<PAGE>
As filed with the Securities and Exchange Commission on July 21, 1999
Registration No. 333-82851
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
McLeodUSA Incorporated
(Exact name of registrant as specified in its charter)
Delaware McLeodUSA Technology Park 42-1407240
(State or other 6400 C Street SW, P.O. Box 3177 (I.R.S. Employer
jurisdiction of Cedar Rapids, IA 52406-3177 Identification Number)
incorporation or (319) 364-0000
organization)
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Clark E. McLeod
Chairman and Chief Executive Officer
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------
Copies to:
Joseph G. Connolly, Jr., Esq. James J. Junewicz, Esq.
Hogan & Hartson L.L.P. Mayer, Brown & Platt
555 Thirteenth Street, N.W. 190 South LaSalle Street
Washington, D.C. 20004 Chicago, Illinois 60603
(202) 637-5600 (312) 782-0600
----------------
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
maximum maximum
Amount to be offering aggregate Amount of
Title of each class of registered price per offering price registration
securities to be registered (1)(2)(3) unit(1)(2)(3)(4) (1)(3)(5) fee(6)
<S> <C> <C> <C> <C>
Class A common stock...
Preferred stock........
Debt securities........
Depositary shares......
Warrants...............
Subscription rights....
Stock purchase
contracts and stock
purchase units.........
Total: $1,750,000,000 $486,500(7)
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</TABLE>
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(1) In U.S. dollars or the equivalent thereof in one or more foreign currencies
or currency units or composite currencies, including the European Currency
Unit.
(2) Such indeterminate number of amount of Class A common stock, preferred
stock, debt securities, depositary shares, warrants, subscription rights
and stock purchase contracts and stock purchase units, as may from time to
time be issued at indeterminate prices, but with an aggregate initial
offering price not to exceed $1,750,000,000, plus such indeterminate number
of shares of Class A common stock and preferred stock as may be issued in
exchange for, or upon conversion of, debt securities or other preferred
stock registered hereunder. Debt securities may be issued with original
issue discount such that the aggregate initial public offering price,
together with the other securities issued hereunder, will not exceed
$1,750,000,000.
(3) Omitted pursuant to General Instruction II.D of Form S-3.
(4) The proposed maximum initial offering price per unit will be determined,
from time to time, by the Registrant.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o). In no event will the aggregate initial offering
price of all primary securities issued from time to time pursuant to this
Registration Statement exceed $1,750,000,000.
(6) Calculated pursuant to Rule 457 of the rules and regulations under the
Securities Act of 1933.
(7) Previously paid.
----------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus supplement is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state or jurisdiction +
+where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY , 1999
P R O S P E C T U S S U P P L E M E N T
(To Prospectus dated , 1999)
[McLEODUSA LOGO]
400,000 Shares
McLeodUSA Incorporated
% Series A Cumulative Convertible Preferred Stock
--------
We are selling 400,000 shares of our % Series A cumulative convertible
preferred stock, liquidation preference $1,000 per share which is convertible
at the option of the holder into shares of our Class A common stock at a
conversion price of $ per share of Class A common stock for each share of
Series A preferred stock, equivalent to a conversion rate of shares of Class
A common stock for each share of Series A preferred stock, subject to
adjustments in certain circumstances. Our Class A common stock is quoted on the
Nasdaq National Market under the symbol "MCLD", and the last reported price of
the Class A common stock on , 1999 was $ per share. Other terms described
in this prospectus supplement include:
. The quarterly dividend will be $ per share, payable at our option in
cash or shares of our Class A common stock, beginning , 1999.
. Beginning on , 2001 and prior to , 2002, if the price of our Class
A common stock equals or exceeds 150% of the conversion price, we may
redeem, for cash, shares of our Class A common stock or both, the Series A
preferred stock at a redemption price of % of the liquidation
preference, plus (1) unpaid dividends and (2) a make whole payment for
future dividends.
. Beginning on , 2002, we may redeem, for cash, the Series A preferred
stock at prices declining to the liquidation preference, plus unpaid
dividends.
. On or after , 2002, we may convert the Series A preferred stock into
our Class A common stock if the trading price of our Class A common stock
equals or exceeds 135% of the conversion price for a specific period.
. We will seek to have the Series A preferred stock listed on the Nasdaq
National Market.
Concurrently with this Series A preferred stock offering, and by a separate
prospectus supplement, we are offering $400,000,000 of % Senior Notes due
2009. The completion of the Series A preferred stock offering and the notes
offering are not dependent on one another.
--------
Investing in the Series A preferred stock involves various risks. See "Risk
Factors" beginning on page S-10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Public Offering Price.................................... $ $
Underwriting Discount.................................... $ $
Proceeds to the Company (before expenses)................ $ $
</TABLE>
The underwriters are offering the Series A preferred stock subject to various
conditions. The underwriters expect to deliver the Series A preferred stock to
purchasers on or about , 1999. The underwriters may purchase up to 60,000
additional shares of Series A preferred stock to cover over-allotments.
--------
Salomon Smith Barney
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
, 1999
<PAGE>
You should rely only on the information provided or incorporated by reference
in this prospectus supplement and accompanying prospectus. Neither we nor the
underwriters have authorized anyone to provide you with different or
inconsistent information. You should assume that the information in this
prospectus supplement and accompanying prospectus is accurate only as of the
date on the front cover of such documents. Our business, financial information,
results of operations and prospects may have changed since those dates.
If it is against the law in any state to make an offer to sell these
securities (or to solicit an offer from someone to buy these securities), then
this offer does not apply to any person in that state, and no offer or
solicitation is made by this prospectus supplement or accompanying prospectus
to any such person.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... S-1
Risk Factors............................................................... S-10
Cautionary Note Regarding Forward-Looking Statements....................... S-17
Use of Proceeds............................................................ S-18
Dividend Policy............................................................ S-18
Market Price of Class A Common Stock ...................................... S-18
Capitalization............................................................. S-19
Selected Consolidated Financial and Operating Data......................... S-20
Pro Forma Financial Data................................................... S-22
Description of the Series A Preferred Stock................................ S-25
Federal Tax Considerations................................................. S-37
Underwriting............................................................... S-43
Legal Matters.............................................................. S-45
Experts.................................................................... S-45
Where You Can Find More Information........................................ S-45
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus...................................................... 1
Where You Can Find More Information........................................ 1
Cautionary Note Regarding Forward-Looking Statements....................... 2
About McLeodUSA............................................................ 3
Coverage Ratios............................................................ 4
Use of Proceeds............................................................ 4
Description of Common Stock................................................ 5
Description of Preferred Stock............................................. 10
Description of Depositary Shares........................................... 13
Description of Debt Securities............................................. 16
Description of Warrants.................................................... 27
Description of Stock Purchase Contracts and Stock Purchase Units........... 29
Description of Subscription Rights......................................... 30
Plan of Distribution....................................................... 31
Legal Matters.............................................................. 32
Experts.................................................................... 32
</TABLE>
<PAGE>
SUMMARY
The following summary highlights selected information about us. It does not
contain all of the information that is important to you. You should carefully
read this entire prospectus supplement and accompanying prospectus and the
other documents to which those documents refer you. In addition, you should
carefully consider the factors set forth under the caption "Risk Factors."
Unless otherwise indicated, dollar amounts over $1 million have been rounded
to one decimal place and dollar amounts less than $1 million have been rounded
to the nearest thousand.
Our Company
We provide communications services to business and residential customers in
the Midwestern and Rocky Mountain regions of the United States. We offer
local, long distance, Internet access, data, voice mail and paging services,
from a single company on a single bill. We believe we are the first company in
many of our markets to offer one-stop shopping for communications services
tailored to customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their communications needs. It also allows businesses to
receive customized services, such as competitive long distance pricing and
enhanced calling features, that might not otherwise be directly available on a
cost-effective basis. As of March 31, 1999, we served over 494,700 local lines
in 408 cities and towns and have a combined total of 488 switches and central
office locations.
In addition to our core business of providing competitive local, long distance
and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. special access, private line and data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
mobile radio, paging services and Web site development and hosting
We plan to derive revenues from high-speed digital access and data services
using Digital Subscriber Line and other technologies.
In most of our markets, we compete with the existing local phone company by
leasing its lines and switches. In other markets, primarily in east central
Illinois and southeast South Dakota, we operate our own lines and switches. We
provide long distance services by using our own communications network
facilities and leasing capacity from long distance and local communications
providers. We are constructing fiber optic communications networks in Iowa,
Illinois, Wisconsin, Indiana, Missouri, Michigan, Minnesota, South Dakota,
North Dakota, Colorado and Wyoming to carry additional communications traffic
on our own network.
Our Strategy
We want to be the leading and most admired provider of communications services
in our markets. To achieve this goal, we are:
. aggressively capturing customer share and generating revenue using leased
communications network capacity
. concurrently building our own communications network
. migrating customers to our communications network to provide enhanced
services and to reduce our operating costs
The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly
penetrate our target markets and build customer loyalty by providing an
integrated product offering to business and residential customers.
S-1
<PAGE>
Build customer share through branding. We believe we will create and strengthen
brand awareness in our target markets by branding our communications services
with the trade name McLeodUSA in combination with the distinctive black-and-
yellow motif of our telephone directories.
Provide outstanding customer service. Our customer service representatives are
available 24 hours a day, seven days a week, to answer customer calls. Our
customer-focused software and systems allow our representatives immediate
access to our customer and network data, enabling a rapid and effective
response to customer requests.
Emphasize small and medium sized businesses. We primarily target small and
medium sized businesses because we believe we can rapidly capture customer
share by providing face-to-face business sales and strong service support to
these customers.
Expand our fiber optic communications network. We are building a state-of-the-
art fiber optic communications network to deliver multiple services and reduce
operating costs.
Expand our intra-city fiber optic communications network. Within selected
cities, we plan to extend our network directly to our customers' locations.
This will allow us to provide expanded services and reduce the expense of
leasing communications facilities from the existing local telephone company.
Explore acquisitions and strategic alliances. We plan to pursue acquisitions,
joint ventures and strategic alliances that expand or complement our business.
Leverage proven management team. Our executive management team consists of
veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
----------------
As of June 30, 1999, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our planned capital
expenditures and operating expenses. Our estimated aggregate capital
requirements include the projected cost of:
. building our fiber optic communications network, including intra-city fiber
optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating acquisitions
. constructing, acquiring, developing or improving telecommunication assets
We expect to use the following to address our capital needs:
. approximately $ million in net proceeds from the sale of the Series A
preferred stock and the % Senior Notes due 2009
. approximately $475.0 million of cash and investments on hand at June 30,
1999
. projected operating cash flow
. additional issuances of debt or equity securities
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements is subject to risks and uncertainties and may differ
materially from our estimates. Accordingly, we may need additional capital to
continue to expand our markets, operations, facilities, network and services.
See "Risk Factors--Failure to Raise Necessary Capital Could Restrict Our
Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions."
----------------
Our principal executive offices are located at McLeodUSA Technology Park, 6400
C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone number
is (319) 364-0000.
S-2
<PAGE>
The Offering
<TABLE>
<S> <C>
Series A Preferred Stock
Offered......................... 400,000 Shares
Over-Allotment Option............ We have granted the underwriters an option to purchase up to
60,000 additional shares of Series A preferred stock to cover
over-allotments. If the over-allotment option is exercised in full by
the underwriters, the total offering price, underwriters' discounts,
and proceeds to us (before expenses) will be $
million, $ million and $ million, respectively.
Dividends........................ Holders of Series A preferred stock will be entitled to receive
cumulative dividends at an annual rate of % of the liquidation
preference payable quarterly on each , , , and ,
commencing on , 1999. Dividends will accrue from the date
of the original issuance of the Series A preferred stock. Any
dividend on the Series A preferred stock shall be, at our option,
payable (1) in cash or (2) through the issuance of a number of
shares of our Class A common stock equal to the dividend amount
divided by the Discounted Current Market Value.
For the foreseeable future, we intend to pay these dividends solely in
shares of Class A common stock. If, in the future, we were to consider
paying cash dividends on the Series A preferred stock we would have to
comply with the restrictions contained in the indentures governing our
outstanding indebtedness. See "Risk Factors--We Are Restricted from
Paying Cash Dividends" and "Description of the Series A Preferred
Stock--Dividends."
Conversion into Class A Common Series A preferred stock is convertible at the option of its holder,
Stock........................... unless previously redeemed, at any time after the issue date, into
shares of our Class A common stock at a conversion rate of
shares of Class A common stock for each share of Series A preferred
stock (representing a conversion price of $ per share of
Class A common stock), subject to adjustment in certain events.
In addition, if on or after , 2002, the closing price of our
Class A common stock has equaled or exceeded 135% of the
Conversion Price for at least 20 out of 30 consecutive days on which
the Nasdaq National Market is open for the transaction of business,
we will have the option to convert all the Series A preferred
stock into Class A common stock at the then current conversion rate.
See "Description of the Series A Preferred Stock-- Conversion Rights."
Liquidation Preference........... $1,000 per share. See "Description of the Series A Preferred Stock
--Liquidation Preference."
Redemption....................... We may redeem the Series A preferred stock at a redemption price
of % of the liquidation preference, plus accumulated and
unpaid dividends to the redemption date, on or after ,
2001, but prior to , 2002, if the closing price of our
Class A common stock equals or exceeds 150% of the conversion
price, currently equal to $ per share, for a specified trading
period, which we refer to as the provisional redemption. In addition
</TABLE>
S-3
<PAGE>
<TABLE>
<C> <S>
to the payments in the previous sentence,
holders will receive a
payment equal to the present value of the
dividends that would
thereafter have been payable on the Series
A preferred stock from
the redemption date to , 2002.
Except in the circumstances described
above, we may not redeem the Series A
preferred stock prior to , 2002.
Thereafter, each share of Series A
preferred stock may be redeemed, at our
option, initially at a redemption price of
% of the liquidation preference and
thereafter at prices declining to 100% on
and after , plus in each case, all
accumulated and unpaid dividends. See
"Description of the Series A Preferred
Stock--Redemption."
Voting Rights.................... Except as required by law, the holders of
the Series A preferred stock will not be
entitled to any voting rights unless
payments of dividends on the Series A
preferred stock are in arrears and unpaid
for an aggregate of six or more quarterly
dividend payments. In such an event, the
holders of the Series A preferred stock
(together with holders of other series of
preferred stock having similar rights) will
be entitled to elect the lesser of two
directors to the board of directors or that
number of directors constituting at least
25% of the board of directors, until such
time as all dividend arrearages have been
paid. See "Description of the Series A
Preferred Stock--Voting Rights."
Change of Control................ Upon the occurrence of a Change of Control
or a Common Stock Change of Control, we
will adjust the Conversion Price. The terms
"Change of Control," "Common Stock Change
of Control" and "Conversion Price" are
defined in the "Description of the Series A
Preferred Stock--Conversion Rights."
Ranking.......................... The Series A preferred stock will be, with
respect to dividends and upon liquidation,
dissolution or winding-up:
. junior to all our existing and future
debt obligations
. junior to each class of capital stock or
series of preferred stock, the terms of
which expressly provide that it ranks
senior to the Series A preferred stock
. on a parity with each class of capital
stock or series of preferred stock, the
terms of which expressly provide that it
ranks on a parity with the Series A
preferred stock
. senior to all classes of our common stock
and each other class of capital stock or
series of preferred stock, the terms of
which do not expressly provide that it
ranks senior to or on a parity with the
Series A preferred stock
See "Description of the Series A Preferred
Stock--Ranking."
Proposed Nasdaq National
Market symbol................... MCLDA
</TABLE>
S-4
<PAGE>
<TABLE>
<C> <S>
Use of Proceeds.................. The net proceeds from the offering will be
used to fund:
. development and construction costs of our
fiber optic network, and construction,
acquisition, development and improvement
of our telecommunications assets
. market expansion activities
. development, construction and operations
necessary to include wireless services as
part of our communications services and
. additional working capital and general
corporate purposes
</TABLE>
Risk Factors
You should consider carefully all of the information contained and
incorporated by reference in this prospectus supplement and accompanying
prospectus, including the information set forth under the caption "Risk
Factors," before making an investment in the Series A preferred stock.
S-5
<PAGE>
Recent Developments
Acquisition of Ovation Communications, Inc.
On March 31, 1999, we acquired Ovation Communications, Inc. for an aggregate
of 11,193,234 shares of our Class A common stock, after giving effect to the
two-for-one stock split described below, and $121.3 million in cash. We paid
approximately $105.6 million of the outstanding debt of Ovation at the time of
the transaction.
Ovation is a diversified communications services company serving business
customers primarily in larger metropolitan areas in Minnesota, Illinois and
Wisconsin (such as Minneapolis/St. Paul, Chicago and Milwaukee) and in small to
mid-sized cities in Michigan. Ovation provides the following services:
. local and network access
. local and long distance telephone
. voice mail, teleconferencing and calling card
. Internet access
Announcement of Data Strategy
On April 14, 1999, we announced plans to offer high-speed digital access and
data services as part of our integrated communications product package using
DSL (Digital Subscriber Line) and other technologies. These services are
expected to include:
. basic dial tone transmitted digitally
. high-speed data communications for Internet and intranet applications
. commercial network connections for local area, metropolitan area and wide
area networks
Follow-on Offering of Secondary Shares
On May 18, 1999, we completed the sale of 18,000,000 shares of Class A common
stock in a secondary offering for the benefit of several selling stockholders
at a sale price of $27 13/16 per share, after giving effect to the two-for-one
stock split described below. We received no proceeds from the sale of these
shares.
Agreements to Acquire Access Communications Holdings, Inc. and S.J. Investments
Holdings, Inc.
On June 1, 1999, we entered into an Agreement and Plan of Merger with Access
Communications Holdings, Inc., a Utah corporation and certain of the
stockholders of Access, pursuant to which we will acquire Access.
As a result of the Access merger, the outstanding shares of common stock of
Access will be converted in the aggregate into the right to receive
approximately $23.3 million and 1,939,864 shares of our Class A common stock,
after giving effect to the two-for-one stock split described below. We also
will assume approximately $48.3 million in Access debt.
In a related transaction, on June 1, 1999, we entered into an Agreement and
Plan of Merger with an affiliated company of Access, S.J. Investments Holdings,
Inc., a Utah corporation, and the stockholders of SJIH, pursuant to which we
will acquire SJIH.
As a result of the SJIH merger, the outstanding shares of common stock of
SJIH will be converted in the aggregate into the right to receive $25 million
and 1,939,864 shares of our Class A common stock, after giving effect to the
two-for-one stock split described below. We also will assume approximately
$48.3 million in SJIH debt. Consummation of the Access merger and the SJIH
merger are subject to the satisfaction of certain conditions.
Although two legally separate corporations, Access and SJIH conduct business
as Access Long Distance. Access Long Distance serves business and residential
customers in the states of Arizona, California, Colorado, Florida, Idaho,
Nevada, New Mexico, Oregon, Utah and Washington. As of March 31, 1999, Access
Long Distance served approximately 17,500 commercial customers and
approximately 11,600 residential customers, generating 1998 revenues of $87
million. Access
S-6
<PAGE>
Long Distance is a switch-based provider of commercial and residential
telecommunications services, including long distance, toll-free and prepaid
calling cards. In addition, Access Long Distance also sells enhanced toll-free
services.
Market Area Expansion
As a result of the Access Long Distance agreements, we will add four new
states to our current 16-state Midwest and Rocky Mountain market area: Arizona,
New Mexico, Oregon and Washington, and provide coverage of the entire U S WEST
geography. The additional states increase our addressable voice and data market
by approximately 23%.
Two-For-One Stock Split
On June 30, 1999, we declared a two-for-one stock split to be effected in the
form of a stock dividend on our Class A common stock. The record date for the
stock split was July 12, 1999 and the distribution of the additional shares
will take place on July 26, 1999.
S-7
<PAGE>
Summary Consolidated Financial and Operating Data
The information in the following table is based on historical financial
information included in our prior SEC filings, including our annual report on
Form 10-K for the fiscal year ended December 31, 1998. The following summary
financial information should be read in connection with this historical
financial information, including the notes which accompany such financial
information. This historical financial information is considered a part of this
document. See "Where You Can Find More Information." Our audited historical
financial statements as of December 31, 1998 and 1997, and for each of the
three years ended December 31, 1998 were audited by Arthur Andersen LLP,
independent public accountants.
The information in the table on the following page reflects consolidated
financial information for the following companies we have acquired:
<TABLE>
<CAPTION>
Acquired Company Date Acquired
---------------- -------------
<S> <C>
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
Telecom*USA Publishing Group Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
Ovation Communications, Inc. March 31, 1999
</TABLE>
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired.
The balance sheet data in the table include the financial position of these
companies at the end of the periods presented, beginning with the period in
which they were acquired. These acquisitions affect the comparability of the
financial data for the periods presented.
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date will receive one additional share of our Class A
common stock for each share held. Distribution of the additional shares will
take place on July 26, 1999. All information in the following table has been
adjusted to reflect the two-for-one stock split.
The pro forma information presented in the operations statement data and
other financial data in the table reflects the operations of Ovation as if the
Ovation acquisition had occurred on January 1, 1998 and the pro forma
information in the balance sheet data in the table includes Ovation's financial
position as of December 31, 1998.
The pro forma information presented in the operations statement data and
other financial data in the table includes the effects of the issuance of $300
million principal amount of our 8 3/8% senior notes in March 1998, $300 million
principal amount of our 9 1/2% senior notes in October 1998 and $500 million
principal amount of the 8 1/8% senior notes in February 1999 as if they had
occurred at the beginning of 1998 and the pro forma information presented in
the balance sheet data in the table includes the effects of the issuance of the
8 1/8% senior notes as if it had occurred at the end of 1998.
The ratio of earnings to fixed charges and preferred stock dividends is
calculated as follows: earnings consist of net loss before income taxes plus
fixed charges (excluding capitalized interest). Fixed charges consist of
interest on all debt (including capitalized interest), amortization of debt
discount and deferred loan costs and the portion of rental expense that is
representative of the interest component of rental expense (deemed to be one-
third of rental expense which management believes is a reasonable approximation
of the interest component). Preferred stock dividends means the amount of pre-
tax earnings that is required to pay the dividends on outstanding preferred
stock. We had no shares of preferred stock outstanding during any of the
periods presented. For each of the years ended December 31, 1994, 1995, 1996,
1997 and 1998, earnings were insufficient to cover fixed charges by $11.4
million, $11.4 million, $22.6 million, $84.4 million and $135.5 million,
respectively. For the three months ended March 31, 1998 and 1999, earnings were
insufficient to cover fixed charges by $32 million and $51.7 million,
respectively. On a pro forma basis, earnings would not have been sufficient to
cover fixed charges by $188.6 million and $61.7 million for the year ended
December 31, 1998 and the three months ended March 31, 1999, respectively.
