company has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the October
1998 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.
"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.
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OTHER INDEBTEDNESS
On March 4, 1997, the Company completed an offering of $500 million
aggregate principal amount at maturity of 1997 Senior Discount Notes. The 1997
Senior Discount Notes were priced at a discount and the Company received net
proceeds of approximately $288.9 million from the offering of the 1997 Senior
Discount Notes. The 1997 Senior Discount Notes will accrete to an aggregate
principal amount of $500 million by March 1, 2002. Interest will not accrue on
the 1997 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. The 1997 Senior Discount Notes rank pari passu in right of
payment with the 1997 Senior Notes, the March 1998 Senior Notes and the
October 1998 Senior Notes. The 1997 Senior Discount Notes will mature on March
1, 2007 and will be payable prior to the maturity of the 1997 Senior Notes,
the March 1998 Senior Notes and the October 1998 Senior Notes.
On July 21, 1997, the Company completed an offering of $225 million
principal amount of 1997 Senior Notes. The Company received net proceeds of
approximately $217.6 million from the offering of the 1997 Senior Notes. The
1997 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. The 1997 Senior Notes rank pari passu in
right of payment with the 1997 Senior Discount Notes, the March 1998 Senior
Notes and the October 1998 Senior Notes. The 1997 Senior Notes will mature on
July 15, 2007 and will be payable prior to the maturity of the March 1998
Senior Notes and the October 1998 Senior Notes.
On March 16, 1998, the Company completed an offering of $300 million
principal amount of March 1998 Senior Notes. The Company received net proceeds
of approximately $291.9 million from the offering of the March 1998 Senior
Notes. The March 1998 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. The March 1998
Senior Notes rank pari passu in right of payment with the 1997 Senior Discount
Notes, the 1997 Senior Notes and the October 1998 Senior Notes. The March 1998
Senior Notes will mature on March 15, 2008 and will be payable prior to the
maturity of the October 1998 Senior Notes.
The Indentures impose operating and financial restrictions on the Company
and its subsidiaries that are substantially the same as the restrictions
governing the October 1998 Senior Notes. These restrictions affect, and in
certain cases significantly limit or prohibit, among other things, the ability
of the Company and its subsidiaries to incur additional indebtedness, pay
dividends or make distributions in respect of the Company's or such
subsidiaries' capital stock, make other restricted payments, enter into sale
and leaseback transactions, create liens upon assets, enter into transactions
with affiliates or related persons, sell assets, or consolidate, merge or sell
all or substantially all of their assets. There can be no assurance that such
covenants will not adversely affect the Company's ability to finance its
future operations or capital needs or to engage in other business activities
that may be in the interest of the Company.
The Company has received a non-binding commitment from The Chase Manhattan
Bank to lead a syndication to provide the Proposed Revolving Credit Facility
to a newly formed, wholly owned subsidiary of the Company (the "Borrower").
The Proposed Revolving Credit Facility would be guaranteed by the Company and
all of its subsidiaries and would be secured by a first priority lien on all
current and future assets and properties of the Company or Borrower and such
subsidiaries and by a first priority pledge of the stock of the Borrower and
such subsidiaries. One of the covenants in the Proposed Revolving Credit
Facility would restrict the Company's ability to prepay, redeem or purchase
debt and one of the events of default would be the occurrence of a default
with respect to other indebtedness of the Borrower or the Company. The
Borrower would be obligated to pay interest
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and fees with respect to the Proposed Revolving Credit Facility at the rates
and in the amounts specified in such commitment. It is expected 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. There can be no assurance however that the Company
will complete the Proposed Revolving Credit Facility on acceptable terms or at
all.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to 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. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on
the first anniversary of the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the 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 pursuant to 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, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Company has agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the holders of the 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 certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the Exchange Notes offered hereby are being passed upon for
the Company by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
the Company. Certain legal matters relating to the Offering were passed upon
for the Initial Purchasers by Mayer, Brown & Platt, Chicago, Illinois.
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EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
ended December 31, 1997, incorporated by reference in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm
as experts in giving said reports.
The consolidated financial statements of Consolidated Communications Inc. as
of December 31, 1996 and 1995, and for each of the three years ended December
31, 1996 incorporated by reference in this Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are incorporated by reference herein
in reliance upon the authority of said firm as experts in giving said reports.
CHANGES IN ACCOUNTANTS
On March 27, 1997, the Company engaged the accounting firm of Arthur
Andersen LLP as the Company's principal independent accountants to replace
McGladrey & Pullen, LLP, the Company's former independent accountants,
effective with such engagement. The decision to change independent accountants
was made following a review of competitive proposals submitted by Arthur
Andersen LLP and two other major public accounting firms, and was recommended
by the Audit Committee of the Board of Directors and approved by the Board.
McGladrey & Pullen, LLP did not resign and did not decline to stand for re-
election. During the Company's two fiscal years ended December 31, 1995 and
December 31, 1996 and during the interim period prior to the engagement of
Arthur Andersen LLP, there have been no consultations with the newly engaged
accountants with regard to either the application of accounting principles as
to any specific transaction, either completed or proposed; the type of audit
opinion that would be rendered on the Company's financial statements; or any
matter of disagreement with the former accountants.
During the two fiscal years ended December 31, 1996 and 1995, and the
interim period subsequent to December 31, 1996, there have been no
disagreements with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused McGladrey & Pullen, LLP to make reference in
their report to such disagreements if not resolved to their satisfaction.
McGladrey & Pullen, LLP's reports on the financial statements of the Company
for the fiscal years ended December 31, 1996 and 1995 have contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles.
The Company has provided McGladrey & Pullen, LLP with a copy of this
disclosure and requested that McGladrey & Pullen, LLP furnish it with a letter
addressed to the Commission stating whether it agrees with the above
statements. (A copy of the McGladrey & Pullen, LLP letter addressed to the
Commission is filed as Exhibit 16.1 to the Company's Annual Report on Form 10-
K for the fiscal year ended December 31, 1997).
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No dealer, salesperson or other person has been authorized to give any infor-
mation or to make any representations in connection with the offer made hereby
except as contained in this Prospectus, and if given or made, no such informa-
tion or representation should be relied upon as having been authorized by the
Company, the Initial Purchasers or any of their respective agents. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any cir-
cumstances, create any implications that there has been no change in the infor-
mation set forth herein or in the affairs of the Company since the date hereof.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy the Exchange Notes by anyone in any jurisdiction in which such of-
fer or solicitation is not authorized or in which the person making such offer
or solicitation is not qualified to do so or to any person to whom it is unlaw-
ful to make such offer or solicitation.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Where You Can Get More Information....................................... ii
Forward-Looking Statements............................................... iii
Summary.................................................................. 1
Risk Factors............................................................. 14
The Exchange Offer....................................................... 24
Recent Developments...................................................... 33
Use of Proceeds.......................................................... 36
Capitalization........................................................... 37
Selected Consolidated Financial Data..................................... 38
Pro Forma Financial Data................................................. 40
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 43
Description of the Exchange Notes........................................ 58
Other Indebtedness....................................................... 93
Plan of Distribution..................................................... 95
Legal Matters............................................................ 95
Experts.................................................................. 96
Changes in Accountants................................................... 96
</TABLE>
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$300,000,000
McLeodUSA
Incorporated
9 1/2% Senior Notes
Due 2008
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PROSPECTUS
Dated January 29, 1999
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