(table begins on the next page)
S-8
<PAGE>
Summary Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 81,323 $267,886 $ 604,146 $ 625,181 $134,331 $181,109 $200,805
-------- -------- --------- --------- -------- -------- --------
Operating expenses:
Cost of service....... 52,624 151,190 323,208 329,527 75,045 92,459 99,797
Selling, general and
administrative....... 46,044 148,158 260,931 274,420 58,768 79,811 90,691
Depreciation and
amortization......... 8,485 33,275 89,107 109,720 19,431 35,110 41,680
Other................. 2,380 4,632 5,575 5,575 1,900 -- --
-------- -------- --------- --------- -------- -------- --------
Total operating
expenses............. 109,533 337,255 678,821 719,242 155,144 207,380 232,168
-------- -------- --------- --------- -------- -------- --------
Operating loss......... (28,210) (69,369) (74,675) (94,061) (20,813) (26,271) (31,363)
Interest income
(expense), net........ 5,369 (11,967) (52,234) (85,898) (10,141) (21,204) (26,074)
Other non-operating
income................ 495 1,426 1,997 1,997 687 (1) (1)
Income taxes........... -- -- -- -- -- -- --
-------- -------- --------- --------- -------- -------- --------
Net loss............... $(22,346) $(79,910) $(124,912) $(177,962) $(30,267) $(47,476) $(57,438)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.28) $ (.73) $ (.99) $ (1.30) $ (.24) $ (.36) $ (.40)
======== ======== ========= ========= ======== ======== ========
Weighted average common
shares outstanding.... 81,012 109,948 125,614 136,808 124,454 132,242 143,436
======== ======== ========= ========= ======== ======== ========
Ratio of earnings to
fixed charges and
preferred stock
dividends............. -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
December 31, 1999
------------------------------ -----------
1996 1997 1998 Actual
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets..................... $224,401 $ 517,869 $ 793,192 $ 974,218
Working capital.................... $185,968 $ 378,617 $ 613,236 $ 740,191
Property and equipment, net........ $ 92,123 $ 373,804 $ 629,746 $ 828,591
Total assets....................... $452,994 $1,345,652 $1,925,197 $ 2,836,380
Long-term debt less current
maturities........................ $ 2,573 $ 613,384 $1,245,170 $ 1,776,475
Stockholders' equity............... $403,429 $ 559,379 $ 462,806 $ 785,415
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $173,782 $601,137 $339,660 $ 739,497 $ 48,930 $ 538,897 $ 560,894
EBITDA(1).............. $(17,345) $(31,462) $ 20,007 $ 21,234 $ 518 $ 8,839 $ 10,317
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines.................................... 65,400 282,600 397,600 494,700
Cities and towns served........................ 120 227 269 408
Central offices/switches....................... -- 366 415 488
Route miles.................................... 2,352 4,908 7,120 7,654
Employees...................................... 2,077 4,941 5,300 6,109
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
S-9
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus supplement before investing in our securities.
You should also consider the additional information set forth in our SEC
reports on Forms 10-K, 10-Q and 8-K and in the other documents considered a
part of this prospectus supplement and accompanying prospectus. See "Where You
Can Find More Information."
Fluctuations in the Market Price of Our Class A Common Stock May Make it More
Difficult for Us to Raise Capital.
The market price of our Class A common stock is extremely volatile and has
fluctuated over a wide range. These fluctuations may impair our ability to
raise capital by offering equity securities. The market price may continue to
fluctuate significantly in response to various factors, including:
. market conditions in the industry
. announcements or actions by competitors
. low trading volume
. sales of large amounts of our Class A common stock in the public market
or the perception that such sales could occur
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. regulatory and judicial actions
. general economic conditions
We May Not Be Able to Successfully Integrate Acquired Companies into Our
Operations, Which Could Slow Our Growth.
The integration of acquired companies into our operations involves a number
of risks, including:
. difficulty integrating new operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel or customers
. inability to successfully incorporate new assets and rights into our
service offerings
. inability to maintain uniform standards, controls, procedures and
policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with acquisition transactions could slow our growth or lower the
quality of our services, which could reduce customer demand and adversely
affect our business.
Continued Rapid Growth of Our Network, Services and Subscribers Could Be Slowed
if We Cannot Manage this Growth.
We have rapidly expanded and developed our network, services and subscriber
base. For example, we recently announced plans to offer high-speed digital
access and data services. Our expansion and development have placed and will
continue to place significant demands on our management, operational and
financial systems and procedures and controls. We may not be able to manage our
anticipated growth effectively, which would adversely affect our business,
results of operations and financial condition.
Further expansion and development will depend on a number of factors,
including:
. cooperation of the existing local telephone companies
. regulatory, judicial and governmental developments
. changes in the competitive climate in which we operate
. development of customer billing, order processing and network management
systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
S-10
<PAGE>
We will need to continue to improve our operational and financial systems and
our procedures and controls as we grow. We must also develop, train and manage
our employees.
We Expect to Incur Significant Losses Over the Next Several Years.
If we do not become profitable in the future, the value of our Class A common
stock may fall and we could have difficulty obtaining funds to continue our
operations. We have incurred net losses every year since we began operations.
Since January 1, 1994, our net losses have been as follows:
Net Losses
<TABLE>
<CAPTION>
Period Amount
- ------ --------------
<S> <C>
1994............................................................. $ 11.4 million
1995............................................................. $ 11.3 million
1996............................................................. $ 22.3 million
1997............................................................. $ 79.9 million
1998............................................................. $124.9 million
</TABLE>
We expect to incur net losses during the next several years while we develop
our businesses, expand our fiber optic communications network and develop
wireless services.
Failure to Raise Necessary Capital Could Restrict Our Ability to Develop Our
Network and Services and Engage in Strategic Acquisitions.
We need significant capital to continue to expand our operations, facilities,
network and services. We cannot assure you that our capital resources will
permit us to fund our planned network deployment and operations or achieve
operating profitability. Our failure to generate or raise sufficient funds may
require us to delay or abandon some of our expansion plans or expenditures,
which could adversely affect our business and competitive position.
As of June 30, 1999, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our capital expenditures and
operating expenses. Our estimated aggregate capital requirements include the
projected costs of:
. building our fiber optic communications network, including intra-city
fiber optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements may differ substantially from our estimate due to factors
such as:
. strategic acquisition costs and effects of acquisitions on our business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological or competitive developments
. new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities.
We may meet any additional capital needs by issuing additional debt or equity
securities or borrowing funds from one or more lenders. We cannot assure you
that we will have timely access to additional financing sources on acceptable
terms. If we do not have such access, we may not be able to expand our markets,
operations, facilities, network and services through acquisitions as we intend.
S-11
<PAGE>
Our High Level of Debt Could Limit Our Flexibility in Responding to Business
Developments and Put Us at a Competitive Disadvantage.
We have substantial debt, which could adversely affect us in a number of
ways, including:
. limiting our ability to obtain necessary financing in the future
. limiting our flexibility to plan for, or react to, changes in our
business
. requiring us to use a substantial portion of our cash flow from
operations to pay our debt obligations rather than for other purposes,
such as working capital or capital expenditures
. making us more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage
. making us more vulnerable to a downturn in our business
As of March 31, 1999, we had $1.8 billion of long-term debt and $785.4
million of stockholders' equity. As a result, we expect our fixed charges to
exceed our earnings for the foreseeable future.
Covenants in Debt Instruments Restrict Our Capacity to Borrow and Invest, Which
Could Impair Our Ability to Expand or Finance Our Operations.
The indentures governing the terms of our long-term debt impose operating and
financial restrictions that limit our discretion on some business matters,
which could make it more difficult for us to expand, finance our operations or
engage in other business activities that may be in our interest. These
restrictions limit or prohibit our ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge or mortgage assets or otherwise create liens
. enter into transactions with related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt could
become immediately due and payable.
Our Ability to Pay Cash Dividends is Restricted.
We have never paid any cash dividends. We do not anticipate paying any cash
dividends for the foreseeable future. The indentures governing our debt
restrict our ability to pay cash dividends. You should not expect that cash
dividends will be paid on the shares of our Series A preferred stock or on the
shares of our Class A common stock that you may acquire upon the conversion of
the Series A preferred stock.
Our Dependence on Regional Bell Operating Companies to Provide Most of Our
Communications Services Could Make it Harder for Us to Offer Our Services at a
Profit.
We depend on the regional Bell operating companies to provide most of our
core local and some of our long distance services. Today, without using the
communications facilities of these companies, we could not provide bundled
local and long distance services to most of our customers. Because of this
dependence, our communications services are highly susceptible to changes in
the conditions for access to these facilities and we may therefore have
difficulty offering our services at profitable and competitive rates.
U S WEST Communications, Inc., Ameritech Corporation and Southwestern Bell
Telephone Company are our primary suppliers of local lines to our customers and
communications services that allow us to transfer and connect calls. Their
communications facilities allow us to provide (1) local service, (2) long
distance service and (3) private lines dedicated to our customers' use. If
these or other companies deny or limit our access to their communications
network elements or wholesale services, we may not be able to offer profitable
communications services.
S-12
<PAGE>
Our plans to provide local service using our own communications network
equipment also depend on the regional Bell operating companies. In order to
interconnect our network equipment and other communications facilities to
network elements controlled by the regional Bell operating companies, we must
first negotiate and enter into interconnection agreements with them.
Interconnection obligations imposed on the regional Bell operating companies by
the Telecommunications Act of 1996 have been, and continue to be, subject to a
variety of legal proceedings, which could affect our ability to obtain
interconnection agreements on acceptable terms. We cannot assure you that we
will succeed in obtaining interconnection agreements on terms that would permit
us to offer local services using our own communications network facilities at
profitable and competitive rates.
Actions by U S WEST May Make it More Difficult for Us to Offer Our
Communications Services.
U S WEST has introduced several measures that may make it more difficult for
us to offer our communications services. For example, in February 1996, U S
WEST filed tariffs and other notices with the public utility commissions in its
fourteen-state service region to limit future Centrex access to its switches.
Centrex access allows us to aggregate lines, have control over several
characteristics of those lines and provide a set of standard features on those
lines. We use U S WEST's Centrex services to provide most of our local
communications services in U S WEST's service territories.
In January 1997, U S WEST also proposed interconnection surcharges in several
of the states in its service region, which would increase our costs of
providing communications services in those states.
We have challenged or are challenging these actions by U S WEST before the
FCC or applicable state public utility commissions. We cannot assure you we
will succeed in our challenges to these or other actions by U S WEST that would
prevent or deter us from using U S WEST's Centrex service or communications
network elements. If U S WEST successfully withdraws or limits our access to
Centrex services in any jurisdiction, we may not be able to offer
communications services in that jurisdiction, which could adversely affect our
business.
We anticipate that U S WEST will also pursue legislation in states within our
target market area to reduce state regulatory oversight over its rates and
operations. If adopted, these initiatives could make it more difficult for us
to challenge U S WEST's actions in the future.
Competition in the Communications Services Industry Could Cause Us to Lose
Customers and Revenue and Could Make it More Difficult for Us to Enter New
Markets.
We face intense competition in all of our markets. This competition could
result in loss of customers and lower revenue for us. It could also make it
more difficult for us to enter new markets. Existing local telephone companies,
including U S WEST, Ameritech, Southwestern Bell and GTE, currently dominate
their local telecommunications markets. Three major competitors, AT&T, MCI
WorldCom and Sprint, dominate the long distance market. Hundreds of other
companies also compete in the long distance marketplace. AT&T, MCI WorldCom and
Sprint also offer local telecommunications services in many locations.
We also compete with other communications services companies which, like us,
compete with the existing local telephone companies in some markets.
Other competitors may include cable television companies, providers of
communications network facilities dedicated to particular customers, providers
of digital access and data services, microwave and satellite carriers, wireless
telecommunications providers, private networks owned by large end-users, and
telecommunications management companies.
These and other firms may enter the markets where we focus our sales efforts.
Many of our existing and potential competitors have financial and other
resources far greater than our own. In addition, the trend toward mergers and
strategic alliances in the communications industry may strengthen some of our
competitors, which could put us at a significant competitive disadvantage.
We May Not Succeed in Developing or Making a Profit from Wireless Services.
Our proposal to offer wireless services involves a high degree of risk and
will impose significant
S-13
<PAGE>
demands on our management and financial resources. Developing wireless services
may require us to, among other things, spend substantial time and money to
acquire, build and test a wireless infrastructure and enter into roaming
arrangements with wireless operators in other markets. We may not succeed in
developing wireless services. Even if we spend substantial amounts to develop
wireless services, we may not make a profit from wireless operations.
Our ability to successfully offer wireless services will also depend on a
number of factors beyond our control, including:
. changes in communications service rates charged by other companies
. changes in the supply and demand for wireless services due to competition
with other wireline and wireless operators in the same geographic area
. changes in the federal, state or local regulatory requirements affecting
the operation of wireless systems
. changes in wireless technologies that could render obsolete the
technology and equipment we choose for our wireless services
Competition in the Wireless Telecommunications Industry Could Make it Harder
for Us to Successfully Offer Wireless Services.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it harder for
us to gain a share of the wireless communications market. We expect up to eight
wireless competitors in each of our target wireless markets. We could face
additional competition from mobile satellite services.
Many of our potential wireless competitors have financial and other resources
far greater than our own and have more experience testing new or improved
products and services. In addition, several wireless competitors operate or
plan to operate, wireless telecommunications systems that encompass most of the
United States, which could give them a significant competitive advantage,
particularly if we only offer regional wireless services.
The Success of Our Communications Services Will Depend on Our Ability to Keep
Pace with Rapid Technological Changes in Our Industry.
Communications technology is changing rapidly. These changes influence the
demand for our services. We need to be able to anticipate these changes and to
develop new and enhanced products and services quickly enough for the changing
market. This will determine whether we can continue to increase our revenues
and number of subscribers and be competitive. Failure to adapt to these changes
may adversely affect our business.
The Loss of Key Personnel Could Weaken Our Technical and Operational Expertise,
Delay Our Introduction of New Services or Entry into New Markets and Lower the
Quality of Our Service.
We may not be able to attract, develop, motivate and retain experienced and
innovative personnel. There is intense competition for qualified personnel in
our business. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could cause us to make less successful
strategic decisions, which could hinder the introduction of new services or the
entry into new markets. We could also be less prepared for technological or
marketing problems, which could reduce our ability to serve our customers and
lower the quality of our services. As a result, our financial condition could
worsen.
Our future success depends on the continued employment of our senior
management team, particularly Clark E. McLeod, our Chairman and Chief Executive
Officer, and Stephen C. Gray, our President and Chief Operating Officer. We do
not have term employment agreements with these employees.
Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay
Installation of Our Networks and Interfere with Our Operations.
To obtain access to rights-of-way needed to install our fiber optic cable, we
must reach agreements with state highway authorities, local governments,
transit authorities, local telephone companies, other utilities, railroads,
long distance carriers and other parties. The failure to obtain or maintain any
rights-of-way could delay our planned network expansion, interfere with our
operations and
S-14
<PAGE>
adversely affect our business. For example, if we lose access to a right-of-
way, we may need to spend significant sums to remove and relocate our
facilities.
Government Regulation May Increase Our Cost of Providing Services, Slow Our
Expansion into New Markets and Subject Our Services to Additional Competitive
Pressures.
Our facilities and services are subject to federal, state and local
regulation. The time and expense of complying with these regulations could slow
down our expansion into new markets, increase our costs of providing services
and subject them to additional competitive pressures. One of the primary
purposes of the Telecommunications Act of 1996 was to open the local telephone
services market to competition. While this has presented us with opportunities
to enter local telephone markets, it also has provided important benefits to
the existing local telephone companies, such as the ability, under specified
conditions, to provide out-of-region long distance service to customers in
their respective regions. In addition, we need to obtain and maintain licenses,
permits and other regulatory approvals in connection with some of our services.
Any of the following could adversely affect our business:
. failure to maintain proper federal and state tariffs
. failure to maintain proper state certifications
. failure to comply with federal, state or local laws and regulations
. failure to obtain and maintain required licenses and permits
. burdensome license or permit requirements to operate in public rights-of-
way
. burdensome or adverse regulatory requirements
Our Management and Principal Stockholders Can Control McLeodUSA and May Have
Different Interests Than Those of Other Stockholders.
As of July 1, 1999, Interstate Energy Corporation, M/C Investors L.L.C.,
Media/Communications Partners III Limited Partnership, Richard A. Lumpkin and
various trusts for the benefit of his family, Clark and Mary McLeod, and our
directors and executive officers beneficially owned approximately 40% of our
outstanding Class A common stock. These stockholders can collectively control
management policy and may be able to control corporate actions requiring a
stockholder vote, including election of the board of directors. Conflicts of
interest may arise between the interests of these stockholders and our other
stockholders. For example, the fact that these stockholders hold so much Class
A common stock could make it more difficult for a third party to acquire us.
You should expect these stockholders to resolve any conflicts in their favor.
Computer Systems May Malfunction and Interrupt Our Services if We and Our
Suppliers Do Not Attain Year 2000 Readiness.
We and our major suppliers of communications services and network elements
rely greatly on computer systems and other technological devices. These may not
be capable of recognizing January 1, 2000 or subsequent dates. This problem
could cause any or all of our systems or services to malfunction or fail.
We are reviewing our computer systems and programs and other technological
devices to determine which are not capable of recognizing the Year 2000 and to
verify system readiness for the millennium date. The review covers all of our
operations and is centrally managed. This review may not be sufficient,
however, to prevent interruptions to our systems and services.
Some of our critical operations and services depend on other companies. For
example, we depend on the existing local telephone companies, primarily the
regional Bell operating companies, to provide most of our local and some of our
long distance services. To the extent U S WEST, Ameritech or Southwestern Bell
fail to address Year 2000 issues which might interfere with their ability to
fulfill their obligations to us, it could interfere with our operations. If we,
our major vendors, our material service providers or our customers fail to
address Year 2000 issues in a timely manner, our business, results of
operations and financial condition could be adversely affected.
S-15
<PAGE>
Secondary Sales of Our Class A Common Stock in the Public Market Could
Adversely Affect Our Stock Price.
We cannot assure you that the market price of our Class A common stock will
not fluctuate or decline significantly in the future as a consequence of sales
by existing stockholders. Accordingly, there can be no assurance that the
market price of the Class A common stock will exceed the Conversion Price of
the Series A preferred stock.
As of July 1, 1999, after giving effect to the two-for-one stock split
announced June 30, 1999, there were outstanding:
. 150.4 million shares of our Class A common stock
. options to purchase 26.7 million shares of our Class A common stock
. 62.8 million shares of Class A common stock owned by Interstate Energy,
M/C Investors, Media/Communications Partners III, Richard A. Lumpkin and
various trusts for the benefit of his family, Clark and Mary McLeod, and
our directors and executive officers, all of which were eligible for sale
in the public market either in accordance with Rule 144 under the
Securities Act of 1933 or otherwise.
Payment of Dividends in Shares of Class A Common Stock May Not Result in Stated
Dividend Yield.
In the event dividends are paid in shares of Class A common stock, the number
of shares of Class A common stock to be issued on each dividend payment date
will be determined by dividing the total dividend to be paid on each share of
Series A preferred stock by the Discounted Current Market Value, as defined
under "Description of the Series A Preferred Stock-- Dividends." If the market
price of Class A common stock applicable in determining the Discounted Current
Market Value is higher than the market price for the Class A common stock on
the dividend payment date and you sell your Class A common stock at such lower
price, your actual dividend yield could be lower than the stated dividend yield
on the Series A preferred stock. In addition, you are likely to incur
commissions and
other transaction costs in connection with the sale of such Class A common
stock.
The Series A Preferred Stock is Subordinated to All Our Liabilities.
In the event of our bankruptcy, liquidation or winding-up, our assets will be
available to pay obligations on the Series A preferred stock only after all
indebtedness and other liabilities, including our existing senior notes, and
all subsequent series of preferred stock which rank senior to the Series A
preferred stock, have been paid. There may not be sufficient assets remaining
to pay amounts due on any or all of the Series A preferred stock then
outstanding. As of March 31, 1999, the Series A preferred stock would have been
junior in right of payment to our $1.8 billion of long-term debt, of which
$325.0 million is attributed to our subsidiaries. The Series A preferred stock
will also be junior in right of payment to our % Senior Notes due 2009 being
offered concurrently with the Series A preferred stock.
Purchasers of Our Series A Preferred Stock Who Convert Their Shares to Class A
Common Stock Will Incur Immediate Dilution.
Persons purchasing Series A preferred stock who convert their shares into
Class A common stock will incur immediate net tangible book value dilution of
$ per share, assuming that they converted all of their shares of Series A
preferred stock on March 31, 1999. Our existing stockholders will receive an
immediate increase in net tangible book value of $ per share. The per share
amounts give effect to the two-for-one stock split announced June 30, 1999.
Our Series A Preferred Stock is a New Issue of Securities and Has Never Been
Publicly Traded.
Prior to this offering there has been no trading market for the Series A
preferred stock. We will seek to have the Series A preferred stock listed for
quotation on the Nasdaq National Market; however, no assurance can be given as
to the liquidity of, or trading market for, the Series A preferred stock. If an
active market for the Series A preferred stock fails to develop or be
sustained, the trading price of such Series A preferred stock could be
materially adversely affected.
S-16
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement and accompanying prospectus and the information
incorporated by reference in them include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend the forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these
sections. All statements regarding our expected financial position and
operating results, our business strategy, our financing plans, our future
capital requirements, forecasted demographic and economic trends relating to
our industry, our ability to complete acquisitions, to realize anticipated cost
savings and other benefits from acquisitions and to recover acquisition-related
costs, and similar matters are forward-looking statements. These statements are
subject to known and unknown risks, uncertainties and other factors that could
cause our actual results to differ materially from the statements. The forward-
looking information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these statements by our use of
forward-looking words such as "may," "will," "should," "anticipate,"
"estimate," "expect," "plan," "believe," "predict," "potential" or "intend."
You should be aware that these statements only reflect our predictions. Actual
events or results may differ substantially. Important factors that could cause
our actual results to be materially different from our expectations include
those discussed in this prospectus supplement under the caption "Risk Factors."
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
S-17
<PAGE>
USE OF PROCEEDS
We will use the net proceeds from the sale of Series A preferred stock along
with funds available from prior offerings and from other financing sources: (1)
to fund development and construction costs of our fiber optic network,
including intra-city fiber optic networks, and construction, acquisition,
development and improvement of telecommunications assets; (2) to fund market
expansion activities in existing and new markets as well as acquisitions, joint
ventures and strategic alliances; (3) to fund development, construction and
operations necessary to include wireless services as part of our communications
services; and (4) for additional working capital and other general corporate
purposes, including funding operating deficits and net losses.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying cash dividends in the foreseeable future. The indentures
that govern the terms of our debt restrict our ability to pay cash dividends.
Future dividends on our Class A common stock, if any, will be at the discretion
of our board of directors and will depend upon, among other things, our
operations, capital requirements and surplus, general financial condition,
contractual restrictions in financing agreements and such other factors as our
board of directors may deem relevant. Although we have the option under the
Certificate of Designations of the Series A preferred stock of paying dividends
in cash, because of the restrictions contained in our indentures, we do not
expect to pay dividends in cash in the foreseeable future. Rather, we expect to
pay such dividends in shares of our Class A common stock.
MARKET PRICE OF CLASS A COMMON STOCK
Our Class A common stock is quoted on the Nasdaq National Market under the
symbol "MCLD." The following table sets forth for the periods indicated the
high and low sales price per share of our Class A common stock as reported by
the Nasdaq National Market. All prices in the following table have been
adjusted to reflect the two-for-one stock split effective July 26, 1999.
<TABLE>
<CAPTION>
1997 High Low
---- ------- ------
<S> <C> <C>
First Quarter............................................. $14.375 $8.688
Second Quarter ........................................... 17.125 8.188
Third Quarter............................................. 20.000 14.313
Fourth Quarter............................................ 20.875 16.000
<CAPTION>
1998
----
<S> <C> <C>
First Quarter............................................. 23.188 15.250
Second Quarter ........................................... 24.156 19.000
Third Quarter............................................. 20.063 10.688
Fourth Quarter............................................ 19.250 7.625
<CAPTION>
1999
----
<S> <C> <C>
First Quarter............................................. 22.125 15.188
Second Quarter............................................ 30.938 21.188
Third Quarter (through July , 1999)......................
</TABLE>
On July , 1999, the last reported sale price of our Class A common stock on
the Nasdaq National Market was $ per share.
S-18
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999, (1) on a
historical basis as adjusted for the stock split announced June 30, 1999, (2)
as adjusted to reflect the sale of 400,000 shares of our Series A preferred
stock and (3) as further adjusted to reflect the sale of $400 million aggregate
principal amount of % Senior Notes due 2009 and the application of the
proceeds from that offering, in each case net of our estimated offering
expenses and the underwriting discount. You should read this table together
with our consolidated financial statements and related notes and the other
financial data appearing elsewhere, or incorporated by reference, into this
prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
March 31, 1999
---------------------------------
As As further
Historical adjusted adjusted
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents................... $ 415,343 $ 802,343 $1,192,593
Investments in available-for-sale
securities................................. 278,676 278,676 278,676
---------- ---------- ----------
Total cash, cash equivalents and
investments in
available-for-sale securities.......... 694,019 1,081,019 1,471,269
========== ========== ==========
Short-term debt............................. 10,276 10,276 10,276
Long-term debt.............................. 1,776,475 1,776,475 2,176,475
---------- ---------- ----------
Stockholders' equity:
Class A common stock, $.01 par value,
250,000,000 shares authorized;
148,881,788 shares issued and
outstanding, actual...................... 1,489 1,489 1,489
Class B common stock, convertible, $.01
par value, 22,000,000 shares authorized;
none issued or outstanding............... -- -- --
Series A preferred stock, convertible,
$.01 par value, 400,000 shares
authorized; 400,000 shares issued and
outstanding, as adjusted................. -- 4 4
Additional paid-in capital................ 1,078,307 1,465,303 1,465,303
Accumulated deficit....................... (300,868) (300,868) (300,868)
Accumulated other comprehensive income.... 6,487 6,487 6,487
---------- ---------- ----------
Total stockholders' equity.............. 785,415 1,172,415 1,172,415
---------- ---------- ----------
Total capitalization.................... $2,572,166 $2,959,166 $3,359,166
========== ========== ==========
</TABLE>
S-19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information in the following table is based on historical financial
information included in our prior SEC filings, including our annual report on
Form 10-K for the fiscal year ended December 31, 1998. The following summary
financial information should be read in connection with this historical
financial information, including the notes which accompany such financial
information. This historical financial information is considered a part of this
document. See "Where You Can Find More Information." Our audited historical
financial statements as of December 31, 1998 and 1997, and for each of the
three years ended December 31, 1998 were audited by Arthur Andersen LLP,
independent public accountants.
The information in the table on the following page reflects consolidated
financial information for the following companies we have acquired:
<TABLE>
<CAPTION>
Acquired Company Date Acquired
---------------- -------------
<S> <C>
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
Telecom*USA Publishing Group Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
Ovation Communications, Inc. March 31, 1999
</TABLE>
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired.
The balance sheet data in the table include the financial position of these
companies at the end of the periods presented, beginning with the period in
which they were acquired. These acquisitions affect the comparability of the
financial data for the periods presented.
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date will receive one additional share of our Class A
common stock for each share held. Distribution of the additional shares will
take place on July 26, 1999. All information in the following table has been
adjusted to reflect the two-for-one stock split.
The pro forma information presented in the operations statement data and
other financial data in the table reflects the operations of Ovation as if the
Ovation acquisition had occurred on January 1, 1998 and the pro forma
information in the balance sheet data in the table includes Ovation's financial
position as of December 31, 1998.
The pro forma information presented in the operations statement data and
other financial data in the table includes the effects of the issuance of $300
million principal amount of our 8 3/8% senior notes in March 1998, $300 million
principal amount of our 9 1/2% senior notes in October 1998 and $500 million
principal amount of the 8 1/8% notes in February 1999 as if they had occurred
at the beginning of 1998 and the pro forma information presented in the balance
sheet data in the table includes the effects of the issuance of the 8 1/8%
notes as if it had occurred at the end of 1998.
The ratio of earnings to fixed charges and preferred stock dividends is
calculated as follows: earnings consist of net loss before income taxes plus
fixed charges (excluding capitalized interest). Fixed charges consist of
interest on all debt (including capitalized interest), amortization of debt
discount and deferred loan costs and the portion of rental expense that is
representative of the interest component of rental expense (deemed to be one-
third of rental expense which management believes is a reasonable approximation
of the interest component). Preferred stock dividends means the amount of pre-
tax earnings that is required to pay the dividends on outstanding preferred
stock. We had no preferred stock outstanding during any of the periods
presented. For each of the years ended December 31, 1994, 1995, 1996, 1997 and
1998, earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32 million and $51.7 million, respectively. On a pro forma
basis, earnings would not have been sufficient to cover fixed charges by $188.6
and $61.7 million for the year ended December 31, 1998 and the three months
ended March 31, 1999, respectively.
(table begins on the next page)
S-20
<PAGE>
Selected Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 81,323 $267,886 $ 604,146 $ 625,181 $134,331 $181,109 $200,805
-------- -------- --------- --------- -------- -------- --------
Operating expenses:
Cost of service....... 52,624 151,190 323,208 329,527 75,045 92,459 99,797
Selling, general and
administrative....... 46,044 148,158 260,931 274,420 58,768 79,811 90,691
Depreciation and
amortization......... 8,485 33,275 89,107 109,720 19,431 35,110 41,680
Other................. 2,380 4,632 5,575 5,575 1,900 -- --
-------- -------- --------- --------- -------- -------- --------
Total operating
expenses............. 109,533 337,255 678,821 719,242 155,144 207,380 232,168
-------- -------- --------- --------- -------- -------- --------
Operating loss......... (28,210) (69,369) (74,675) (94,061) (20,813) (26,271) (31,363)
Interest income
(expense), net........ 5,369 (11,967) (52,234) (85,898) (10,141) (21,204) (26,074)
Other non-operating
income................ 495 1,426 1,997 1,997 687 (1) (1)
Income taxes........... -- -- -- -- -- -- --
-------- -------- --------- --------- -------- -------- --------
Net loss............... $(22,346) $(79,910) $(124,912) $(177,962) $(30,267) $(47,476) $(57,438)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.28) $ (.73) $ (.99) $ (1.30) $ (.24) $ (.36) $ (.40)
======== ======== ========= ========= ======== ======== ========
Weighted average common
shares outstanding.... 81,012 109,948 125,614 136,808 124,454 132,242 143,436
======== ======== ========= ========= ======== ======== ========
Ratio of earnings to
fixed charges and
preferred stock
dividends............. -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
December 31, 1999
------------------------------ -----------
1996 1997 1998 Actual
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets..................... $224,401 $ 517,869 $ 793,192 $ 974,218
Working capital.................... $185,968 $ 378,617 $ 613,236 $ 740,191
Property and equipment, net........ $ 92,123 $ 373,804 $ 629,746 $ 828,591
Total assets....................... $452,994 $1,345,652 $1,925,197 $ 2,836,380
Long-term debt less current
maturities........................ $ 2,573 $ 613,384 $1,245,170 $ 1,776,475
Stockholders' equity............... $403,429 $ 559,379 $ 462,806 $ 785,415
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $173,782 $601,137 $339,660 $ 739,497 $ 48,930 $ 538,897 $ 560,894
EBITDA(1).............. $(17,345) $(31,462) $ 20,007 $ 21,234 $ 518 $ 8,839 $ 10,317
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines.................................... 65,400 282,600 397,600 494,700
Cities and towns served........................ 120 227 269 408
Central offices/switches....................... -- 366 415 488
Route miles.................................... 2,352 4,908 7,120 7,654
Employees...................................... 2,077 4,941 5,300 6,109
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
S-21
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to:
. the issuance of $300 million aggregate principal amount of our 8 3/8% senior
notes in March 1998
. the issuance of $300 million aggregate principal amount of our 9 1/2% senior
notes in October 1998
. the issuance of $500 million aggregate principal amount of our 8 1/8% senior
notes in February 1999
. our acquisition of Ovation Communications, Inc. in March 1999
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
reflects the Ovation acquisition using the purchase method of accounting, and
assumes that the Ovation acquisition and the issuance of the 8 3/8% senior
notes, the 9 1/2% senior notes and the 8 1/8% senior notes were consummated at
the beginning of 1998. The unaudited pro forma financial information is derived
from and should be read in conjunction with our consolidated financial
statements, Ovation's consolidated financial statements and the related notes
thereto incorporated by reference in this prospectus. The pro forma adjustments
are based upon available information and assumptions that management believes
to be reasonable. Depreciation and amortization were adjusted to include
amortization of intangibles acquired in the Ovation acquisition. The acquired
intangibles will be amortized over periods ranging from 3 to 30 years. For
purposes of this pro forma presentation, the issuance of the 8 3/8% senior
notes, the 9 1/2% senior notes and the 8 1/8% senior notes are collectively
referred to as the "Notes Offerings."
The adjustments for the Ovation acquisition reflect the preliminary
allocation of the net purchase price of Ovation to the assets of Ovation,
including intangible assets, and record the payment of $121.3 million in cash
and the issuance of 11,193,234 shares of our Class A common stock (as adjusted
for the two-for-one stock split described below) valued at $16.88 per share (as
adjusted for the two-for-one stock split described below). The value of $16.88
per share represents the average closing price of our Class A common stock on
the Nasdaq National Market for the eleven trading days beginning five days
prior to the date the agreement was announced, January 7, 1999, and ending five
days after such announcement. The adjustments include the elimination of the
Ovation equity components, including common stock, treasury stock, other
capital and retained deficit.
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date will receive one additional share of our Class A
common stock for each share held. Distribution of the additional shares will
take place on July 26, 1999. All information in the Pro Forma Financial Data
has been adjusted to reflect the two-for-one stock split.
We have provided this unaudited pro forma financial data for informational
purposes only. This data does not necessarily indicate the operating results
that would have occurred had the Ovation acquisition been consummated at the
beginning of 1998, nor does it necessarily indicate future operating results or
financial position.
S-22
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed
Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------
Adjustments Pro Forma Adjustments
for the for the for the
Notes Notes Ovation
McLeodUSA Offerings Offerings Ovation Acquisition Total
--------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue............................... $ 604,146 $ -- $ 604,146 $21,035 $ -- $ 625,181
--------- -------- --------- ------- -------- ---------
Operating Expenses:
Cost of service...................... 323,208 -- 323,208 6,319 -- 329,527
Selling, general and administrative.. 260,931 -- 260,931 13,489 -- 274,420
Depreciation and amortization........ 89,107 -- 89,107 5,383 15,230 109,720
Other................................ 5,575 -- 5,575 -- -- 5,575
--------- -------- --------- ------- -------- ---------
Total operating expenses............ 678,821 -- 678,821 25,191 15,230 719,242
--------- -------- --------- ------- -------- ---------
Operating loss........................ (74,675) -- (74,675) (4,156) (15,230) (94,061)
Interest expense, net................. (52,234) (32,056) (84,290) (1,608) -- (85,898)
Other non-operating income............ 1,997 -- 1,997 -- -- 1,997
Income taxes.......................... -- -- -- -- -- --
--------- -------- --------- ------- -------- ---------
Net loss............................. $(124,912) $(32,056) $(156,968) $(5,764) $(15,230) $(177,962)
========= ======== ========= ======= ======== =========
Loss per common share................. $ (0.99) $ (1.25) $ (1.30)
========= ========= =========
Weighted average common shares
outstanding.......................... 125,614 125,614 136,808
========= ========= =========
Other Financial Data:
EBITDA(1)............................. $ 20,007 $ -- $ 20,007 $ 1,227 $ -- $ 21,234
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
S-23
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed
Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------------------------------------
Adjustments Pro Adjustments
for the Forma for for the
Notes the Notes Ovation
McLeodUSA Offerings Offerings Ovation Acquisition Total
--------- ----------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data
Revenue................ $181,109 $ -- $181,109 $19,696 $ -- $200,805
-------- ------- -------- ------- ------- --------
Operating expenses:
Cost of service....... 92,459 -- 92,459 7,338 -- 99,797
Selling, general and
administrative....... 79,811 -- 79,811 10,880 -- 90,691
Depreciation and
amortization......... 35,110 -- 35,110 2,829 3,741 41,680
Other................. -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Total operating
expenses............ 207,380 -- 207,380 21,047 3,741 232,168
-------- ------- -------- ------- ------- --------
Operating loss........ (26,271) -- (26,271) (1,351) (3,741) (31,363)
Interest expense,
net.................. (21,204) (2,487) (23,691) (2,383) -- (26,074)
Other non-operating
income............... (1) -- (1) -- -- (1)
Income taxes.......... -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Net loss.............. $(47,476) $(2,487) $(49,963) $(3,734) $(3,741) $(57,438)
======== ======= ======== ======= ======= ========
Loss per common
share................ $ (0.36) $ (0.38) $ (0.40)
======== ======== ========
Weighted average
common shares
outstanding.......... 132,242 132,242 143,436
======== ======== ========
Other Financial Data:
EBITDA(1).............. $ 8,839 $ -- $ 8,839 $ 1,478 $ -- $ 10,317
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
S-24
<PAGE>
DESCRIPTION OF THE SERIES A PREFERRED STOCK
The following is a summary of certain provisions of the Certificate of
Designations and the Series A preferred stock. Copies of the Certificate of
Designations and the form of Series A preferred stock share certificate are
available upon request at our address set forth under "Where You Can Find More
Information." This summary is not intended to be complete and is subject to,
and is qualified in its entirety by reference to, the Certificate of
Designations. The definitions of certain capitalized terms used in the
following summary that are not defined herein are defined in the Certificate of
Designations. For purposes of this description of the Series A preferred stock,
the words "McLeodUSA," "we," "our" or "us" refer to McLeodUSA Incorporated and
do not include its subsidiaries.
General
At the consummation of this offering, we will issue 400,000 shares of our
% Series A Cumulative Convertible Preferred Stock, $0.01 par value per
share, designated as " % Series A Cumulative Convertible Preferred Stock."
When issued, the Series A preferred stock will be validly issued, fully paid
and nonassessable. The holders of the Series A preferred stock will have no
preemptive or preferential right to purchase or subscribe to stock,
obligations, warrants or any other of our securities of any class. We will seek
to have the Series A preferred stock approved for listing on the Nasdaq
National Market.
Ranking
The Series A preferred stock will, with respect to dividend rights and rights
on liquidation, dissolution or winding-up, rank:
. junior to all our existing and future debt obligations
. junior to "Senior Stock," which is each class of our capital stock or
series of preferred stock established after the Series A preferred stock
by our board of directors that has terms which expressly provide that
such class or series will rank senior to the Series A preferred stock
. on a parity with "Parity Stock," which is each class of capital stock or
series of preferred stock established after the Series A preferred stock
by our board of directors that has terms which expressly provide that
such class or series will rank on a parity with the Series A preferred
stock
. senior to "Junior Stock," which is all classes of our common stock,
including our Class A common stock and Class B common stock, and any
other class of our capital stock established after the Series A
preferred stock by our board of directors whose terms do not expressly
provide that such class or series ranks senior to, or on a parity with,
our Series A preferred stock
While any shares of Series A preferred stock are outstanding, we may not
authorize, create or increase the authorized amount of any class or series of
capital stock that ranks senior to the Series A preferred stock with respect to
the payment of dividends or amounts upon liquidation, dissolution or winding-up
without the consent of the holders of at least 66 2/3% of the outstanding
shares of Series A preferred stock. We may, however, without the consent of any
holder of Series A preferred stock, create additional classes of capital stock,
increase the authorized number of shares of preferred stock or issue series of
a stock that ranks on a parity with, or junior to, the Series A preferred stock
with respect, in each case, to the payment of dividends and amounts upon
liquidation, dissolution and winding-up. See "--Voting Rights."
Dividends
Subject to the rights of any holders of Senior Stock and Parity Stock,
holders of shares of Series A preferred stock will be entitled to receive,
when, as and if declared by the board of directors out of funds of McLeodUSA
legally available for payment, cumulative dividends at the annual rate of %
per share on the liquidation preference thereof of $1,000 per share of Series A
preferred stock (equivalent to $ per share
S-25
<PAGE>
annually). Dividends on the Series A preferred stock will be payable quarterly
on , , and of each year commencing
, 1999, at such annual rate and shall accrue from the most
recent date as to which dividends shall have been paid or, if no dividends have
been paid, from the date of the original issuance of the Series A preferred
stock. Each such dividend will be payable to holders of record as they appear
on our stock records at the close of business on the record date next preceding
such quarterly dividend payment date, which record dates will be established by
the board of directors but, in any event, will be not more than 60 days nor
less than 15 days before the respective quarterly dividend payment dates.
Dividends will be cumulative from such quarterly dividend payment date, whether
or not in any dividend period or periods there shall be funds of McLeodUSA
legally available for the payment of such dividends. Accumulations of dividends
on shares of Series A preferred stock will not bear interest. Dividends payable
on the Series A preferred stock for any period greater or less than a full
quarterly dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
Any dividend on the Series A preferred stock shall be, at the option of
McLeodUSA, payable (1) in cash or (2) through the issuance of shares of our
Class A common stock. If we pay dividends in shares of Class A common stock,
the number of shares of Class A common stock to be issued on each dividend
payment date will be determined by dividing the total dividend to be paid on
each share of Series A preferred stock by the applicable Discounted Current
Market Value (as defined below) of the Class A common stock. The transfer agent
is authorized and directed in the Certificate of Designations to aggregate any
fractional shares of Class A common stock that are issued as dividends, sell
them at the best available price and distribute the proceeds to the holders of
the Series A preferred stock in proportion to their respective interests. We
will pay the expenses of the transfer agent with respect to such sale,
including brokerage commissions. In the event the sale by the transfer agent of
such aggregated fractional interests would be restricted, McLeodUSA and the
transfer agent will agree upon other appropriate arrangements for the cash
realization of fractional interests. All shares of Class A common stock
distributed on the related dividend payment date in payment of dividends on the
Series A preferred stock will be freely transferable without restriction under
the Securities Act.
The "Discounted Current Market Value" of the Class A common stock with
respect to a dividend payment date means the product of (x) 97% and (y) the
"Market Average Value" as of the record date relating to such dividend payment
date. The "Market Average Value" will equal the average of the daily closing
prices of the Class A common stock for the five consecutive Trading Days ending
on (and including) the fourth Trading Day prior to such dividend payment date.
The closing price for each Trading Day will be the last sales price on the
Nasdaq National Market, or the principal securities exchange or other
securities market on which the Class A common stock is then being traded.
"Trading Day" means any day on which the Class A common stock is traded for any
period on the Nasdaq National Market (or on the principal securities exchange
or other securities market on which the Class A common stock is then being
traded).
No dividend will be declared or paid upon, or any sum set apart for the
payment of dividends upon, any outstanding share of the Series A preferred
stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Series A preferred stock.
We will not (1) declare, pay or set apart funds for the payment of any
dividend or other distribution with respect to any Junior Stock or (2) redeem,
purchase or otherwise acquire for consideration any Junior Stock through a
sinking fund or otherwise, unless (A) all accrued and unpaid dividends with
respect to the Series A preferred stock and any Parity Stock at the time such
dividends are payable have been paid or funds have been set apart for payment
of such dividends and (B) sufficient funds have been paid or set apart for the
payment of the dividend for the current dividend period with respect to the
Series A preferred stock and any Parity Stock.
No dividend will be declared or paid on any Parity Stock unless full
cumulative dividends have been paid on the Series A preferred stock for all
prior dividend periods; provided, however, if accrued dividends on the
S-26
<PAGE>
Series A preferred stock for all prior dividend periods have not been paid in
full, then any dividend declared for any dividend period on the Series A
preferred stock and on any Parity Stock will be declared ratably in proportion
to accrued and unpaid dividends on the Series A preferred stock and such Parity
Stock.
Notwithstanding anything herein to the contrary, we may declare and pay
dividends on Parity Stock or Junior Stock which are payable solely in shares of
Parity Stock or Junior Stock (in the case of Parity Stock) or of Junior Stock
(in the case of Junior Stock) or by the increase in the liquidation value of
Parity Stock or Junior Stock, as applicable, or repurchase, redeem or otherwise
acquire Junior Stock in exchange for Junior Stock and Parity Stock in exchange
for Parity Stock or Junior Stock.
For the foreseeable future, we intend to pay all dividends on the Series A
preferred stock (except with respect to cash paid in lieu of fractional shares)
in shares of our Class A common stock. If, in the future, we were to consider
paying cash dividends on the Series A preferred stock we would have to comply
with the restrictions contained in the indentures governing our outstanding
indebtedness. See "Risk Factors--We Are Restricted from Paying Cash Dividends."
Redemption
Provisional Redemption
We may redeem Series A preferred stock, upon not less than 30 nor more than
60 days' prior notice mailed by first-class mail to each holder's registered
address, at a redemption price of % of the liquidation preference, plus
accumulated and unpaid dividends, if any, whether or not declared (including a
prorated dividend for any partial dividend period), to the redemption date (the
"Provisional Redemption Date"), on or after , 2001, but prior to
, 2002, if the closing price of our Class A common stock equals or
exceeds 150% of the Conversion Price for at least 20 Trading Days within any 30
Trading Day period. This type of redemption is a "Provisional Redemption."
If we undertake a Provisional Redemption, the holders of shares of Series A
preferred stock that are called for redemption also will receive a payment
(referred to as the "additional payment") in an amount equal to the present
value of the aggregate value of the dividends that would thereafter have been
payable on the Series A preferred stock (whether or not such dividends have
been declared) for the period from the Provisional Redemption Date to ,
2002 (which period is referred to as the "additional period"). The present
value will be calculated using the bond equivalent yield on U.S. Treasury notes
or bills having a term nearest in length to that of the additional period as of
the day immediately preceding the date on which a notice of Provisional
Redemption is mailed.
We may effect any provisional redemption, in whole or in part, at our option,
by payment of the redemption price, including any additional payment, in cash,
through delivery of shares of Class A common stock or a combination thereof,
subject to applicable law, by delivering notice to the holders of the Series A
preferred stock not less than 30 nor more than 60 days prior to the scheduled
redemption date.
Optional Redemption
Except under the foregoing circumstances for a Provisional Redemption, we may
not redeem the Series A preferred stock prior to , 2002. Thereafter,
each share of the Series A preferred stock may be redeemed, at our option, in
whole or in part, at any time or from time to time, upon not less than 30 nor
more than 60 days' prior notice mailed by first-class mail to each holder's
registered address, at the following redemption prices, plus accumulated and
unpaid dividends, if any, to the date fixed for redemption (including a
prorated dividend for any partial dividend period), payable in cash.
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If redeemed during the 12-month period commencing on (or, if such
date is not a date on which the Nasdaq National Market is open for business,
then on the next day the Nasdaq National Market is open for business) of the
years set forth below, the redemption prices shall be:
<TABLE>
<CAPTION>
Period Redemption Price
------ ----------------
<S> <C>
2002..................................................... $
2003.....................................................
2004.....................................................
2005 and thereafter...................................... $1,000.00
</TABLE>
In the case of any partial optional redemption, selection of the Series A
preferred stock for redemption will be made by us in compliance with the
requirements of the principal national securities exchange, if any, on which
the Series A preferred stock is listed, or if the Series A preferred stock is
not listed on a national securities exchange, on a pro rata basis, by lot or
such other method as we, in our sole discretion, deem fair and appropriate;
provided, however, that we may redeem all the shares held by holders of fewer
than five shares (or all of the shares held by the holders who would hold fewer
than five shares as a result of such redemption) as we may determine.
If any Provisional Redemption Date or other redemption date falls after a
dividend payment record date and prior to the related dividend payment date,
the holders of the Series A preferred stock at the close of business on such
record date will be entitled to receive the dividend payable on such shares on
the corresponding dividend payment date, notwithstanding the redemption of such
shares following such dividend payment record date. Except as provided for in
the preceding sentence, no payment or allowance will be made for accrued
dividends on any shares of Series A preferred stock called for redemption.
Our ability to redeem the Series A preferred stock at our option is limited
by the terms of our outstanding indebtedness. We may not be able to redeem the
Series A preferred stock unless we simultaneously redeem or repay such
indebtedness.
Liquidation Preference
Upon the voluntary or involuntary liquidation, dissolution or winding-up of
McLeodUSA, and subject to the rights of the creditors of McLeodUSA and holders
of Senior Stock and Parity Stock, each holder of Series A preferred stock will
be entitled to be paid, out of the assets of McLeodUSA available for
distribution to stockholders, an amount equal to the liquidation preference of
$1,000 per share of Series A preferred stock held by such holder, plus
accumulated and unpaid dividends thereon to the date fixed for liquidation,
dissolution or winding-up (including an amount equal to a prorated dividend for
the period from the last divided payment date to the date fixed for
liquidation, dissolution or winding-up) before any distribution is made on any
Junior Stock, including our Class A common stock. If, upon any voluntary or
involuntary liquidation, dissolution or winding-up of McLeodUSA, the amounts
payable with respect to the Series A preferred stock and all other Parity Stock
are not paid in full, the holders of the Series A preferred stock and the
Parity Stock will share equally and ratably in any distribution of the assets
of McLeodUSA in proportion to the respective amounts to which they are
entitled. After payment of the full amount of the liquidation preference of the
Series A preferred stock, and, if applicable, an amount equal to a prorated
dividend, the holders of shares of Series A preferred stock will not be
entitled to any further participation in any distribution of the assets of
McLeodUSA. However, neither the sale, conveyance, exchange or transfer (for
cash, shares of stock, securities or other consideration) of all or
substantially all of the property or assets of McLeodUSA nor the consolidation
or merger of McLeodUSA with, or into, one or more entities will be deemed to be
a liquidation, dissolution or winding-up of McLeodUSA.
The Certificate of Designations will not contain any provision requiring
funds to be set aside to protect the liquidation preference of the Series A
preferred stock even though it is substantially in excess of the par value
thereof.
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Voting Rights
The holders of Series A preferred stock, except as otherwise required under
Delaware law or as provided in the Certificate of Designations, shall not be
entitled to vote on any matter required or permitted to be voted upon by our
stockholders. In exercising any such vote, each outstanding share of Series A
preferred stock will have one vote (excluding shares of Series A preferred
stock held by McLeodUSA or any entity controlled by McLeodUSA, which shares
will have no votes).
The Certificate of Designations will provide that if dividends on the Series
A preferred stock are in arrears and unpaid for six or more dividend periods
(whether or not consecutive) then the holders of the outstanding shares of
Series A preferred stock, voting separately and as a class together with the
holders of any Parity Stock upon which like rights have been conferred and are
exercisable, will be entitled to elect to serve on the board of directors the
lesser of (x) two additional members to the board of directors or (y) that
number of directors constituting at least 25% of the members of the board of
directors, and the number of members of the board of directors will be
immediately and automatically increased by such number. Such voting rights of
the Series A preferred stock will continue until such time as all dividends in
arrears on the Series A preferred stock are paid in full, at which time the
term of any directors elected pursuant to the provisions of this paragraph
(subject to the right of holders of any other preferred stock to elect such
directors) shall terminate and the number of directors constituting the board
of directors will be immediately and automatically decreased by such number
(until the occurrence of any such subsequent event).
The Certificate of Designations will also provide that, except as expressly
set forth above under "--Ranking," (1) the creation, authorization or issuance
of any shares of Junior Stock or Parity Stock, including the designation of a
series thereof within the existing class of Series A preferred stock, or (2)
the increase or decrease in the amount of authorized capital stock of any
class, including any preferred stock, shall not require the consent of the
holders of Series A preferred stock and shall not be deemed to affect adversely
the rights, preferences, privileges or voting rights of shares of Series A
preferred stock.
Conversion Rights
Shares of Series A preferred stock will be convertible, in whole or in part,
at any time after the issue date, at the option of the holders thereof, into
shares of Class A common stock initially at the conversion price of $ per
share, subject to adjustment as described below ("Conversion Price"). The right
to convert shares of Series A preferred stock called for redemption will
terminate at the close of business on the relevant redemption date.
We will have the option to convert all of the shares of Series A preferred
stock into shares of Class A common stock at the Conversion Price if, on or
after , 2002, the closing price of our Class A common stock has equaled
or exceeded 135% of the Conversion Price for at least 20 out of 30 consecutive
days on which the Nasdaq National Market (or the principal securities exchange
or other securities market on which the Class A common stock is then being
traded) is open for the transaction of business.
Conversion of shares of Series A preferred stock, or a specified portion
thereof, may be effected by delivering certificates evidencing such shares,
together with written notice of conversion and a proper assignment of such
certificates to McLeodUSA or in blank, to the office or agency to be maintained
by McLeodUSA for that purpose. Initially, Norwest Shareowner Services will
maintain such office.
Each conversion will be deemed to have been effected immediately prior to the
close of business on the date on which the certificates for shares of Series A
preferred stock shall have been surrendered and notice (and if applicable,
payment of an amount equal to the dividends payable on such shares) received by
McLeodUSA. McLeodUSA will issue a certificate evidencing the Class A common
stock distributed upon conversion as soon as reasonably practical after the
conversion date.
All shares of Class A common stock distributed upon conversion will be freely
transferable without restriction under the Securities Act.
Holders of shares of Series A preferred stock at the close of business on a
dividend payment record date will be entitled to receive the dividend payable
on such shares on the corresponding dividend payment date notwithstanding the
conversion of such shares following the dividend payment record date and prior
to such
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dividend payment date. However, shares of Series A preferred stock surrendered
for conversion during the period between the close of business on any dividend
payment record date and the opening of business on the corresponding dividend
payment date (except shares converted after the issuance of a notice of
redemption with respect to a redemption date during such period, which will be
entitled to such dividend) must be accompanied by payment of an amount equal
to the dividend payable on such shares on such dividend payment date. A holder
of shares of Series A preferred stock on a dividend payment record date who
(or whose transferee) tenders any such shares for conversion into shares of
Class A common stock on such dividend payment date will receive the dividend
payable on such shares of Series A preferred stock on such date, and the
converting holder need not include payment of the amount of such dividend upon
surrender of shares of Series A preferred stock for conversion. Except as
provided above, we will make no payment or allowance for unpaid dividends,
whether or not in arrears, on converted shares or the dividends on the shares
of Class A common stock issued upon such conversion.
Fractional shares of Class A common stock will not be issued upon conversion
but, in lieu thereof, we will pay a cash adjustment based on the current
market price (as defined) of the Class A common stock on the business day
prior to such conversion date.
The Conversion Price is subject to adjustment upon certain events, including:
(1) any redemption payment or payment of a dividend or other distribution
payable in shares of Class A common stock to all holders of any class
of capital stock of McLeodUSA, other than the issuance of shares of
Class A common stock in connection with the payment (1) in redemption
for, of dividends on or upon the conversion of the Series A preferred
stock or (2) to all holders of the Series A preferred stock based upon
the number of shares of Class A common stock into which the Series A
preferred stock is then convertible;
(2) any issuance to all holders of shares of McLeodUSA's common stock of
rights, options or warrants entitling them to subscribe for or purchase
shares of Class A common stock or securities convertible into or
exchangeable for shares of Class A common stock at less than market
value as of the date of conversion or exchange; provided, however, that
no adjustment will be made with respect to such a distribution if the
holder of shares of the Series A preferred stock would be entitled to
receive such rights, options or warrants upon conversion at any time of
shares of the Series A preferred stock into Class A common stock and
provided, further, that if such rights, options or warrants are only
exercisable upon the occurrence of certain triggering events, then the
Conversion Price will not be adjusted until such triggering events
occur;
(3) any subdivision, combination or reclassification of Class A common
stock;
(4) any distribution consisting exclusively of cash or any other
transaction for which the penultimate paragraph below is applicable,
which specifies that no antidilution adjustment shall be made to all
holders of shares of Class A common stock in an aggregate amount that,
together with (1) all other such cash distributions made within the
then preceding 12 months in respect of which no adjustment has been
made and (2) any cash and the fair market value of other consideration
paid or payable in respect of any tender offer by McLeodUSA or any of
its subsidiaries for shares of Class A common stock concluded within
the then preceding 12 months in respect of which no adjustment has been
made, exceeds 15% of McLeodUSA's market capitalization (defined as the
product of the then current market price of the Class A common stock
times the number of shares of Class A common stock then outstanding on
the record date of such distribution);
(5) the completion of a tender or exchange offer which McLeodUSA or any of
its subsidiaries makes for shares of Class A common stock that involves
an aggregate consideration that, together with (1) any cash and other
consideration payable in a tender or exchange offer by McLeodUSA or any
of its subsidiaries for shares of any of the Class A common stock
expiring within the then preceding 12 months in respect of which no
adjustment has been made and (2) the aggregate amount of any such
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cash distributions referred to in clause 4 above to all holders of
shares of Class A common stock within the then preceding 12 months in
respect of which no adjustments have been made, exceeds 15% of
McLeodUSA's market capitalization immediately prior to the expiration of
such tender offer; or
(6) a distribution to all holders of Class A common stock consisting of
evidences of indebtedness, shares of capital stock other than Class A
common stock or assets, including securities, but excluding those
dividends and those issuances of rights, options, warrants and other
distributions for which an adjustment to the Conversion Price as
referred to above is applicable (other than in connection with a merger
effected solely to reflect a change in the jurisdiction of
incorporation of McLeodUSA).
No adjustment of the Conversion Price will be required to be made:
(A) until cumulative adjustments amount to one percent of such price,
or
(B) with respect to rights, options or warrants issued pursuant to
certain employee benefit plans of McLeodUSA.
McLeodUSA also may from time to time decrease the Conversion Price by any
amount for any period of at least 20 days, so long as the decrease is
irrevocable during such period, in which case McLeodUSA shall give at least 15
days' notice of such decrease. In addition to the foregoing adjustments,
McLeodUSA will be permitted to make such reductions in the Conversion Price as
it determines to be advisable in order that any stock dividend, subdivision of
shares, distribution of rights to purchase stock or securities or distribution
of securities convertible into or exchangeable for stock made by McLeodUSA to
its stockholders will not be taxable to the recipients. In the event McLeodUSA
elects to make such a reduction in the Conversion Price, McLeodUSA will comply
with the requirements of Rule 14e-1 under the Securities Exchange Act, and any
other securities laws and regulations thereunder, if and to the extent that
such laws and regulations are applicable in connection with the reduction of
the Conversion Price. See "Federal Tax Considerations."
In the event that, after the issuance of the Series A preferred stock,
McLeodUSA distributes rights, options or warrants (other than those referred
to in clause B above) to all holders of Class A common stock, so long as any
such rights, options or warrants have not expired or been redeemed by
McLeodUSA, the holder of any shares of Series A preferred stock surrendered
for conversion will be entitled to receive upon such conversion, in addition
to the shares of Class A common stock then issuable upon such conversion,
which we call the conversion shares, a number of rights, options or warrants
to be determined as follows: (1) if such conversion occurs on or prior to the
date for the distribution to the holders of rights, options or warrants or
separate certificates evidencing such rights, options or warrants, called the
distribution date, the same number of rights, options or warrants to which a
holder of a number of shares of Class A common stock equal to the number of
conversion shares is entitled at the time of such conversion in accordance
with the terms and provisions applicable to the rights, options or warrants,
and (2) if such conversion occurs after such distribution date, the same
number of rights, options or warrants to which a holder of the number of
shares of Class A common stock into which such Series A preferred stock was
convertible immediately prior to such distribution date would have been
entitled on such distribution date in accordance with the terms and provisions
of and applicable to the rights, options or warrants.
Except as stated above, the Conversion Price will not be adjusted for the
issuance of common stock, or any securities convertible into or exchangeable
for common stock or carrying the right to purchase any of the foregoing, in
exchange for cash, property or services.
In case of:
(1) any merger or consolidation of McLeodUSA, other than a merger or
consolidation in which (a) McLeodUSA is the continuing corporation and (b)
the Class A common stock outstanding immediately prior to the merger or
consolidation is not exchanged for cash, securities or other property of
another corporation;
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(2) any sale or transfer to another corporation of the property of
McLeodUSA as an entirety or substantially as an entirety; or
(3) any statutory exchange of securities with another corporation, other
than in connection with a merger or acquisition,
there will be no adjustment of the Conversion Price. Each share of the then
outstanding Series A preferred stock will, without the consent of the holder of
any Series A preferred stock, become convertible only into the kind and amount
of securities, cash or other property receivable upon such merger,
consolidation, sale, transfer or statutory exchange by a holder of the number
of shares of Class A common stock into which such Series A preferred stock was
convertible immediately prior to such merger, consolidation, sale, transfer or
statutory exchange, assuming such holder of Class A common stock failed to
exercise his rights of election, if any, as to the kind or amount of
securities, cash or other property receivable upon such merger, consolidation,
sale, transfer or statutory exchange. In the case of a cash merger of McLeodUSA
into another company or any other cash transaction of the type mentioned above,
the effect of these provisions would be that thereafter each share of Series A
preferred stock would be convertible at the Conversion Price in effect at such
time into the same amount of cash per share into which each share of Series A
preferred stock would have been convertible had such share been converted into
Class A common stock immediately prior to the effective date of such cash
merger or transaction. Depending upon the terms of such cash merger or
transaction, the aggregate amount of cash into which such shares of Series A
preferred stock would be converted could be more or less than the liquidation
preference with respect to such Series A preferred stock.
Holders of Series A preferred stock at the close of business on a record date
will be entitled to receive the dividend payable on such shares on the
corresponding dividend payment date notwithstanding the conversion of such
shares following such record date and prior to such dividend payment date.
However, Series A preferred stock surrendered for conversion during the period
between the close of business on any record date and the opening of business on
the corresponding dividend payment date, except shares converted after the
issuance of a notice of redemption with respect to a redemption date during
such period or coinciding with such dividend payment date, which will be
entitled to such dividend, must be accompanied by payment of an amount equal to
the dividend payable on such shares on such dividend payment date. A holder of
Series A preferred stock on a record date who, or whose transferee, tenders any
such shares for conversion into shares of Class A common stock on such dividend
payment date will receive the dividend payable by McLeodUSA on such shares of
Series A preferred stock on such date. The converting holder need not include
payment of the amount of such dividend upon surrender of Series A preferred
stock for conversion. Except as provided above, McLeodUSA will make no payment
or allowance for unpaid dividends, whether or not in arrears, on converted
shares or for dividends on the Class A common stock issued upon such
conversion.
Change of Control
Notwithstanding any other provision in the preceding paragraphs to the
contrary, if any Change in Control (as defined) occurs, then the Conversion
Price in effect will be adjusted immediately after such Change in Control as
described below. In addition, in the event of a Common Stock Change in Control
(as defined), each share of the Series A preferred stock shall be convertible
solely into common stock of the kind received by holders of Class A common
stock as the result of such Common Stock Change in Control.
A "Change in Control" shall be deemed to have occurred at such time as:
. the sale, lease, transfer, conveyance or other disposition (other than
by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all the assets of McLeodUSA to any
"person" (as such term is used in Section 13(d)(3) of the Securities
Exchange Act)
. the adoption of a plan relating to the liquidation, dissolution or
winding-up of McLeodUSA
. the consummation of any transaction (including any merger or
consolidation) the result of which is that any "person" (as defined
above) other than any Permitted Holder (as defined below) becomes the
beneficial owner (as such term is defined in Rules 13d-3 and 13d-5
promulgated under the Securities Exchange Act, except that a person will
be deemed to have beneficial ownership of all shares that such
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person has the right to acquire whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 50% of the voting stock of McLeodUSA, or
. the first day on which a majority of the members of the board of
directors of McLeodUSA are not Continuing Directors (as defined in the
Certificate of Designations)
"Permitted Holders" include: IES Industries Inc. and its successors and
assigns; Clark E. McLeod, Mary E. McLeod and Richard A. Lumpkin, and
foundations and trusts controlled by any of them; and affiliates (other than
the Company and its subsidiaries) of each of the foregoing.
The term "Common Stock Change in Control" means any Change in Control in
which more than 50% of the value (as determined in good faith by McLeodUSA's
board of directors) or the consideration received by holders of Class A common
stock consists of common stock of another company that for each of the 10
consecutive Trading Days referred to in the definition of "Applicable Price"
below has been admitted for listing or admitted for listing subject to notice
of issuance on a national securities exchange or quoted on the Nasdaq National
Market; provided, however, that a Change in Control shall not be a Common
Stock Change in Control unless either (1) McLeodUSA continues to exist after
the occurrence of such Change in Control and the outstanding shares of Series
A preferred stock continue to exist as outstanding shares of Series A
preferred stock, or (2) not later than the occurrence of such Change in
Control, the outstanding shares of Series A preferred stock are converted into
or exchanged for shares of convertible preferred stock of a corporation
succeeding to McLeodUSA's business, which convertible preferred stock has
powers, preferences and relative, participating, optional or other rights, and
qualifications, limitations and restrictions, substantially similar to those
of the Series A preferred stock.
The term "Non-Stock Change in Control" means any Change in Control other
than a Common Stock Change in Control.
The term "Applicable Price" means (i) in the event of a Non-Stock Change in
Control in which the holders of the Class A common stock receive only cash,
the amount of cash received by the holder of one share of Class A common stock
and (ii) in the event of any other Non-Stock Change in Control or any Common
Stock Change in Control, the average of the closing prices for the Class A
common stock during the 10 Trading Days prior to and including the record date
for the determination of the holders of Class A common stock entitled to
receive cash, securities, property or other assets in connection with such
Non-Stock Change in Control or Common Stock Change in Control or, if there is
no such cash, securities, property or other assets or the date upon which such
Non-Stock Change in Control is deemed to have occurred, as the case may be, in
each case as adjusted in good faith by the board of directors to appropriately
reflect any of the events referred to in clauses 1 through 6 under "--
Conversion Rights."
For purposes of calculating any adjustment to be made in the event of a
Change of Control, immediately after such Change in Control:
(1) in the case of a Non-Stock Change in Control, the Conversion Price
will thereupon become the lower of (A) the Conversion Price in effect
immediately prior to such Non-Stock Change in Control, but after giving
effect to any other prior adjustments, and (B) the results obtained by
multiplying the greater of the Applicable Price and the then applicable
Reference Market Price (as defined) by a fraction of which the numerator
will be $1,000 and the denominator will be the then current redemption
price per share or, prior to , 2002, an amount per share of Series
A preferred stock determined by McLeodUSA in its sole discretion, after
consultation with an investment banking firm, to be the equivalent of the
hypothetical redemption price that would have been applicable if the Series
A preferred stock had been redeemable during such period; provided,
however, that if, as a result of the operation of this clause (1), the
cumulative number of shares of Class A common stock issued or issuable upon
conversion of the Series A preferred stock, after giving effect to the
adjustment described in this clause (1) and all prior conversions of Series
A preferred stock, would exceed a number (the "Threshold Number") equal to
20% of the outstanding shares of Class A common stock as of the issue date
of the Series A preferred stock, then until and unless McLeodUSA obtains
the approval of its common stockholders for the issuance
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of any shares of Class A common stock in excess of the Threshold Number,
the Conversion Price shall be adjusted pursuant to this clause (1) to that
price that would entitle the holders of Series A preferred stock to receive
in the aggregate, upon conversion for all the Series A preferred stock
(including all prior conversions of Series A preferred stock), no more than
the Threshold Number of shares of Class A common stock; and
(2) in the case of a Common Stock Change in Control, the Conversion Price
in effect immediately prior to such Common Stock Change in Control, but
after giving effect to any other prior adjustments, will thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator will be the Purchaser Stock Price (as defined) and the
denominator will be the Applicable Price; provided, however, that in the
event of a Common Stock Change in Control in which (A) 100% of the value of
the consideration received by a holder of Class A common stock is common
stock of the successor, acquiror or other third party (and cash, if any, is
paid with respect to any fractional interests in such common stock
resulting from such Common Stock Change in Control) and (B) all the Class A
common stock will have been exchanged for, converted into, or acquired for,
common stock (and cash with respect to fractional interests) of the
successor, acquiror or other third party, the Conversion Price in effect
immediately prior to such Common Stock Change in Control will thereupon be
adjusted by multiplying such Conversion Price by a fraction, of which the
numerator will be one (1) and the denominator will be the number of shares
of common stock of the successor, acquiror, or other third party received
by a holder of one share of our Class A common stock as a result of such
Common Stock Change in Control.
The foregoing Conversion Price adjustments in the event of a Non-Stock Change
in Control will apply in situations whereby a Change in Control not involving a
change in beneficial ownership of the Class A common stock has occurred or
whereby all or substantially all of the Class A common stock is acquired in a
transaction in which 50% or less of the value received by holders of such Class
A common stock consists of common stock that has been admitted for listing on a
national securities exchange or quoted on the Nasdaq National Market. If the
market price of the Class A common stock immediately prior to a Non-Stock
Change in Control is lower than the applicable Conversion Price then in effect,
the Conversion Price will be adjusted as described in clause 1 above and the
holders of the Series A preferred stock will be entitled to receive the amount
and kind of consideration that would have been received if the Series A
preferred stock had been converted into Class A common stock prior to the Non-
Stock Change in Control after giving effect to such adjustment.
The foregoing Conversion Price adjustments in the event of a Common Stock
Change in Control will apply in situations whereby more than 50% of the value
received by holders of Class A common stock consists of common stock of another
company that has been admitted for listing on a national securities exchange or
quoted on the Nasdaq National Market, in which case the Series A preferred
stock will become convertible into shares of common stock of the other company.
If consideration for the Class A common stock consists partly of common stock
of another company and partly of other securities, cash or property, each share
of Series A preferred stock will be convertible solely into a number of shares
of such common stock determined so that the initial value of such shares
(measured as described in the definition of Purchaser Stock Price) equals the
value of the shares of Class A common stock into which such share of Series A
preferred stock was convertible immediately before the transaction (measured as
described in the definition of Applicable Price). If consideration for Class A
common stock is solely common stock of another company, each share of Series A
preferred stock will be convertible into the same number of shares of such
common stock of another company receivable by a holder of the number of shares
of Class A common stock into which such share of Series A preferred stock was
convertible immediately before such transaction.
The term "Purchaser Stock Price" means, with respect to any Common Stock
Change in Control, the product of (1) the number of shares of common stock
received as consideration in such Common Stock Change in Control for each share
of Class A common stock, and (2) the average of the per share closing prices
for the common stock received as consideration in such Common Stock Change in
Control for the 10 consecutive
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Trading Days prior to and including the record date for the determination of
the holders of Class A common stock entitled to receive such common stock, or,
if there is no such record date, the date upon which the holders of the Class A
common stock shall have the right to receive such common stock, in each case,
as adjusted in good faith by the board of directors of McLeodUSA to
appropriately reflect any of the events referred to in clauses 1 through 6
under "--Conversion Rights"; provided, however, that if no such closing prices
exist, then the Purchaser Stock Price shall be set at a price determined in
good faith by the board of directors of McLeodUSA.
The term "Reference Market Price" shall initially mean $ (which is an
amount equal to 66 2/3% of the reported last sale price for the Class A common
stock on the Nasdaq National Market on , 1999), and in the event of
any adjustment to the Conversion Price other than as a result of a Change in
Control, the Reference Market Price shall also be adjusted so that the ratio of
the Reference Market Price to the Conversion Price after giving effect to any
such adjustment shall always be the same as the ratio of $ to the
initial Conversion Price set forth on the cover page of this prospectus
supplement.
Depending upon whether a Change in Control is a Non-Stock Change in Control
or Common Stock Change in Control, a holder of Series A preferred stock may
receive significantly different consideration upon conversion. In the event of
a Non-Stock Change in Control, the holder has the right to convert each share
of the Series A preferred stock into the kind and amount of the shares of stock
and other securities or property or assets receivable by a holder of the number
of shares of Class A common stock issuable upon conversion of such share of the
Series A preferred stock immediately prior to such Non-Stock Change in Control,
but after giving effect to the adjustment described above. However, in the
event of a Common Stock Change in Control in which less than 100% of the value
of the consideration received by a holder of Class A common stock is common
stock of the acquiror or other third party, a holder of a share of Series A
preferred stock who converts a share following the Common Stock Change in
Control will receive consideration in the form of such common stock only,
whereas a holder who has converted his share prior to the Common Stock Change
in Control will receive consideration in the form of common stock as well as
any other securities or assets (which may include cash) receivable thereupon by
a holder of the number of shares of Class A common stock issuable upon
conversion of such share of Series A preferred stock immediately prior to such
Common Stock Change in Control.
In the case of certain reclassifications, consolidations, mergers, sales or
transfers of assets or other transactions pursuant to which the Class A common
stock is converted into the right to receive other securities, cash or other
property, each share of Series A preferred stock then outstanding would,
without the consent of any holders of Series A preferred stock, become
convertible only into the kind and amount of securities, cash and other
property receivable upon the transaction by a holder immediately prior to such
transaction if such holder had converted its share of Series A preferred stock.
If at any such time McLeodUSA makes a distribution of property to its
stockholders that would be taxable to such stockholders as a dividend for
federal income tax purposes (for example, distributions of evidences of
indebtedness or assets of McLeodUSA, but generally not stock dividends or
rights to subscribe for capital stock) and, pursuant to the antidilution
provisions described above, the Conversion Price of the Series A preferred
stock is reduced, such reduction may be deemed to be the receipt of taxable
income by holders of the Series A preferred stock.
Consolidation, Merger and Sale of Assets
The Certificate of Designations will provide that McLeodUSA, without the
consent of the holders of any of the outstanding Series A preferred stock, may
consolidate with or merge into any other Person or convey, transfer or lease
its properties and assets substantially as an entirety to any Person or may
permit any Person to consolidate with or merge into, or transfer or lease its
properties substantially as an entirety to, McLeodUSA
provided, however that (a) the successor, transferee or lessee is organized
under the laws of the United States,
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any state thereof or the District of Columbia, (b) the shares of Series A
preferred stock shall become shares of such successor, transferee or lessee,
having in respect of such successor, transferee or lessee the same powers,
preferences and relative, participating, optional or other special rights and
the qualifications, limitations or restrictions thereon, the Series A preferred
stock had immediately prior to such transaction; and (c) certain other
conditions are met.
Under any consolidation by McLeodUSA with, or merger by McLeodUSA into, any
other Person or any conveyance, transfer or lease of the properties and assets
of McLeodUSA substantially as an entirety as described in the preceding
paragraph, the successor resulting from such consolidation or into which
McLeodUSA is merged or the transferee or lessee to which such conveyance,
transfer or lease is made, will succeed to, and be substituted for, and may
exercise every right and power of, McLeodUSA under the shares of Series A
preferred stock, and thereafter, except in the case of a lease, the predecessor
(if still in existence) will be released from its obligations and covenants
with respect to the Series A preferred stock.
SEC Reports and Reports to Holders
Whether or not we are required to file reports with the SEC, if any shares of
Series A preferred stock are outstanding, we will file with the SEC all such
reports and other information as we would be required to file with the SEC by
Sections 13(a) or 15(d) under the Securities Exchange Act. See "Where You Can
Find More Information." We will supply each holder of Series A preferred stock,
upon request, without cost to such holder, copies of such reports or other
information.
Transfer Agent, Registrar and Dividend Disbursing Agent
The transfer agent, registrar, dividend disbursing agent and redemption agent
for the shares of Series A preferred stock will be Norwest Bank Minnesota, N.A.
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FEDERAL TAX CONSIDERATIONS
The following is a summary of certain material U.S. federal tax
considerations relevant to the purchase, ownership and disposition of our
Series A preferred stock and Class A common stock. This summary is based on
the current provisions of the Internal Revenue Code of 1986, as amended,
Treasury regulations and judicial and administrative authority, all of which
are subject to change, possibly on a retroactive basis. This summary applies
only to investors who hold our Series A preferred stock or Class A common
stock as capital assets, within the meaning of section 1221 of the Internal
Revenue Code, and does not discuss the tax consequences to special classes of
investors, such as brokers or dealers in securities or currencies, financial
institutions, tax-exempt entities, life insurance companies, persons holding
our convertible preferred stock or common stock as a part of a hedging, short
sale or conversion transaction or a straddle, investors whose functional
currency is not the United States dollar, persons who hold our convertible
preferred stock or common stock through partnerships or other pass-through
entities, or, except as specifically noted, foreign holders and certain U.S.
expatriates. State, local and foreign tax consequences of ownership of our
Series A preferred stock and Class A common stock are not summarized.
We have not requested, and do not intend to request, any rulings from the
Internal Revenue Service concerning the federal tax consequences of an
investment in our Series A preferred stock or Class A common stock. You are
advised to consult with your own tax advisor regarding the consequences of
acquiring, holding or disposing of our Series A preferred stock or Class A
common stock in light of current tax laws, your particular investment
circumstances, and the application of state, local and foreign tax laws.
When we refer in the summary to a "United States Holder," we mean a
beneficial owner of Series A preferred stock or Class A common stock that is:
. a citizen or resident of the United States for United States federal
income tax purposes
. a corporation created or organized in the United States or under the
laws of the United States or of any political subdivision thereof
. an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source, or
. a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of
the trust
When we refer in the summary to a "Non-United States Holder," we mean a
beneficial owner of convertible preferred stock or common stock that is not a
United States Holder.
United States Holders
Distributions
We have the right to pay distributions on the Series A preferred stock and
the Class A common stock in cash or in shares of our Class A common stock. If
we distribute our Class A common stock, the amount of the distribution for
federal income tax purposes will be the fair market value (which may differ
from the Discounted Current Market Value) of the Class A common stock on the
date the distribution is paid, and the distribution will be subject to federal
income tax to the same extent as a cash distribution.
A distribution on the Series A preferred stock or Class A common stock will
be treated as a dividend to the extent of our current or accumulated earnings
and profits attributable to the distribution as determined under U.S. federal
income tax principles. The amount of our earnings and profits at any time will
depend upon our future actions and financial performance. If the amount of the
distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, the distribution will be treated as a
nontaxable return of capital and will be applied against and reduce your
adjusted tax basis in the stock, but not below zero. The
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reduction in tax basis will increase the amount of any gain, or reduce the
amount of any loss, which you would otherwise realize on the sale or other
taxable disposition of the stock. If the distribution exceeds both our current
and accumulated earnings and profits attributable to the distribution and your
adjusted tax basis in your stock, the excess will be treated as capital gain
and will be either long-term or short-term capital gain depending on your
holding period for the stock.
Corporate investors in our Series A preferred stock or Class A common stock
generally should be eligible for the 70% dividends-received deduction with
respect to the portion of any distribution on the stock taxable as a dividend.
However, corporate investors should consider certain provisions that may limit
the availability of a dividend received deduction, including the 46-day holding
period required by section 246(c) of the Internal Revenue Code, the rules of
section 246A which reduce the dividends-received deduction of dividends on
certain debt-financed stock, and the rules in section 1059 of the Internal
Revenue Code that reduce the basis of stock in respect of certain extraordinary
dividends, as well as the effect of the dividends-received deduction on the
determination of alternative minimum tax liability.
Optional redemption for Class A common stock or cash
If we redeem our Series A preferred stock for Class A common stock, the
exchange should constitute a recapitalization within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code. You will not recognize gain or loss
on the exchange unless some of the Class A common stock is received in
discharge of dividend arrearages, in which case the redemption will be treated
as a distribution on the Series A preferred stock to the extent of the
dividends in arrears. The amount constituting a distribution will be taxed as a
dividend to the extent of our current or accumulated earnings and profits
attributable to the distribution at the time, in accordance with the treatment
described above for distributions. Your tax basis in our Class A common stock
received pursuant to the redemption generally will equal your tax basis in the
Series A preferred stock surrendered in exchange, and your holding period for
the Class A common stock generally will include the period you held your Series
A preferred stock. However, the tax basis of Class A common stock received in
discharge of dividend arrearages will be its fair market value on the date
received and the holding period of that stock will commence on the day after
its receipt.
If we redeem our Series A preferred stock for cash, the redemption will be
taxable to you. The redemption generally will be treated as a sale or exchange
if you do not own, actually or constructively within the meaning of section 318
of the Internal Revenue Code, any stock of McLeodUSA other than the redeemed
Series A preferred stock. If you do own, actually or constructively, other
stock of McLeodUSA, a cash redemption of your Series A preferred stock may be
taxable in accordance with the treatment described above for distributions.
Such treatment as a distribution will not apply if the redemption (1) is
"substantially disproportionate" with respect to you under section 302(b)(2) of
the Internal Revenue Code, or (2) is "not essentially equivalent to a dividend"
under section 302(b)(1) of the Internal Revenue Code. A distribution to you
will be "not essentially equivalent to a dividend" if results in a meaningful
reduction in your stock interest in us, which should be the case if your
proportionate ownership interest, taking into account any actual ownership of
Class A common stock and any stock constructively owned, is reduced, your
relative stock interest in McLeodUSA is minimal, and you exercise no control
over our business affairs.
If a cash redemption of your Series A preferred stock is treated as a sale or
exchange, it will result in capital gains or losses equal to the difference
between the amount of cash received and the adjusted tax basis in the Series A
preferred stock redeemed, except to the extent that the redemption price
includes unpaid dividends which we declare prior to the redemption. The capital
gain or loss will be long term if you have held the Series A preferred stock
for more than one year. Any cash you receive in discharge of dividend
arrearages on the Series A preferred stock will be treated as a distribution on
the Series A preferred stock to the extent of the dividends in arrears, taxable
in accordance with the treatment described above for distributions.
If the cash you receive on redemption of your Series A preferred is taxed as
a dividend, your tax basis (reduced for amounts, if any, treated as return of
capital) in the redeemed Series A preferred stock will be
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transferred to any remaining other McLeodUSA stock you own, subject, in the
case of a corporate taxpayer, to reduction of possible gain recognition under
section 1059 of the Internal Revenue Code in an amount equal to the nontaxed
portion of such dividend. If you do not actually own any other McLeodUSA stock,
having a remaining stock interest only constructively, you may lose the benefit
of your tax basis in the Series A preferred stock but the tax basis may be
shifted to the stock of the related person whose stock you constructively own.
Under certain circumstances, section 305(c) of the Internal Revenue Code
requires that any excess of the redemption price of preferred stock over its
issue price be treated as constructively distributed on a periodic basis prior
to actual receipt. However, these rules do not apply if you and McLeodUSA are
not "related" within the meaning of Treasury regulations under section 305(c),
there are no plans, arrangements or agreements that effectively require or are
intended to compel us to redeem the Series A preferred stock, and our exercise
of the right to redeem would not reduce the yield of the Series A preferred
stock, as determined under the regulations. We intend to take the position that
the existence of our optional redemption rights does not result in a
constructive distribution under section 305(c). The preferred stock will also
be issued with a liquidation premium, since the liquidation preference will
exceed the proceeds received by us after excluding amounts deposited in the
deposit account. Although the regulations under section 305(c) do not
specifically address the treatment of liquidation premiums, we believe that a
similar rationale should apply to such premiums.
Conversion
You generally will not recognize gain or loss on conversion of shares of
Series A preferred stock into our Class A common stock, except with respect to
any cash paid in lieu of fractional shares of Class A common stock. However,
you may recognize gain or dividend income to the extent there are dividends in
arrears on such stock at the time of conversion into Class A common stock. Your
tax basis in the common stock received upon conversion of Series A preferred
stock generally will be equal to your tax basis in the Series A preferred stock
and the holding period of the Series A common stock generally will include your
holding period for the Series A preferred stock. However, the tax basis of any
Class A common stock received on conversion which is treated as a dividend will
be equal to its fair market value on the date of the distribution and the
holding period of that Class A common stock will commence on the day after its
receipt.
You may be deemed to have received a constructive distribution of stock
taxable as a dividend if the conversion ratio of the Series A preferred stock
is adjusted to reflect a cash or property distribution on our Class A common
stock or to prevent dilution in the case of certain issuances of rights or
warrants to purchase Class A common stock at below market prices. Although an
adjustment to the conversion price made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution your
interest in McLeodUSA generally will not be considered to result in a
constructive distribution of stock, certain of the possible adjustments may
trigger this rule. If a nonqualifying adjustment is made, or if we fail to make
an adjustment in certain cases, you might be deemed to have received a taxable
stock dividend. If so, the amount of the dividend to be included in income
would be the fair market value of the additional Class A common stock to which
you would be entitled by reason of the increase in your proportionate equity
interest in McLeodUSA.
Sale or other taxable disposition
If you sell or dispose of your Series A preferred stock or Class A common
stock in a taxable transaction other than a redemption or conversion by us, you
will recognize capital gain or loss equal to the difference between the amount
of cash and the fair market value of property received and your tax basis in
the Series A preferred stock or Class A common stock. The gain or loss will be
long-term capital gain or loss if your holding period for the stock exceeds one
year. For corporate taxpayers, long-term capital gains are taxed at the same
rate as ordinary income. For individual taxpayers, net capital gains--the
excess of the taxpayer's net long-term capital gains over this net short-term
capital losses--are subject to a maximum tax rate of 20% if the stock is held
for more than one year.
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Non-United States Holders
Distributions
Distributions received by you as a Non-United States Holder in respect of
the Series A preferred stock, whether in cash or shares of Class A common
stock, and distributions in respect of Class A common stock, to the extent
considered dividends for U.S. federal income tax purposes, generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty, unless
the dividend is effectively connected with your conduct of a trade or business
within the United States or, where a tax treaty applies, is attributable to a
United States permanent establishment you maintain. For distributions of Class
A common stock, any amounts we withhold will reduce the value of the Class A
common stock distributed to you. If the dividend is effectively connected with
your conduct of a trade or business within the United States or, where a tax
treaty applies, is attributable to your United States permanent establishment,
the dividend will be subject to federal income tax on a net income basis at
applicable graduated individual or corporate rates and will be exempt from the
30% withholding tax.
In addition to the graduated rate described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a
United States trade or business or, where a tax treaty applies, is
attributable to your United States permanent establishment, may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or at a lower rate specified by an applicable income tax treaty.
For purposes of obtaining a reduced rate of withholding under an income tax
treaty, you will be required to provide certain information concerning your
country of residence and entitlement to tax treaty benefits.
If you claim exemption from withholding with respect to dividends effectively
connected with your conduct of a business within the United States, you must
provide appropriate certification, currently, Internal Revenue Service Form
4224, to McLeodUSA or its paying agent. If you are eligible for a reduced rate
of U.S. federal withholding tax you may obtain a refund of any excess withheld
amounts by timely filing an appropriate claim for refund.
If a distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, it will be treated first as a return of your
tax basis in the stock to the extent of your basis and then as gain from the
sale of a capital asset which would be taxable as described below. Any
withholding tax on distributions in excess of our current and accumulated
earnings and profits is refundable to you upon the timely filing of an
appropriate claim for refund with the Internal Revenue Service.
Under currently applicable Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of
such country, unless the payor has knowledge to the contrary, for purposes of
the withholding discussed above, and, under the current interpretation of
these Treasury regulations, for purposes of determining the applicability of a
tax treaty rate. Under Treasury regulations currently scheduled to be
effective with respect to dividends paid after December 31, 2000, a Non-United
States Holder of McLeodUSA stock who wishes to claim the benefit of an
applicable treaty rate, and to avoid backup withholding as discussed below,
will be required to satisfy applicable certification and other requirements.
However, under either set of regulations, some payments to foreign partnership
and fiscally transparent entities may not be eligible for a reduced rate of
withholding tax under an applicable income tax treaty.
Disposition of Series A preferred stock or Class A common stock
Generally, you will not be subject to United States federal income tax on
any gain recognized upon the sale or other disposition of Series A preferred
stock or Class A common stock. However, you will be subject to federal income
tax on the gain if:
(1) the gain is effectively connected with your United States trade or,
if a tax treaty applies, attributable to your United States permanent
establishment;
(2) you are an individual who is a former citizen of the United States
who lost such citizenship within the preceding ten-year period, or former
long-term resident of the United States who relinquished United States
residency on or after February 6, 1995, and the loss of citizenship or
permanent residency had as one of its principal purposes the avoidance of
United States tax; or
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(3) you are a non-resident alien individual, are present in the United
States for 183 days or more days in the taxable year of disposition and
either (a) have a "tax home" in the United States for United States federal
income tax purposes or (b) the gain is attributable to an office or other
fixed place of business you maintain in the United States.
You will also be subject to federal income tax on the gain from the sale of
our Series A preferred stock or Class A common stock if we are or have been a
"United States real property holding corporation"--which we refer to in this
prospectus supplement as USRPHC--within the meaning of section 897(c)(2) of
the Internal Revenue Code at any time you held the stock, or within the five-
year period preceding the sale of the stock if you hold the stock for more
than five years. We believe we are not now a USRPHC, that we have not been an
USRPHC at any time since we were formed, and that it is unlikely we will
become a USRPHC. If we were a USRPHC or were to become a USRPHC, you would be
subject to U.S. income tax on any gain from your sale of Series A preferred
stock or from your sale of Class A common stock if you beneficially own, or
owned at any time during a specified 5-year period, more than 5 percent of the
total fair market value of the class of stock you sold.
Redemption and conversion of Series A preferred stock
As a Non-United States Holder, you generally will not recognize any gain or
loss for United States federal income tax purposes upon conversion of Series A
preferred stock into Class A common stock, except with respect to any cash
paid in lieu of fractional shares of Class A common stock, which would be
subject to the rules described under "Disposition of Series A preferred stock
or Class A common stock." However, you may recognize gain or dividend income
to the extent there are dividends in arrears on the Series A preferred stock
at the time of conversion into Class A common stock.
A redemption of Series A preferred stock for cash will be an event which
will constitute either a dividend to the extent of our current and accumulated
earnings and profits or a sale or exchange. See "United States Holders--
Optional redemption for Class A common stock or cash." To the extent the
redemption is treated as a dividend, the tax consequences are described in
"Non-United States Holders--Distributions," and to the extent the redemption
is treated as a sale or exchange, the tax consequences are described in "Non-
United States Holders--Disposition of Series A preferred stock or Class A
common stock."
Federal estate taxes
If you are an individual Non-United States Holder, Series A preferred stock
or Class A common stock you hold or are treated as owning at the time of your
death will be included in your United States gross estate for United States
federal estate tax purposes and may be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.
Information Reporting And Backup Withholding
We generally will be required to report to certain holders of our Series A
preferred stock or Class A common stock and to the Internal Revenue Service
the amount of any dividends paid to the holder in each calendar year and the
amounts of tax withheld, if any, with respect to such payments. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which a Non-United States
Holder resides under the provisions of an applicable income tax treaty.
Each holder of Series A preferred stock or Class A common stock--other than
an exempt holder such as a corporation, tax-exempt organization, qualified
pension or profit-sharing trust, individual retirement account, or a
nonresident alien individual who provides certification as to his or her
status as a nonresident--will be required to provide, under penalties of
perjury, a certification setting forth the holder's name, address, correct
federal taxpayer identification number and a statement that the holder is not
subject to backup withholding. If a nonexempt holder fails to provide the
required certification, we will be required to withhold 31% of the amount
otherwise payable to the holder, and remit the withheld amount to the Internal
Revenue Service as a credit
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against the holder's federal income tax liability. However, no backup
withholding will be required with respect to any payment subject to the 30%
United States withholding tax discussed above. You should consult your own tax
advisor regarding your qualification for exemption from backup withholding and
the procedure for obtaining any applicable exemption.
The Internal Revenue Service has finalized Treasury regulations regarding the
backup withholding and information rules which are effective for payments made
after December 31, 2000 subject to certain transition rules. In general, these
regulations unify certification procedures and forms and clarify and modify
reliance standards. Among other provisions, these regulations also include the
new provisions discussed below regarding sales of stock outside the United
States by or for a broker. A Non-United States Holder should consult its own
tax advisor regarding the application of the new regulations.
Payment of the proceeds of a sale of Series A preferred stock or Class A
common stock by or through a United States office of a broker is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-United States Holder or
otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Series A preferred stock or Class A common stock by or through a foreign office
of a broker. If, however, such broker is, for United States federal income tax
purposes a United States person, a "controlled foreign corporation" for U.S.
federal tax purposes, or a foreign person that derives 50% or more of its gross
income for a certain period from the conduct of a trade or business in the
United States, or, for taxable years beginning after December 31, 2000, a
foreign partnership in which one or more United States persons, in the
aggregate, own more than 50% of the income or capital interests in the
partnership or if the partnership is engaged in a trade or business in the
United States, such payments will be subject to information reporting, but not
backup withholding, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a Non-United States Holder and certain
other conditions are met, or (2) the beneficial owner otherwise establishes an
exemption.
For payments after December 31, 2000, certification will be required in the
case of the disposition of shares of Series A preferred stock or Class A common
stock held in an offshore account if the disposition is made through a foreign
broker described in the immediately preceeding paragraph.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against the holder's United States federal income tax
liability provided the required information is furnished to the Internal
Revenue Service.
The foregoing discussion is for general information and is not tax advice.
Accordingly, each prospective holder of Series A preferred stock or Class A
common stock should consult its tax advisor as to the particular tax
consequences to it of the Series A preferred stock and Class A common stock,
including the applicability and effect of any state, local or foreign income
tax laws, and any recent or prospective changes in applicable tax laws.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter has severally agreed to purchase from
us and we have agreed to sell to the underwriters, the number of shares of
Series A preferred stock shown opposite its name below. The obligations of the
several underwriters to purchase these shares are subject to terms and
conditions contained in the underwriting agreement.
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ -------
<S> <C>
Salomon Smith Barney Inc. ........................................
Goldman, Sachs & Co. .............................................
Morgan Stanley Dean Witter........................................
-------
Total .......................................................... 400,000
=======
</TABLE>
In the underwriting agreement, the underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of Series A preferred stock offered hereby (other than those subject to
the over-allotment option described below), if any such shares are purchased.
In the event of a default by any underwriter, the underwriting agreement
provides that, in certain circumstances, the purchase commitments of the non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated.
The underwriters, for whom Salomon Smith Barney Inc., Goldman, Sachs & Co.
and Morgan Stanley Dean Witter are acting as representatives, propose initially
to offer the shares of Series A preferred stock to the public at the public
offering price set forth on the cover page of this prospectus supplement, and
to some dealers at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may reallow, a concession not in
excess of $ per share to other dealers. After the public offering, the public
offering price and such concessions may be changed.
We have granted the underwriters an option, exercisable within 30 days of the
date of this prospectus supplement, to purchase up to 60,000 additional shares
of Series A preferred stock to cover over-allotments, if any, at the public
offering price set forth on the cover page of this prospectus supplement. To
the extent that the underwriters exercise such option, in whole or in part,
each underwriter will have a firm commitment, subject to several conditions, to
purchase the same proportion of the option shares as the number of shares
purchased by such underwriter in the above table bears to the total number of
Series A preferred stock purchased by all of the underwriters in the table
above.
The following table shows the per share and total public offering price, the
underwriting discount to be paid to the underwriters, and the proceeds before
expenses to us. The totals are presented assuming either no exercise or full
exercise by the underwriters of the over-allotment option.
<TABLE>
<CAPTION>
Total
-----------------
Per No Full
Share Exercise Exercise
----- -------- --------
<S> <C> <C> <C>
Public offering price ........................... $ $ $
Underwriting discount ........................... $ $ $
Proceeds to company ............................. $ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell the shares of Series A preferred stock
and/or shares of our Class A common stock in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of our shares
of Series A preferred stock in excess of the number of shares of Series A
preferred stock to be purchased by the underwriters in the offering, which
creates a syndicate short position. Syndicate covering transactions involve
purchases of our shares of Series A preferred stock in the open market after
the distribution has been completed in order to cover syndicate short
positions. Stabilizing transactions consist of bids or purchases of our shares
of Series A preferred stock and/or shares of our Class A common stock made for
the purpose of preventing or retarding a decline in the market price of our
shares of Series A preferred stock and/or shares of our Class A common stock
while the offering is in progress.
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The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
underwriters, in covering syndicate short positions or making stabilizing
purchases, repurchase shares originally sold by that syndicate member.
Any of these activities may cause the price of our shares of Series A
preferred stock and/or our Class A common stock to be higher than the price
that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected on the Nasdaq National Market
or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
In addition, in connection with this offering, the underwriters (and selling
group members) may engage in passive market making transactions in our Class A
common stock on the Nasdaq National Market prior to the pricing and completion
of the offering. Passive market making consists of displaying bids on the
Nasdaq National Market no higher than the bid prices of independent market
makers and making purchases at no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in our Class A common stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may cause the price of our Class A common stock to be higher than the
price that otherwise would exist in the open market in the absence of such
transactions. If passive market making is commenced, it may be discontinued at
any time.
We estimate that the total expenses of this offering will be $ .
Salomon Smith Barney Inc. and Morgan Stanley Dean Witter have performed
investment banking and advisory services for us from time to time for which
they have received customary fees and expenses. They may, from time to time,
engage in transactions with and perform services for us in the ordinary course
of their business.
The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
contribute to payments the underwriters may be required to make in respect of
such liabilities.
We, our directors and officers, and several other stockholders have each
agreed with the underwriters that they will not offer, sell or contract to
sell, or otherwise dispose of, directly or indirectly, or announce an offering
of any shares of our Class A common stock or any securities convertible into,
or exchangeable for, shares of Class A common stock for a period of days from
the date of this prospectus supplement, without the prior written consent of
Salomon Smith Barney Inc., except:
. in the case of McLeodUSA, any such transactions in connection with
acquisitions, employee benefit or option plans, or upon conversion of
outstanding securities
. in the case of our directors, officers and stockholders, dispositions of
shares of our Class A common stock as bona fide gifts or pledges where
the recipients of such gifts or the pledgees, as the case may be, agree
in writing with the underwriters to be bound by these same restrictions
In addition, Clark E. McLeod, Mary E. McLeod, Interstate Energy, M/C, and
Richard A. Lumpkin and Gail G. Lumpkin and several other parties related to the
Lumpkins have agreed not to sell or otherwise dispose of any of our equity
securities without the consent of the board of directors of McLeodUSA. See
"Description of Capital Stock--Stockholders' Agreement."
S-44
<PAGE>
LEGAL MATTERS
The validity of our depositary shares and Series A preferred stock offered
hereby is being passed upon for us by Hogan & Hartson L.L.P., Washington, D.C.,
our special counsel. Certain legal matters relating to this offering are being
passed upon for the underwriters by Mayer, Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, incorporated by reference in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Ovation Communications, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 incorporated by
reference in this registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon, and are
incorporated by reference herein in reliance upon such report given upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus supplement
forms a part. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about our Class A common
stock. The rules and regulations of the SEC allow us to omit some of the
information included in the registration statement from this prospectus
supplement.
In addition, we have filed reports, proxy statements and other information
with the SEC under the Securities Exchange Act. You may read and copy any of
this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may obtain information on the operation of the SEC's Public Reference
Room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC file
number for our documents filed under the Securities Exchange Act is 0-20763.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information into this
prospectus supplement and accompanying prospectus. This means we can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is
considered to be a part of this prospectus supplement, except for any such
information that is superseded by information included directly in this
document.
S-45
<PAGE>
This prospectus supplement incorporates by reference the documents listed
below that we have previously filed or will file with the SEC. They contain
important information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed on March 24, 1999, as amended by Form 10-K/A filed on April
22, 1999
. Our Current Reports on Form 8-K filed on April 15, 1999, April 16, 1999,
June 17, 1999 and July 2, 1999
. All documents filed with the SEC by us under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act after the date of this
prospectus supplement and before the offering is terminated, are
considered to be a part of this prospectus, effective the date such
documents are filed
. The description of our Class A common stock set forth in our registration
statement filed under Section 12 of the Securities Exchange Act on Form
8-A on May 24, 1996, including any amendment or report filed with the SEC
for the purpose of updating such description
. The consolidated financial statements of Ovation Communications, Inc. and
subsidiaries appearing on pages F-1 through F-17 of our definitive
prospectus dated March 24, 1999 and filed with the SEC on March 26, 1999
pursuant to Rule 424(b) under the Securities Act as part of our
Registration Statement on Form S-4 (Registration No. 333-71811).
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated McLeodUSA Technology Park 6400 C Street SW, P.O. Box
3177 Cedar Rapids, IA 52406-3177 Attn: General Counsel Telephone (319) 364-0000
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
S-46
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+prospectus supplement is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state or jurisdiction +
+where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY , 1999
P R O S P E C T U S S U P P L E M E N T
(To Prospectus dated , 1999)
[McLEODUSA LOGO]
$400,000,000
McLeodUSA Incorporated
% Senior Notes Due 2009
--------
We are offering $400,000,000 of % Senior Notes due 2009.
. The notes will accrue interest from the date they are issued at the rate of
% per year, payable semi-annually in arrears on and of each
year, commencing on , 2000.
. The notes will be unsecured, will rank equally with all our existing and
future senior unsecured indebtedness and will be effectively subordinated to
all our existing and future secured indebtedness to the extent of the assets
that secure such indebtedness and to all of our subsidiaries' existing or
future indebtedness, whether or not secured.
. We may redeem the notes, in whole or in part, at our option, at any time on
or after . We also may be able to redeem some of the notes at any time
after their issuance if certain circumstances occur. In addition, upon a
change of control of our company, you will be able to require us to
repurchase your notes. The prices we will pay you for your notes are set
forth in this prospectus supplement. You also will receive accrued and
unpaid interest. You should read this entire prospectus supplement and the
accompanying prospectus to understand all of the terms of the notes.
Concurrently with this notes offering, and by a separate prospectus supplement,
we are offering 400,000 shares of our % Series A cumulative convertible
preferred stock. The completion of the notes offering and the Series A
preferred stock offering are not dependent on one another.
Investing in the notes involves various risks. See "Risk Factors" beginning on
page S-9.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
--------
PRICE: % PLUS ACCRUED INTEREST, IF ANY
--------
The underwriters are offering the notes subject to several conditions. The
underwriters expect to deliver the notes to purchasers on or about , 1999.
--------
Salomon Smith Barney
Credit Suisse First Boston
Lehman Brothers
, 1999
<PAGE>
You should rely only on the information provided or incorporated by reference
in this prospectus supplement and accompanying prospectus. Neither we nor the
underwriters have authorized anyone to provide you with different or
inconsistent information. You should assume that the information in this
prospectus supplement and accompanying prospectus is accurate only as of the
date on the front cover of such documents. Our business, financial information,
results of operations and prospects may have changed since those dates.
If it is against the law in any state to make an offer to sell these
securities (or to solicit an offer from someone to buy these securities), then
this offer does not apply to any person in that state, and no offer or
solicitation is made by this prospectus supplement or the accompanying
prospectus to any such person.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... S-1
Risk Factors............................................................... S-9
Cautionary Note Regarding Forward-Looking Statements....................... S-16
Use of Proceeds............................................................ S-16
Capitalization............................................................. S-17
Selected Consolidated Financial and Operating Data......................... S-18
Pro Forma Financial Data................................................... S-20
Description of the Notes................................................... S-23
Other Indebtedness......................................................... S-55
Underwriting............................................................... S-57
Legal Matters.............................................................. S-58
Experts.................................................................... S-58
Where You Can Find More Information........................................ S-58
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus....................................................... 1
Where You Can Find More Information......................................... 1
Cautionary Note Regarding Forward-Looking Statements........................ 2
About McLeodUSA............................................................. 3
Coverage Ratios............................................................. 4
Use of Proceeds............................................................. 4
Description of Common Stock................................................. 5
Description of Preferred Stock.............................................. 10
Description of Depositary Shares............................................ 13
Description of Debt Securities.............................................. 16
Description of Warrants..................................................... 27
Description of Stock Purchase Contracts and Stock Purchase Units............ 29
Description of Subscription Rights.......................................... 30
Plan of Distribution........................................................ 31
Legal Matters............................................................... 32
Experts..................................................................... 32
</TABLE>
<PAGE>
SUMMARY
The following summary highlights selected information about us. It does not
contain all of the information that is important to you. You should carefully
read this entire prospectus supplement and accompanying prospectus and the
other documents to which those documents refer you. In addition, you should
carefully consider the factors set forth under the caption "Risk Factors."
Unless otherwise indicated, dollar amounts over $1 million have been rounded
to one decimal place and dollar amounts less than $1 million have been rounded
to the nearest thousand.
Our Company
We provide communications services to business and residential customers in
the Midwestern and Rocky Mountain regions of the United States. We offer
local, long distance, Internet access, data, voice mail and paging services,
from a single company on a single bill. We believe we are the first company in
many of our markets to offer one-stop shopping for communications services
tailored to customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their communications needs. It also allows businesses to
receive customized services, such as competitive long distance pricing and
enhanced calling features, that might not otherwise be directly available on a
cost-effective basis. As of March 31, 1999, we served over 494,700 local lines
in 408 cities and towns and have a combined total of 488 switches and central
office locations.
In addition to our core business of providing competitive local, long distance
and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. special access, private line and data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
mobile radio, paging services and Web site development and hosting
We plan to derive revenues from high-speed digital access and data services
using Digital Subscriber Line and other technologies.
In most of our markets, we compete with the existing local phone company by
leasing its lines and switches. In other markets, primarily in east central
Illinois and southeast South Dakota, we operate our own lines and switches. We
provide long distance services by using our own communications network
facilities and leasing capacity from long distance and local communications
providers. We are constructing fiber optic communications networks in Iowa,
Illinois, Wisconsin, Indiana, Missouri, Michigan, Minnesota, South Dakota,
North Dakota, Colorado and Wyoming to carry additional communications traffic
on our own network.
Our Strategy
We want to be the leading and most admired provider of communications services
in our markets. To achieve this goal, we are:
. aggressively capturing customer share and generating revenue using leased
communications network capacity
. concurrently building our own communications network
. migrating customers to our communications network to provide enhanced
services and to reduce our operating costs
The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly
penetrate our target markets and build customer loyalty by providing an
integrated product offering to business and residential customers.
S-1
<PAGE>
Build customer share through branding. We believe we will create and strengthen
brand awareness in our target markets by branding our communications services
with the trade name McLeodUSA in combination with the distinctive black-and-
yellow motif of our telephone directories.
Provide outstanding customer service. Our customer service representatives are
available 24 hours a day, seven days a week, to answer customer calls. Our
customer-focused software and systems allow our representatives immediate
access to our customer and network data, enabling a rapid and effective
response to customer requests.
Emphasize small and medium sized businesses. We primarily target small and
medium sized businesses because we believe we can rapidly capture customer
share by providing face-to-face business sales and strong service support to
these customers.
Expand our fiber optic communications network. We are building a state-of-the-
art fiber optic communications network to deliver multiple services and reduce
operating costs.
Expand our intra-city fiber optic communications network. Within selected
cities, we plan to extend our network directly to our customers' locations.
This will allow us to provide expanded services and reduce the expense of
leasing communications facilities from the existing local telephone company.
Explore acquisitions and strategic alliances. We plan to pursue acquisitions,
joint ventures and strategic alliances that expand or complement our business.
Leverage proven management team. Our executive management team consists of
veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
----------------
As of June 30, 1999, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our planned capital
expenditures and operating expenses. Our estimated aggregate capital
requirements include the projected cost of:
. building our fiber optic communications network, including intra-city fiber
optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
.integrating acquisitions
. constructing, acquiring, developing or improving telecommunication assets
We expect to use the following to address our capital needs:
. approximately $ million in net proceeds from the sale of the notes and
the Series A preferred stock
. approximately $475.0 million of cash and investments on hand at June 30,
1999
. projected operating cash flow
. additional issuances of debt or equity securities
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements is subject to risks and uncertainties and may differ
materially from our estimates. Accordingly, we may need additional capital to
continue to expand our markets, operations, facilities, network and services.
See "Risk Factors--Failure to Raise Necessary Capital Could Restrict Our
Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions."
----------------
Our principal executive offices are located at McLeodUSA Technology Park, 6400
C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone number
is (319) 364-0000.
S-2
<PAGE>
The Offering
Securities Offered.......... $400 million principal amount of % Senior
Notes due , 2009.
Interest.................... Interest on the notes will accrue at the rate
of % per year and will be payable in cash
semi-annually in arrears on and
of each year, commencing , 2000.
Ranking..................... The notes will not be secured by any assets
and:
. will be effectively subordinated to all of
our and our subsidiaries' existing and
future secured indebtedness, including any
Senior Credit Facility (as defined herein)
or Qualified Receivable Facility (as defined
herein)
. will be effectively subordinated to all
liabilities of our subsidiaries (including
trade payables)
. will rank equal in right of payment with all
of our existing and future senior unsecured
indebtedness
. will rank senior in right of payment to all
of our existing and future subordinated
indebtedness
As of March 31, 1999:
. together with our subsidiaries, we had total
secured indebtedness of $52.1 million
. our subsidiaries had total liabilities of
$325.0 million
. we had $1.8 billion of outstanding senior
unsecured indebtedness that will rank equal
in right of payment with the notes
. we had no outstanding subordinated
indebtedness
See "Description of the Notes--General."
Optional Redemption......... We have the option to redeem some or all of the
notes at any time on or after , 2004 at
the redemption prices set forth herein, plus
accrued and unpaid interest 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
, 2002, we have the option to use some or
all of the net proceeds from such sale to
redeem up to 33 1/3% of the originally issued
principal amount of the notes at a redemption
price equal to % of the principal amount of
the notes plus accrued and unpaid interest
thereon to the redemption date; provided that
at least 66 2/3% of the originally issued
principal amount of the notes would remain
outstanding immediately after giving effect to
such redemption. See "Description of the
Notes--Optional Redemption."
Change of Control........... Upon a Change of Control (as defined herein),
you will have the right to require us to repur-
chase all or any part of your notes at a pur-
chase price equal to % of their principal
amount plus accrued and unpaid interest. Howev-
er, we cannot assure you we will have
S-3
<PAGE>
the financial resources necessary to repurchase
the notes upon a Change of Control. See "De-
scription of the Notes--Repurchase at the Op-
tion of Holders upon a Change of Control."
Certain Covenants........... The indenture governing the notes contains
certain covenants which, among other things,
restrict our ability and the ability of our
subsidiaries to:
. incur additional indebtedness
. pay dividends
. make distributions in respect of our or our
subsidiaries' capital stock
. make other restricted payments
. enter into sale and leaseback transactions
. 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 Notes--Certain Covenants."
Use of Proceeds............. The net proceeds from the offering will be used
to fund:
. development and construction costs of our
fiber optic network and construction,
acquisition, development and improvement of
our telecommunications assets
. market expansion activities
. development, construction and operations
necessary to include wireless services as
part of our communications services and
. additional working capital and general
corporate purposes
See "Use of Proceeds."
Risk Factors
You should consider carefully all of the information contained and
incorporated by reference in this prospectus supplement and accompanying
prospectus, including the information set forth under the caption "Risk
Factors," before making an investment in the notes.
S-4
<PAGE>
Recent Developments
Acquisition of Ovation Communications, Inc.
On March 31, 1999, we acquired Ovation Communications, Inc. for an aggregate
of 11,193,234 shares of our Class A common stock, after giving effect to the
two-for-one stock split described below, and $121.3 million in cash. We paid
approximately $105.6 million of the outstanding debt of Ovation at the time of
the transaction.
Ovation is a diversified communications services company serving business
customers primarily in larger metropolitan areas in Minnesota, Illinois and
Wisconsin (such as Minneapolis/St. Paul, Chicago and Milwaukee) and in small to
mid-sized cities in Michigan. Ovation provides the following services:
. local and network access
. local and long distance telephone
. voice mail, teleconferencing and calling card
. Internet access
Announcement of Data Strategy
On April 14, 1999, we announced plans to offer high-speed digital access and
data services as part of our integrated communications product package using
DSL (Digital Subscriber Line) and other technologies. These services are
expected to include:
. basic dial tone transmitted digitally
. high-speed data communications for Internet and intranet applications
. commercial network connections for local area, metropolitan area and wide
area networks
Follow-on Offering of Secondary Shares
On May 18, 1999, we completed the sale of 18,000,000 shares of Class A common
stock in a secondary offering for the benefit of several selling stockholders
at a sale price of $27 13/16 per share, after giving effect to the two-for-one
stock split described below. We received no proceeds from the sale of these
shares.
Agreements to Acquire Access Communications Holdings, Inc. and S.J. Investments
Holdings, Inc.
On June 1, 1999, we entered into an Agreement and Plan of Merger with Access
Communications Holdings, Inc., a Utah corporation and certain of the
stockholders of Access, pursuant to which we will acquire Access.
As a result of the Access merger, the outstanding shares of common stock of
Access will be converted in the aggregate into the right to receive
approximately $23.3 million and 1,939,864 shares of our Class A common stock,
after giving effect to the two-for-one stock split described below. We also
will assume approximately $48.3 million in Access debt.
In a related transaction, on June 1, 1999, we entered into an Agreement and
Plan of Merger with an affiliated company of Access, S.J. Investments Holdings,
Inc., a Utah corporation, and the stockholders of SJIH, pursuant to which we
will acquire SJIH.
As a result of the SJIH merger, the outstanding shares of common stock of
SJIH will be converted in the aggregate into the right to receive $25 million
and 1,939,864 shares of our Class A common stock, after giving effect to the
two-for-one stock split described below. We also will assume approximately
$48.3 million in SJIH debt. Consummation of the Access merger and the SJIH
merger are subject to the satisfaction of certain conditions.
Although two legally separate corporations, Access and SJIH conduct business
as Access Long Distance. Access Long Distance serves business and residential
customers in the states of Arizona, California, Colorado, Florida, Idaho,
Nevada, New Mexico, Oregon, Utah and Washington. As of March 31, 1999, Access
Long Distance served approximately 17,500 commercial customers and
approximately 11,600 residential customers, generating 1998 revenues of $87
million. Access
S-5
<PAGE>
Long Distance is a switch-based provider of commercial and residential
telecommunications services, including long distance, toll-free and prepaid
calling cards. In addition, Access Long Distance also sells enhanced toll-free
services.
Market Area Expansion
As a result of the Access Long Distance agreements, we will add four new
states to our current 16-state Midwest and Rocky Mountain market area: Arizona,
New Mexico, Oregon and Washington, and provide coverage of the entire U S WEST
geography. The additional states increase our addressable voice and data market
by approximately 23%.
Two-For-One Stock Split
On June 30, 1999, we declared a two-for-one stock split to be effected in the
form of a stock dividend on our Class A common stock. The record date for the
stock split was July 12, 1999 and the distribution of the additional shares
will take place on July 26, 1999.
S-6
<PAGE>
Summary Consolidated Financial and Operating Data
The information in the following table is based on historical financial
information included in our prior SEC filings, including our annual report on
Form 10-K for the fiscal year ended December 31, 1998. The following summary
financial information should be read in connection with this historical
financial information, including the notes which accompany such financial
information. This historical financial information is considered a part of this
document. See "Where You Can Find More Information." Our audited historical
financial statements as of December 31, 1998 and 1997, and for each of the
three years ended December 31, 1998 were audited by Arthur Andersen LLP,
independent public accountants.
The information in the table on the following page reflects consolidated
financial information for the following companies we have acquired:
<TABLE>
<CAPTION>
Acquired Company Date Acquired
---------------- -------------
<S> <C>
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
Telecom*USA Publishing Group Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
Ovation Communications, Inc. March 31, 1999
</TABLE>
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired.
The balance sheet data in the table include the financial position of these
companies at the end of the periods presented, beginning with the period in
which they were acquired. These acquisitions affect the comparability of the
financial data for the periods presented.
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date will receive one additional share of our Class A
common stock for each share held. Distribution of the additional shares will
take place on July 26, 1999. All information in the following table has been
adjusted to reflect the two-for-one stock split.
The pro forma information presented in the operations statement data and
other financial data in the table reflects the operations of Ovation as if the
Ovation acquisition had occurred on January 1, 1998 and the pro forma
information in the balance sheet data in the table includes Ovation's financial
position as of December 31, 1998.
The pro forma information presented in the operations statement data and
other financial data in the table includes the effects of the issuance of $300
million principal amount of our 8 3/8% senior notes in March 1998, $300 million
principal amount of our 9 1/2% senior notes in October 1998 and $500 million
principal amount of the 8 1/8% senior notes in February 1999 as if they had
occurred at the beginning of 1998 and the pro forma information presented in
the balance sheet data in the table includes the effects of the issuance of the
8 1/8% senior notes as if it had occurred at the end of 1998.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs
and the portion of rental expense that is representative of the interest
component of rental expense (deemed to be one-third of rental expense which
management believes is a reasonable approximation of the interest component).
For each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32 million and $51.7 million, respectively. On a pro forma
basis, earnings would not have been sufficient to cover fixed charges by $188.6
million and $61.7 million for the year ended December 31, 1998 and the three
months ended March 31, 1999, respectively.
(table begins on the next page)
S-7
<PAGE>
Summary Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 81,323 $267,886 $ 604,146 $ 625,181 $134,331 $181,109 $200,805
-------- -------- --------- --------- -------- -------- --------
Operating expenses:
Cost of service....... 52,624 151,190 323,208 329,527 75,045 92,459 99,797
Selling, general and
administrative....... 46,044 148,158 260,931 274,420 58,768 79,811 90,691
Depreciation and
amortization......... 8,485 33,275 89,107 109,720 19,431 35,110 41,680
Other................. 2,380 4,632 5,575 5,575 1,900 -- --
-------- -------- --------- --------- -------- -------- --------
Total operating
expenses............. 109,533 337,255 678,821 719,242 155,144 207,380 232,168
-------- -------- --------- --------- -------- -------- --------
Operating loss......... (28,210) (69,369) (74,675) (94,061) (20,813) (26,271) (31,363)
Interest income
(expense), net........ 5,369 (11,967) (52,234) (85,898) (10,141) (21,204) (26,074)
Other non-operating
income................ 495 1,426 1,997 1,997 687 (1) (1)
Income taxes........... -- -- -- -- -- -- --
-------- -------- --------- --------- -------- -------- --------
Net loss............... $(22,346) $(79,910) $(124,912) $(177,962) $(30,267) $(47,476) $(57,438)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.28) $ (.73) $ (.99) $ (1.30) $ (.24) $ (.36) $ (.40)
======== ======== ========= ========= ======== ======== ========
Weighted average common
shares outstanding.... 81,012 109,948 125,614 136,808 124,454 132,242 143,436
======== ======== ========= ========= ======== ======== ========
Ratio of earnings to
fixed charges......... -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
December 31, 1999
------------------------------ -----------
1996 1997 1998 Actual
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets..................... $224,401 $ 517,869 $ 793,192 $ 974,218
Working capital.................... $185,968 $ 378,617 $ 613,236 $ 740,191
Property and equipment, net........ $ 92,123 $ 373,804 $ 629,746 $ 828,591
Total assets....................... $452,994 $1,345,652 $1,925,197 $ 2,836,380
Long-term debt less current
maturities........................ $ 2,573 $ 613,384 $1,245,170 $ 1,776,475
Stockholders' equity............... $403,429 $ 559,379 $ 462,806 $ 785,415
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $173,782 $601,137 $339,660 $ 739,497 $ 48,930 $ 538,897 $ 560,894
EBITDA(1).............. $(17,345) $(31,462) $ 20,007 $ 21,234 $ 518 $ 8,839 $ 10,317
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines.................................... 65,400 282,600 397,600 494,700
Cities and towns served........................ 120 227 269 408
Central offices/switches....................... -- 366 415 488
Route miles.................................... 2,352 4,908 7,120 7,654
Employees...................................... 2,077 4,941 5,300 6,109
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
S-8
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus supplement before investing in our securities.
You should also consider the additional information set forth in our SEC
reports on Forms 10-K, 10-Q and 8-K and in the other documents considered a
part of this prospectus supplement and accompanying prospectus. See "Where You
Can Find More Information."
Fluctuations in the Market Price of Our Class A Common Stock May Make it More
Difficult for Us to Raise Capital.
The market price of our Class A common stock is extremely volatile and has
fluctuated over a wide range. These fluctuations may impair our ability to
raise capital by offering equity securities. The market price may continue to
fluctuate significantly in response to various factors, including:
. market conditions in the industry
. announcements or actions by competitors
. low trading volume
. sales of large amounts of our Class A common stock in the public market
or the perception that such sales could occur
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. regulatory and judicial actions
. general economic conditions
We May Not Be Able to Successfully Integrate Acquired Companies into Our
Operations, Which Could Slow Our Growth.
The integration of acquired companies into our operations involves a number
of risks, including:
. difficulty integrating new operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel or customers
. inability to successfully incorporate new assets and rights into our
service offerings
. inability to maintain uniform standards, controls, procedures and
policies
. impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with acquisition transactions could slow our growth or lower the
quality of our services, which could reduce customer demand and adversely
affect our business and our ability to repay the notes.
Continued Rapid Growth of Our Network, Services and Subscribers Could Be Slowed
if We Cannot Manage this Growth.
We have rapidly expanded and developed our network, services and subscriber
base. For example, we recently announced plans to offer high-speed digital
access and data services. Our expansion and development have placed and will
continue to place significant demands on our management, operational and
financial systems and procedures and controls. We may not be able to manage our
anticipated growth effectively, which would adversely affect our business,
results of operations and financial condition and our ability to repay the
notes.
Further expansion and development will depend on a number of factors,
including:
. cooperation of the existing local telephone companies
. regulatory, judicial and governmental developments
. changes in the competitive climate in which we operate
. development of customer billing, order processing and network management
systems
. availability of financing
. technological developments
. availability of rights-of-way, building access and antenna sites
. existence of strategic alliances or relationships
. emergence of future opportunities
S-9
<PAGE>
We will need to continue to improve our operational and financial systems and
our procedures and controls as we grow. We must also develop, train and manage
our employees.
We Expect to Incur Significant Losses Over the Next Several Years.
If we do not become profitable in the future, the value of our Class A common
stock may fall and we could have difficulty obtaining funds to continue our
operations or to pay amounts due on the notes. We have incurred net losses
every year since we began operations. Since January 1, 1994, our net losses
have been as follows:
Net Losses
<TABLE>
<CAPTION>
Period Amount
- ------ --------------
<S> <C>
1994............................................................. $ 11.4 million
1995............................................................. $ 11.3 million
1996............................................................. $ 22.3 million
1997............................................................. $ 79.9 million
1998............................................................. $124.9 million
</TABLE>
We expect to incur net losses during the next several years while we develop
our businesses, expand our fiber optic communications network and develop
wireless services.
Failure to Raise Necessary Capital Could Restrict Our Ability to Develop Our
Network and Services and Engage in Strategic Acquisitions.
We need significant capital to continue to expand our operations, facilities,
network and services. We cannot assure you that our capital resources will
permit us to fund our planned network deployment and operations or achieve
operating profitability. Our failure to generate or raise sufficient funds may
require us to delay or abandon some of our expansion plans or expenditures,
which could adversely affect our business and competitive position and our
ability to repay the notes.
As of June 30, 1999, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.4 billion through 2001 to fund our capital expenditures and
operating expenses. Our estimated aggregate capital requirements include the
projected costs of:
. building our fiber optic communications network, including intra-city
fiber optic networks
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. integrating acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements may differ substantially from our estimate due to factors
such as:
. strategic acquisition costs and effects of acquisitions on our business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for our services
. regulatory, technological or competitive developments
. new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities.
We may meet any additional capital needs by issuing additional debt or equity
securities or borrowing funds from one or more lenders. We cannot assure you
that we will have timely access to additional financing sources on acceptable
terms. If we do not have such access, we may not be able to expand our markets,
operations, facilities, network and services through acquisitions as we intend.
Our High Level of Debt Could Limit Our Flexibility in Responding to Business
Developments and Put Us at a Competitive Disadvantage.
We have substantial debt, which could adversely affect us in a number of
ways, including:
. limiting our ability to obtain necessary financing in the future
S-10
<PAGE>
. limiting our flexibility to plan for, or react to, changes in our
business
. requiring us to use a substantial portion of our cash flow from
operations to pay our debt obligations rather than for other purposes,
such as working capital or capital expenditures
. making us more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage
. making us more vulnerable to a downturn in our business
As of March 31, 1999, we had $1.8 billion of long-term debt and $785.4
million of stockholders' equity. As a result, we expect our fixed charges to
exceed our earnings for the foreseeable future.
Covenants in Debt Instruments Restrict Our Capacity to Borrow and Invest, Which
Could Impair Our Ability to Expand or Finance Our Operations.
The indentures governing the terms of our long-term debt, including the notes
we are offering, impose operating and financial restrictions that limit our
discretion on some business matters, which could make it more difficult for us
to expand, finance our operations or engage in other business activities that
may be in our interest. These restrictions limit or prohibit our ability to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge or mortgage assets or otherwise create liens
. enter into transactions with related persons
. sell assets
. consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt could
become immediately due and payable.
Our Dependence on Regional Bell Operating Companies to Provide Most of Our
Communications Services Could Make it Harder for Us to Offer Our Services at a
Profit.
We depend on the regional Bell operating companies to provide most of our
core local and some of our long distance services. Today, without using the
communications facilities of these companies, we could not provide bundled
local and long distance services to most of our customers. Because of this
dependence, our communications services are highly susceptible to changes in
the conditions for access to these facilities and we may therefore have
difficulty offering our services at profitable and competitive rates.
U S WEST Communications, Inc., Ameritech Corporation and Southwestern Bell
Telephone Company are our primary suppliers of local lines to our customers and
communications services that allow us to transfer and connect calls. Their
communications facilities allow us to provide (1) local service, (2) long
distance service and (3) private lines dedicated to our customers' use. If
these or other companies deny or limit our access to their communications
network elements or wholesale services, we may not be able to offer profitable
communications services.
Our plans to provide local service using our own communications network
equipment also depend on the regional Bell operating companies. In order to
interconnect our network equipment and other communications facilities to
network elements controlled by the regional Bell operating companies, we must
first negotiate and enter into interconnection agreements with them.
Interconnection obligations imposed on the regional Bell operating companies by
the Telecommunications Act of 1996 have been, and continue to be, subject to a
variety of legal proceedings, which could affect our ability to obtain
interconnection agreements on acceptable terms. We cannot assure you that we
will succeed in obtaining interconnection agreements on terms that would permit
us to offer local services using our own communications network facilities at
profitable and competitive rates.
S-11
<PAGE>
Actions by U S WEST May Make it More Difficult for Us to Offer Our
Communications Services.
U S WEST has introduced several measures that may make it more difficult for
us to offer our communications services. For example, in February 1996, U S
WEST filed tariffs and other notices with the public utility commissions in its
fourteen-state service region to limit future Centrex access to its switches.
Centrex access allows us to aggregate lines, have control over several
characteristics of those lines and provide a set of standard features on those
lines. We use U S WEST's Centrex services to provide most of our local
communications services in U S WEST's service territories.
In January 1997, U S WEST also proposed interconnection surcharges in several
of the states in its service region, which would increase our costs of
providing communications services in those states.
We have challenged or are challenging these actions by U S WEST before the
FCC or applicable state public utility commissions. We cannot assure you we
will succeed in our challenges to these or other actions by U S WEST that would
prevent or deter us from using U S WEST's Centrex service or communications
network elements. If U S WEST successfully withdraws or limits our access to
Centrex services in any jurisdiction, we may not be able to offer
communications services in that jurisdiction, which could adversely affect our
business and our ability to repay the notes.
We anticipate that U S WEST will also pursue legislation in states within our
target market area to reduce state regulatory oversight over its rates and
operations. If adopted, these initiatives could make it more difficult for us
to challenge U S WEST's actions in the future.
Competition in the Communications Services Industry Could Cause Us to Lose
Customers and Revenue and Could Make it More Difficult for Us to Enter New
Markets.
We face intense competition in all of our markets. This competition could
result in loss of customers and lower revenue for us. It could also make it
more difficult for us to enter new markets. Existing local telephone companies,
including U S WEST, Ameritech, Southwestern Bell and GTE, currently dominate
their local telecommunications markets. Three major competitors, AT&T, MCI
WorldCom and Sprint, dominate the long distance market. Hundreds of other
companies also compete in the long distance marketplace. AT&T, MCI WorldCom and
Sprint also offer local telecommunications services in many locations.
We also compete with other communications services companies which, like us,
compete with the existing local telephone companies in some markets.
Other competitors may include cable television companies, providers of
communications network facilities dedicated to particular customers, providers
of digital access and data services, microwave and satellite carriers, wireless
telecommunications providers, private networks owned by large end-users, and
telecommunications management companies.
These and other firms may enter the markets where we focus our sales efforts.
Many of our existing and potential competitors have financial and other
resources far greater than our own. In addition, the trend toward mergers and
strategic alliances in the communications industry may strengthen some of our
competitors, which could put us at a significant competitive disadvantage and
adversely affect our ability to repay the notes.
We May Not Succeed in Developing or Making a Profit from Wireless Services.
Our proposal to offer wireless services involves a high degree of risk and
will impose significant demands on our management and financial resources.
Developing wireless services may require us to, among other things, spend
substantial time and money to acquire, build and test a wireless infrastructure
and enter into roaming arrangements with wireless operators in other markets.
We may not succeed in developing wireless services. Even if we spend
substantial amounts to develop wireless services, we may not make a profit from
wireless operations.
S-12
<PAGE>
Our ability to successfully offer wireless services will also depend on a
number of factors beyond our control, including:
. changes in communications service rates charged by other companies
. changes in the supply and demand for wireless services due to competition
with other wireline and wireless operators in the same geographic area
. changes in the federal, state or local regulatory requirements affecting
the operation of wireless systems
. changes in wireless technologies that could render obsolete the
technology and equipment we choose for our wireless services
Competition in the Wireless Telecommunications Industry Could Make it Harder
for Us to Successfully Offer Wireless Services.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it harder for
us to gain a share of the wireless communications market. We expect up to eight
wireless competitors in each of our target wireless markets. We could face
additional competition from mobile satellite services.
Many of our potential wireless competitors have financial and other resources
far greater than our own and have more experience testing new or improved
products and services. In addition, several wireless competitors operate or
plan to operate, wireless telecommunications systems that encompass most of the
United States, which could give them a significant competitive advantage,
particularly if we only offer regional wireless services.
The Success of Our Communications Services Will Depend on Our Ability to Keep
Pace with Rapid Technological Changes in Our Industry.
Communications technology is changing rapidly. These changes influence the
demand for our services. We need to be able to anticipate these changes and to
develop new and enhanced products and services quickly enough for the changing
market. This will determine whether we can continue to increase our revenues
and number of subscribers and be competitive. Failure to adapt to these changes
may adversely affect our business and our ability to repay the notes.
The Loss of Key Personnel Could Weaken Our Technical and Operational Expertise,
Delay Our Introduction of New Services or Entry into New Markets and Lower the
Quality of Our Service.
We may not be able to attract, develop, motivate and retain experienced and
innovative personnel. There is intense competition for qualified personnel in
our business. The loss of the services of key personnel, or the inability to
attract additional qualified personnel, could cause us to make less successful
strategic decisions, which could hinder the introduction of new services or the
entry into new markets. We could also be less prepared for technological or
marketing problems, which could reduce our ability to serve our customers and
lower the quality of our services. As a result, our financial condition could
worsen and could adversely affect our ability to repay the notes.
Our future success depends on the continued employment of our senior
management team, particularly Clark E. McLeod, our Chairman and Chief Executive
Officer, and Stephen C. Gray, our President and Chief Operating Officer. We do
not have term employment agreements with these employees.
Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay
Installation of Our Networks and Interfere with Our Operations.
To obtain access to rights-of-way needed to install our fiber optic cable, we
must reach agreements with state highway authorities, local governments,
transit authorities, local telephone companies, other utilities, railroads,
long distance carriers and other parties. The failure to obtain or maintain any
rights-of-way could delay our planned network expansion, interfere with our
operations and adversely affect our business and our ability to repay the
notes. For example, if we lose access to a right-of-way, we may need to spend
significant sums to remove and relocate our facilities.
Government Regulation May Increase Our Cost of Providing Services, Slow Our
Expansion into New Markets and Subject Our Services to Additional Competitive
Pressures.
Our facilities and services are subject to federal, state and local
regulation. The time and expense of complying with these regulations could slow
down our expansion into new markets, increase
S-13
<PAGE>
our costs of providing services and subject them to additional competitive
pressures. One of the primary purposes of the Telecommunications Act of 1996
was to open the local telephone services market to competition. While this has
presented us with opportunities to enter local telephone markets, it also has
provided important benefits to the existing local telephone companies, such as
the ability, under specified conditions, to provide out-of-region long distance
service to customers in their respective regions. In addition, we need to
obtain and maintain licenses, permits and other regulatory approvals in
connection with some of our services. Any of the following could adversely
affect our business and our ability to repay the notes:
. failure to maintain proper federal and state tariffs
. failure to maintain proper state certifications
. failure to comply with federal, state or local laws and regulations
. failure to obtain and maintain required licenses and permits
. burdensome license or permit requirements to operate in public rights-of-
way
. burdensome or adverse regulatory requirements
Our Management and Principal Stockholders Can Control McLeodUSA and May Have
Different Interests Than the Noteholders.
Certain decisions concerning our operations or financial structure may
present conflicts of interests between our stockholders and the holders of the
notes. For example, if we encounter financial difficulties or are unable to pay
our debts as they mature, the interests of our stockholders might conflict with
those of the holders of the notes. In addition, our stockholders may have an
interest in pursuing acquisitions, divestitures, financings or other
transactions that, in their judgment could enhance their equity investment,
even though such transactions might involve risk to the holders of the notes.
As of July 1, 1999, Interstate Energy Corporation, M/C Investors L.L.C.,
Media/Communications Partners III Limited Partnership, Richard A. Lumpkin and
various trusts for the benefit of his family, Clark and Mary McLeod, and our
directors and executive officers beneficially owned approximately 40% of our
outstanding Class A common stock. Because these stockholders can collectively
control management policy and may be able to control corporate actions
requiring a stockholder vote, any such conflict of interest may be resolved in
favor of our stockholders to the detriment of the holders of the notes.
Computer Systems May Malfunction and Interrupt Our Services if We and Our
Suppliers Do Not Attain Year 2000 Readiness.
We and our major suppliers of communications services and network elements
rely greatly on computer systems and other technological devices. These may not
be capable of recognizing January 1, 2000 or subsequent dates. This problem
could cause any or all of our systems or services to malfunction or fail.
We are reviewing our computer systems and programs and other technological
devices to determine which are not capable of recognizing the Year 2000 and to
verify system readiness for the millennium date. The review covers all of our
operations and is centrally managed. This review may not be sufficient,
however, to prevent interruptions to our systems and services.
Some of our critical operations and services depend on other companies. For
example, we depend on the existing local telephone companies, primarily the
regional Bell operating companies, to provide most of our local and some of our
long distance services. To the extent U S WEST, Ameritech or Southwestern Bell
fail to address Year 2000 issues which might interfere with their ability to
fulfill their obligations to us, it could interfere with our operations. If we,
our major vendors, our material service providers or our customers fail to
address Year 2000 issues in a timely manner, our business, results of
operations, financial condition and ability to repay the notes could be
adversely affected.
S-14
<PAGE>
We Depend upon Payments from Our Subsidiaries to Pay Principal and Interest on
Our Debt Obligations.
We are a holding company, which means we conduct all of our operations and
derive all of our operating income from our subsidiaries. Our ability to pay
our obligations, including our obligation to pay principal and interest on the
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 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 Notes Are Subordinate to Our Subsidiaries' Obligations and Our Own Secured
Obligations.
The notes will be effectively subordinated in right of payment to all
liabilities of our subsidiaries. This means that in the event of a bankruptcy,
liquidation or reorganization, our subsidiaries must pay their creditors in
full before we could use their assets to pay you. As of March 31, 1999, our
subsidiaries had total liabilities after the elimination of loans and advances
from us to our subsidiaries of approximately $325.0 million. In addition, the
indenture that will govern the notes and the indentures governing our 10 1/2%
senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes, which we refer to collectively as our
indentures, permit us and our subsidiaries to incur additional debt.
The notes will be unsecured and will be subordinated to our secured debt.
This means if we default on any of our secured debt, our secured creditors
could foreclose on their collateral and receive
payment out of the proceeds of that collateral before we could use those assets
to pay you. If the value of
the collateral is less than the amount owed, our secured creditors will have
equal rights with you to our remaining assets. As of March 31, 1999, we had
total secured debt of approximately $52.1 million. The
indentures permit us and our subsidiaries to incur additional secured debt,
including unlimited purchase money debt and up to $250 million under one or
more credit facilities.
There Is No Established Trading Market for the Notes, Which Could Make it More
Difficult for You to Sell Your Notes and Could Adversely Affect Their Price.
The notes constitute a new issue of securities for which no established
trading market exists. Consequently, it may be more difficult for you to sell
your notes. If notes are traded after their initial issuance, they may trade at
a discount, depending upon:
. our financial condition
. prevailing interest rates
. the market for similar securities
. other factors beyond our control, including general economic conditions.
We do not intend to apply for a listing or quotation of the notes on any
securities exchange. The underwriters have informed us that they intend to make
a market in the notes. However, the underwriters 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
notes following the offering.
S-15
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement and accompanying prospectus and the information
incorporated by reference in them include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend the forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these
sections. All statements regarding our expected financial position and
operating results, our business strategy, our financing plans, our future
capital requirements, forecasted demographic and economic trends relating to
our industry, our ability to complete acquisitions, to realize anticipated cost
savings and other benefits from acquisitions and to recover acquisition-related
costs, and similar matters are forward-looking statements. These statements are
subject to known and unknown risks, uncertainties and other factors that could
cause our actual results to differ materially from the statements. The forward-
looking information is based on various factors and was derived using numerous
assumptions. In some cases, you can identify these statements by our use of
forward-looking words such as "may," "will," "should," "anticipate,"
"estimate," "expect," "plan," "believe," "predict," "potential" or "intend."
You should be aware that these statements only reflect our predictions. Actual
events or results may differ substantially. Important factors that could cause
our actual results to be materially different from our expectations include
those discussed in this prospectus supplement under the caption "Risk Factors."
We undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
USE OF PROCEEDS
We will use the net proceeds from the sale of the notes along with funds
available from prior offerings and from other financing sources: (1) to fund
development and construction costs of our fiber optic network, including intra-
city fiber optic networks, and construction, acquisition, development and
improvement of telecommunications assets; (2) to fund market expansion
activities in existing and new markets as well as acquisitions, joint ventures
and strategic alliances; (3) to fund development, construction and operations
necessary to include wireless services as part of our communications services;
and (4) for additional working capital and other general corporate purposes,
including funding operating deficits and net losses.
S-16
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of March 31, 1999, (1) on a
historical basis as adjusted for the stock split announced on June 30, 1999,
(2) as adjusted to reflect the sale of $400 million aggregate principal amount
of notes and (3) as further adjusted to reflect the sale of 400,000 shares of
our Series A preferred stock and the application of the proceeds from that
offering, in each case net of our estimated offering expenses and the
underwriting discount. You should read this table together with our
consolidated financial statements and related notes and the other financial
data appearing elsewhere, or incorporated by reference, into this prospectus
supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
March 31, 1999
----------------------------------
As As further
Historical adjusted adjusted
---------- ---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents.................. $ 415,343 $ 805,593 $1,192,593
Investments in available-for-sale
securities................................ 278,676 278,676 278,676
---------- ---------- ----------
Total cash, cash equivalents and
investments in
available-for-sale securities......... 694,019 1,084,269 1,471,269
========== ========== ==========
Short-term debt............................ 10,276 10,276 10,276
Long-term debt............................. 1,776,475 2,176,475 2,176,475
---------- ---------- ----------
Stockholders' equity:
Class A common stock, $.01 par value,
250,000,000 shares authorized;
148,881,788 shares issued and
outstanding, actual..................... 1,489 1,489 1,489
Class B common stock, convertible, $.01
par value, 22,000,000 shares authorized;
none issued or outstanding.............. -- -- --
Series A preferred stock, convertible,
$.01 par value, 400,000 shares
authorized; 400,000 shares issued and
outstanding, as adjusted further........ -- -- 4
Additional paid-in capital............... 1,078,307 1,078,307 1,465,303
Accumulated deficit...................... (300,868) (300,868) (300,868)
Accumulated other comprehensive income... 6,487 6,487 6,487
---------- ---------- ----------
Total stockholders' equity............. 785,415 785,415 1,172,415
---------- ---------- ----------
Total capitalization................... $2,572,166 $2,972,166 $3,359,166
========== ========== ==========
</TABLE>
S-17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The information in the following table is based on historical financial
information included in our prior SEC filings, including our annual report on
Form 10-K for the fiscal year ended December 31, 1998. The following summary
financial information should be read in connection with this historical
financial information, including the notes which accompany such financial
information. This historical financial information is considered a part of this
document. See "Where You Can Find More Information." Our audited historical
financial statements as of December 31, 1998 and 1997, and for each of the
three years ended December 31, 1998 were audited by Arthur Andersen LLP,
independent public accountants.
The information in the table on the following page reflects consolidated
financial information for the following companies we have acquired:
<TABLE>
<CAPTION>
Acquired Company Date Acquired
---------------- -------------
<S> <C>
MWR Telecom, Inc. April 28, 1995
Ruffalo, Cody & Associates, Inc. July 15, 1996
Telecom*USA Publishing Group Inc. September 20, 1996
Consolidated Communications, Inc. September 24, 1997
Ovation Communications, Inc. March 31, 1999
</TABLE>
The operations statement data and other financial data in the table include
the operations of these companies beginning on the dates they were acquired.
The balance sheet data in the table include the financial position of these
companies at the end of the periods presented, beginning with the period in
which they were acquired. These acquisitions affect the comparability of the
financial data for the periods presented.
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date will receive one additional share of our Class A
common stock for each share held. Distribution of the additional shares will
take place on July 26, 1999. All information in the following table has been
adjusted to reflect the two-for-one stock split.
The pro forma information presented in the operations statement data and
other financial data in the table reflects the operations of Ovation as if the
Ovation acquisition had occurred on January 1, 1998 and the pro forma
information in the balance sheet data in the table includes Ovation's financial
position as of December 31, 1998.
The pro forma information presented in the operations statement data and
other financial data in the table includes the effects of the issuance of $300
million principal amount of our 8 3/8% senior notes in March 1998, $300 million
principal amount of our 9 1/2% senior notes in October 1998 and $500 million
principal amount of the 8 1/8% notes in February 1999 as if they had occurred
at the beginning of 1998 and the pro forma information presented in the balance
sheet data in the table includes the effects of the issuance of the 8 1/8%
notes as if it had occurred at the end of 1998.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs
and the portion of rental expense that is representative of the interest
component of rental expense (deemed to be one-third of rental expense which
management believes is a reasonable approximation of the interest component).
For each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32 million and $51.7 million, respectively. On a pro forma
basis, earnings would not have been sufficient to cover fixed charges by $188.6
and $61.7 million for the year ended December 31, 1998 and the three months
ended March 31, 1999, respectively.
(table begins on the next page)
S-18
<PAGE>
Selected Consolidated Financial and Operating Data
(In thousands, except per share and operating data)
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
------------------------------------------ -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- --------- ----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 81,323 $267,886 $ 604,146 $ 625,181 $134,331 $181,109 $200,805
-------- -------- --------- --------- -------- -------- --------
Operating expenses:
Cost of service....... 52,624 151,190 323,208 329,527 75,045 92,459 99,797
Selling, general and
administrative....... 46,044 148,158 260,931 274,420 58,768 79,811 90,691
Depreciation and
amortization......... 8,485 33,275 89,107 109,720 19,431 35,110 41,680
Other................. 2,380 4,632 5,575 5,575 1,900 -- --
-------- -------- --------- --------- -------- -------- --------
Total operating
expenses............. 109,533 337,255 678,821 719,242 155,144 207,380 232,168
-------- -------- --------- --------- -------- -------- --------
Operating loss......... (28,210) (69,369) (74,675) (94,061) (20,813) (26,271) (31,363)
Interest income
(expense), net........ 5,369 (11,967) (52,234) (85,898) (10,141) (21,204) (26,074)
Other non-operating
income................ 495 1,426 1,997 1,997 687 (1) (1)
Income taxes........... -- -- -- -- -- -- --
-------- -------- --------- --------- -------- -------- --------
Net loss............... $(22,346) $(79,910) $(124,912) $(177,962) $(30,267) $(47,476) $(57,438)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.28) $ (.73) $ (.99) $ (1.30) $ (.24) $ (.36) $ (.40)
======== ======== ========= ========= ======== ======== ========
Weighted average common
shares outstanding.... 81,012 109,948 125,614 136,808 124,454 132,242 143,436
======== ======== ========= ========= ======== ======== ========
Ratio of earnings to
fixed charges......... -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
March 31,
December 31, 1999
------------------------------ -----------
1996 1997 1998 Actual
-------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Current assets..................... $224,401 $ 517,869 $ 793,192 $ 974,218
Working capital ................... $185,968 $ 378,617 $ 613,236 $ 740,191
Property and equipment, net........ $ 92,123 $ 373,804 $ 629,746 $ 828,591
Total assets....................... $452,994 $1,345,652 $1,925,197 $ 2,836,380
Long-term debt less current
maturities........................ $ 2,573 $ 613,384 $1,245,170 $ 1,776,475
Stockholders' equity............... $403,429 $ 559,379 $ 462,806 $ 785,415
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended March 31,
---------------------------------------- -----------------------------------
Pro Forma Pro Forma
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited) (unaudited)
Other Financial Data:
Capital expenditures,
including business
acquisitions.......... $173,782 $601,137 $339,660 $ 739,497 $ 48,930 $ 538,897 $ 560,894
EBITDA(1).............. $(17,345) $(31,462) $ 20,007 $ 21,234 $ 518 $ 8,839 $ 10,317
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
---------------------- ---------
1996 1997 1998 1999
------ ------- ------- ---------
<S> <C> <C> <C> <C>
Operating Data: (unaudited)
Local lines.................................... 65,400 282,600 397,600 494,700
Cities and towns served........................ 120 227 269 408
Central offices/switches....................... -- 366 415 488
Route miles.................................... 2,352 4,908 7,120 7,654
Employees...................................... 2,077 4,941 5,300 6,109
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
S-19
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to:
.the issuance of $300 million aggregate principal amount of our 8 3/8% senior
notes in March 1998
.the issuance of $300 million aggregate principal amount of our 9 1/2% senior
notes in October 1998
.the issuance of $500 million aggregate principal amount of our 8 1/8% senior
notes in February 1999
.our acquisition of Ovation Communications, Inc. in March 1999
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
reflects the Ovation acquisition using the purchase method of accounting, and
assumes that the Ovation acquisition and the issuance of the 8 3/8% senior
notes, the 9 1/2% senior notes and the 8 1/8% senior notes were consummated at
the beginning of 1998. The unaudited pro forma financial information is derived
from and should be read in conjunction with our consolidated financial
statements, Ovation's consolidated financial statements and the related notes
thereto incorporated by reference in this prospectus. The pro forma adjustments
are based upon available information and assumptions that management believes
to be reasonable. Depreciation and amortization were adjusted to include
amortization of intangibles acquired in the Ovation acquisition. The acquired
intangibles will be amortized over periods ranging from 3 to 30 years. For
purposes of this pro forma presentation, the issuance of the 8 3/8% senior
notes, the 9 1/2% senior notes and the 8 1/8% senior notes are collectively
referred to as the "Notes Offerings."
The adjustments for the Ovation acquisition reflect the preliminary
allocation of the net purchase price of Ovation to the assets of Ovation,
including intangible assets, and record the payment of $121.3 million in cash
and the issuance of 11,193,234 shares of our Class A common stock (as adjusted
for the two-for-one stock split described below) valued at $16.88 per share (as
adjusted for the two-for-one stock split described below). The value of $16.88
per share represents the average closing price of our Class A common stock on
the Nasdaq National Market for the eleven trading days beginning five days
prior to the date the agreement was announced, January 7, 1999, and ending five
days after such announcement. The adjustments include the elimination of the
Ovation equity components, including common stock, treasury stock, other
capital and retained deficit.
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date will receive one additional share of our Class A
common stock for each share held. Distribution of the additional shares will
take place on July 26, 1999. All information in the Pro Forma Financial Data
has been adjusted to reflect the two-for-one stock split.
We have provided this unaudited pro forma financial data for informational
purposes only. This data does not necessarily indicate the operating results
that would have occurred had the Ovation acquisition been consummated at the
beginning of 1998, nor does it necessarily indicate future operating results or
financial position.
S-20
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed
Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------
Adjustments Pro Forma Adjustments
for the for the for the
Notes Notes Ovation
McLeodUSA Offerings Offerings Ovation Acquisition Total
--------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue............................... $ 604,146 $ -- $ 604,146 $21,035 $ -- $ 625,181
--------- -------- --------- ------- -------- ---------
Operating Expenses:
Cost of service...................... 323,208 -- 323,208 6,319 -- 329,527
Selling, general and administrative.. 260,931 -- 260,931 13,489 -- 274,420
Depreciation and amortization........ 89,107 -- 89,107 5,383 15,230 109,720
Other................................ 5,575 -- 5,575 -- -- 5,575
--------- -------- --------- ------- -------- ---------
Total opertaing expenses............ 678,821 -- 678,821 25,191 15,230 719,242
--------- -------- --------- ------- -------- ---------
Operating loss........................ (74,675) -- (74,675) (4,156) (15,230) (94,061)
Interest expense, net................. (52,234) (32,056) (84,290) (1,608) -- (85,898)
Other non-operating income............ 1,997 -- 1,997 -- -- 1,997
Income taxes.......................... -- -- -- -- -- --
--------- -------- --------- ------- -------- ---------
Net loss............................. $(124,912) $(32,056) $(156,968) $(5,764) $(15,230) $(177,962)
========= ======== ========= ======= ======== =========
Loss per common share................. $ (0.99) $ (1.25) $ (1.30)
========= ========= =========
Weighted average common shares
outstanding.......................... 125,614 125,614 136,808
========= ========= =========
Other Financial Data:
EBITDA(1)............................. $ 20,007 $ -- $ 20,007 $ 1,227 $ -- $ 21,234
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
S-21
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed
Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Three Months Ended March 31, 1999
---------------------------------------------------------------
Adjustments Pro Adjustments
for the Forma for for the
Notes the Notes Ovation
McLeodUSA Offerings Offerings Ovation Acquisition Total
--------- ----------- --------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data
Revenue................ $181,109 $ -- $181,109 $19,696 $ -- $200,805
-------- ------- -------- ------- ------- --------
Operating expenses:
Cost of service....... 92,459 -- 92,459 7,338 -- 99,797
Selling, general and
administrative....... 79,811 -- 79,811 10,880 -- 90,691
Depreciation and
amortization......... 35,110 -- 35,110 2,829 3,741 41,680
Other................. -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Total operating
expenses............ 207,380 -- 207,380 21,047 3,741 232,168
-------- ------- -------- ------- ------- --------
Operating loss........ (26,271) -- (26,271) (1,351) (3,741) (31,363)
Interest expense,
net.................. (21,204) (2,487) (23,691) (2,383) -- (26,074)
Other non-operating
income............... (1) -- (1) -- -- (1)
Income taxes.......... -- -- -- -- -- --
-------- ------- -------- ------- ------- --------
Net loss.............. $(47,476) $(2,487) $(49,963) $(3,734) $(3,741) $(57,438)
======== ======= ======== ======= ======= ========
Loss per common
share................ $ (0.36) $ (0.38) $ (0.40)
======== ======== ========
Weighted average
common shares
outstanding.......... 132,242 132,242 143,436
======== ======== ========
Other Financial Data:
EBITDA(1).............. $ 8,839 $ -- $ 8,839 $ 1,478 $ -- $ 10,317
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data because
it is a measure commonly used in the industry. EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity.
S-22
<PAGE>
DESCRIPTION OF THE NOTES
General
The notes will be issued under an indenture, which we refer to as the base
indenture, as supplemented by a first supplemental indenture, which we refer to
as the supplemental indenture, between McLeodUSA and United States Trust
Company of New York, as trustee. We refer to the base indenture and the
supplemental indenture taken together as the indenture. For purposes of this
description of the notes, references to "McLeodUSA," "we," "our" or "us" refers
to McLeodUSA Incorporated and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the notes include those stated in the indenture and those made a
part of the indenture by reference to the Trust Indenture Act of 1939 as in
effect on the date of the base indenture. The notes will be subject to all of
those terms, and holders of the notes are referred to the indenture and the
Trust Indenture Act for a complete statement of the applicable terms. A copy of
the indenture is available from McLeodUSA on request. The statements and
definitions of terms under this caption relating to the notes and the indenture
are summaries and do not purport to be complete. These summaries make use of
terms defined in the indenture and are qualified in their entirety by express
reference to the indenture. Some of the terms used in this description are
defined below under "--Definitions."
The notes will rank equal in right of payment with our 10 1/2% senior
discount notes, 9 1/4% senior notes, 8 3/8% senior notes, the 9 1/2% senior
notes and the 8 1/8% senior notes, and all other existing and future senior
unsecured indebtedness of McLeodUSA and will rank senior in right of payment to
all existing and future subordinated indebtedness of McLeodUSA. As of March 31,
1999, McLeodUSA had no outstanding subordinated indebtedness and, other than
our 10 1/2% senior discount notes, the 9 1/4% senior notes, 8 3/8% senior
notes, 9 1/2% senior notes and 8 1/8% senior notes, had no outstanding
indebtedness that would rank equal with the notes. For a description of these
notes and other outstanding indebtedness of McLeodUSA, see "Other
Indebtedness." The notes will not be secured by any assets and will be
effectively subordinated to any existing and future secured indebtedness of
McLeodUSA and its subsidiaries, including any Senior Credit Facility or
Qualified Receivable Facility, to the extent of the value of the assets
securing such indebtedness. As of March 31, 1999, the total secured
indebtedness of McLeodUSA and its subsidiaries was approximately $52.1 million.
The operations of McLeodUSA are conducted through its subsidiaries and,
therefore, McLeodUSA depends upon cash flow from those entities to meet its
obligations. The subsidiaries will have no direct obligation to pay amounts due
on the notes and will not guarantee the notes. As a result, the notes will be
effectively subordinated to all existing and future third-party indebtedness,
including any Senior Credit Facility or any applicable Qualified Receivable
Facility, and other liabilities of McLeodUSA's subsidiaries, including trade
payables. As of March 31, 1999, the total liabilities of McLeodUSA's
subsidiaries, after the elimination of loans and advances by McLeodUSA to its
subsidiaries, were approximately $325.0 million. Any rights McLeodUSA or its
creditors may have, including the holders of notes, to participate in the
assets of any of McLeodUSA's subsidiaries upon any liquidation or
reorganization of any such subsidiary will be subject to the prior claims of
that subsidiary's creditors, including trade creditors.
Principal, Maturity and Interest
The notes will be limited in principal amount to $400 million and will mature
on , 2009. Interest on the notes will accrue at the rate of % per
annum and will be payable in cash semi-annually in arrears on and
of each year, commencing , 2000. Interest will be computed on the basis
of a 360-day year comprised of twelve 30-day months.
Principal and interest will be payable at the office of the Paying Agent but,
at the option of McLeodUSA, interest may be paid by check mailed to the
registered holders at their registered addresses. The notes will be issued
without coupons and in fully registered form only, in minimum denominations of
$1,000 and any integral multiples of $1,000 in excess thereof. Unless otherwise
designated by McLeodUSA, McLeodUSA's office or agency in New York will be the
office of the trustee maintained for such purpose. The notes will be issued
only against payment therefor in immediately available funds.
S-23
<PAGE>
Book-Entry System
The notes will initially be issued in the form of one or more Global
Securities, as defined in the indenture, held in book-entry form. The 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
notes for all purposes under the 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 notes that are issued as described below under "--Certificated Notes"
will be issued in definitive form. Upon the transfer of a note in definitive
form, such note will, unless the Global Security has previously been exchanged
for notes in definitive form, be exchanged for an interest in the Global
Security representing the principal amount 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 notes held by such persons. Ownership of
beneficial interests in a Global Security will be limited to persons that have
accounts with the Depository, referred to herein as participants, or to persons
that may hold interests through participants. Ownership of beneficial interests
by participants in a Global Security will be shown on, and the transfer of that
ownership interest will be effected only through, records maintained by the
Depository or its nominee for such Global Security. Ownership of beneficial
interests in such Global Security by persons that hold through participants
will be shown on, and the transfer of that ownership interest within such
participant will be effected only through, records maintained by such
participant. The laws of some jurisdictions require that some purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Security.
Payment of principal of, premium, if any, and interest on 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 notes
represented thereby for all purposes under the indenture. None of McLeodUSA,
the trustee, any agent of McLeodUSA or the underwriters will have any
responsibility or liability for:
1. any aspect of the Depository's reports relating to or payments made on
account of beneficial ownership interests in a Global Security
representing any notes or for maintaining, supervising or reviewing any
of the Depository's records relating to such beneficial ownership
interests or
2. any other matter relating to the actions and practices of the Depository
or any of its participants.
McLeodUSA has been advised by the Depository that upon receipt of any payment
of principal of, premium on, if any, or interest on any Global Security, the
Depository will immediately credit, on its book-entry registration and transfer
system, the accounts of participants with payments in amounts proportionate to
their respective beneficial interests in the principal or face amount of such
Global Security, as shown on the records of the Depository. McLeodUSA expects
that payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held
for customer accounts registered in "street name" and will be the sole
responsibility of such participants.
So long as the Depository or its nominee is the registered owner or holder of
such Global Security, the Depository or such nominee, as the case may be, will
be considered the sole owner or holder of the notes represented by such Global
Security for the purposes of receiving payment on the notes, receiving notices
and for all other purposes under the indenture and the notes. Beneficial
interests in 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
S-24
<PAGE>
not be considered the holders of, such Global Security for any purposes under
the 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
indenture. McLeodUSA understands that, under existing industry practices, in
the event that McLeodUSA requests any action of holders or that an owner of a
beneficial interest in a Global Security desires to give or take any action
that a holder is entitled to give or take under the indenture, the Depository
would authorize the participants holding the relevant beneficial interest to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Depository has advised McLeodUSA that it will take any action permitted
to be taken by a holder of notes, including the presentation of 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 notes as to which such participant or participants has or have given
such direction.
The Depository has advised McLeodUSA that the Depository is a limited-purpose
trust company organized under the Banking Law of the State of New York, a
"banking organization" within the meaning of New York Banking Law, a member of
the Federal Reserve System, a "clearing corporation" within the meaning of the
New York Uniform Commercial Code and a "clearing agency" registered under the
Securities Exchange Act. The Depository was created to hold the securities of
its participants and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic book-
entry changes in accounts of the participants, thereby eliminating the need for
physical movement of securities certificates. The Depository's participants
include securities brokers and dealers including the underwriters, banks, trust
companies, clearing corporations and various other organizations some of whom,
and/or their representatives, own the Depository. Access to the Depository's
book-entry system is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a participant, either directly or indirectly, and dealers including the
underwriterss, banks, trust companies, clearing corporations and various other
organizations some of whom, and/or their representatives, own the Depository.
Access to the Depository's book-entry system is also available to others, such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that McLeodUSA
believes to be reliable, but McLeodUSA takes no responsibility for the accuracy
thereof.
Certificated Notes
The notes represented by a Global Security are exchangeable for certificated
notes only if:
. the Depository notifies McLeodUSA that it is unwilling or unable to
continue as a depository for such Global Security or if at any time the
Depository ceases to be a clearing agency registered under the Securities
Exchange Act, and a successor depository is not appointed by within 90
days
. McLeodUSA executes and delivers to the trustee a notice that such Global
Security shall be so transferable, registrable and exchangeable, and such
transfer shall be registrable, or
. there shall have occurred and be continuing an Event of Default with
respect to the notes represented by such Global Security
Any Global Security that is exchangeable for certificated notes pursuant to the
preceding sentence will be transferred to, and registered and exchanged for,
certificated notes in authorized denominations and registered in such names as
the Depository or its nominee holding such Global Security may direct. Subject
to the
S-25
<PAGE>
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 notes:
. certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples thereof
. payment of principal, any repurchase price, and interest on the
certificated notes will be payable, and the transfer of the certificated
notes will be registrable, at the office or agency we maintain for such
purposes, and
. no service charge will be made for any issuance of the certificated
notes, although McLeodUSA may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection therewith
Optional Redemption
The notes will be subject to redemption at the option of McLeodUSA, in whole
or in part, at any time on or after , 2004 and prior to maturity, upon not
less than 30 nor more than 60 days' notice, in amounts of $1,000 or an integral
multiple of $1,000, at the redemption prices, expressed as percentages of
principal amount, set forth below, plus accrued and unpaid interest thereon, if
any, if redeemed during the twelve month periods beginning of the years
indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2004.............................................................. %
2005.............................................................. %
2006.............................................................. %
2007 and after.................................................... 100.000%
</TABLE>
The notes will be redeemable prior to , 2002 only in the event that
McLeodUSA receives net proceeds from the sale of its common stock in a
Strategic Equity Investment on or before , 2002, in which case McLeodUSA
may, at its option, use all or a portion of any such net proceeds to redeem up
to 33 1/3% of the originally issued principal amount of the notes; provided,
that at least 66 2/3% of the originally issued principal amount of the 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 notes to be redeemed at such
holder's address appearing in the Security Register, in amounts of $1,000 or an
integral multiple of $1,000 at a redemption price equal to % of the
principal amount of the notes so redeemed, plus accrued and unpaid interest
thereon, if any, to but excluding the Redemption Date.
If less than all of the notes are to be redeemed, the trustee shall select,
in such manner as it shall deem fair and appropriate, the particular notes to
be redeemed or any portion thereof that is an integral multiple of $1,000.
Mandatory Redemption
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control" and "--Asset Sales," McLeodUSA is not required to make
mandatory redemption payments or sinking fund payments with respect to the
notes.
Repurchase at the Option of Holders upon a Change of Control
Upon the occurrence of a Change of Control, each holder shall have the right
to require McLeodUSA to repurchase all or any part, equal to $1,000 principal
amount or an integral multiple thereof, of such holder's 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 notes plus accrued and unpaid interest, if any, to any Change of Control
Payment Date.
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<PAGE>
Within 30 days following any Change of Control, McLeodUSA or the trustee, at
the request and expense of McLeodUSA shall mail a notice to each holder
stating:
. that a Change of Control Offer is being made pursuant to the covenant
described under "--Repurchase at the Option of Holders upon a Change of
Control" and that all notes timely tendered will be accepted for payment
. the Change of Control Purchase Price and the purchase date (the "Change
of Control Payment Date"), which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed
. that any notes or portions thereof not tendered or accepted for payment
will continue to accrue interest
. that, unless McLeodUSA defaults in the payment of the Change of Control
Purchase Price, all notes or portions thereof accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest
from and after the Change of Control Payment Date
. that holders electing to have any notes or portions thereof purchased
under a Change of Control Offer will be required to surrender their notes
before the close of business on the third Business Day preceding the
Change of Control Payment Date
. 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 notes delivered for purchase, and a
statement that such holder is withdrawing its election to have such notes
or portions thereof purchased
. that holders electing to have notes purchased under the Change of Control
Offer must specify the principal amount that is being tendered for
purchase, which principal amount must be $1,000 or an integral multiple
thereof
. that holders whose notes are being purchased only in part will be issued
new notes equal in principal amount to the unpurchased portion of the
note or notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof, and
. any other information necessary to enable any holder to tender notes and
to have such notes purchased pursuant to the indenture
McLeodUSA will comply with the requirements of Section 14(e) under the
Securities Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
repurchase of notes under a Change of Control Offer.
On the Change of Control Payment Date, McLeodUSA will:
.accept for payment notes or portions thereof properly tendered under the
Change of Control Offer
. irrevocably deposit with the Paying Agent in immediately available funds
an amount equal to the Change of Control Purchase Price in respect of all
notes or portions thereof accepted, and
. deliver, or cause to be delivered, to the trustee the notes accepted
together with an Officers' Certificate listing the notes or portions
thereof tendered to McLeodUSA and accepted for payment
The Paying Agent shall promptly mail to each holder of accepted notes payment
in an amount equal to the Change of Control Purchase Price for such notes, and
the trustee shall promptly authenticate and mail to each holder a new note
equal in principal amount to any unpurchased portion of the notes surrendered,
if any; provided that each such new note shall be in a principal amount of
$1,000 or any integral multiple thereof.
The existence of the holders' right to require, subject to several
conditions, McLeodUSA to repurchase notes upon a Change of Control may deter a
third party from acquiring McLeodUSA in a transaction that constitutes a Change
of Control. If a Change of Control Offer is made, there can be no assurance
that McLeodUSA will have sufficient funds to pay the Change of Control Purchase
Price for all notes tendered by holders seeking to accept the Change of Control
Offer. In addition, instruments governing other indebtedness of McLeodUSA may
prohibit McLeodUSA from purchasing any notes prior to their Stated Maturity,
including
S-27
<PAGE>
under a Change of Control Offer. In the event that a Change of Control Offer
occurs at a time when McLeodUSA does not have sufficient available funds to pay
the Change of Control Purchase Price for all notes tendered pursuant to such
offer or at a time when McLeodUSA is prohibited from purchasing the notes, and
McLeodUSA is unable either to obtain the consent of the holders of the relevant
indebtedness or to repay such indebtedness, an Event of Default would occur
under the indenture. In addition, one of the events that constitutes a Change
of Control under the indenture is a sale, conveyance, transfer or lease of all
or substantially all of the property of McLeodUSA. The indenture is governed by
New York law, and there is no established definition under New York law of
"substantially all" of the assets of a corporation. Accordingly, if McLeodUSA
were to engage in a transaction in which it disposed of less than all of its
assets, a question of interpretation could arise as to whether such disposition
was of "substantially all" of the assets of McLeodUSA and whether McLeodUSA was
required to make a Change of Control Offer.
Except as described herein with respect to a Change of Control the indenture
does not contain any other provisions that permit holders of notes to require
that McLeodUSA repurchase or redeem notes in the event of a takeover,
recapitalization or similar restructuring.
Asset Sales
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless:
. McLeodUSA or such Restricted Subsidiary, as the case may be, receives
consideration for such Asset Sale at least equal to the Fair Market
Value, as evidenced by a Board Resolution delivered to the trustee, of
the Property or assets sold or otherwise disposed of
. at least 75% of the consideration received by McLeodUSA or such
Restricted Subsidiary for such Property or assets consists of
(a) cash, readily-marketable cash equivalents, or Telecommunications
Assets
(b) shares of publicly-traded Voting Stock of any Person engaged in the
Telecommunications Business in the United States, or
(c) the assumption of Indebtedness of McLeodUSA or such Restricted
Subsidiary, other than Indebtedness that is subordinated to the notes, and
the release of McLeodUSA or the Restricted Subsidiary, as the case may be,
from all liability on the Indebtedness assumed, and
. McLeodUSA or such Restricted Subsidiary, as the case may be, uses the Net
Cash Proceeds from such Asset Sale in the manner set forth in the next
paragraph.
Within 360 days after any Asset Sale, McLeodUSA or such Restricted
Subsidiary, as the case may be, may at its option:
. reinvest an amount equal to the Net Cash Proceeds, or any portion
thereof, from such Asset Sale in Telecommunications Assets or in Capital
Stock of any Person engaged in the Telecommunications Business and/or
. apply an amount equal to such Net Cash Proceeds, or remaining Net Cash
Proceeds, to the permanent reduction of Indebtedness of McLeodUSA, other
than Indebtedness to a Restricted Subsidiary, that is senior to or ranks
equally with the notes or to the permanent reduction of Indebtedness or
preferred stock of any Restricted Subsidiary, other than Indebtedness to,
or preferred stock owned by, McLeodUSA or another Restricted Subsidiary.
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or to reduce senior or equally ranked
Indebtedness of McLeodUSA or Indebtedness or preferred stock of its Restricted
Subsidiaries shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $25 million, McLeodUSA shall, within 30 days, use such Excess
Proceeds to make an offer to purchase (an "Asset Sale Offer") from all holders
of notes on a pro rata basis with the holders of all other Indebtedness that
ranks equally with the notes and that requires McLeodUSA to make an offer
equivalent to an Asset Sale Offer, notes in an aggregate principal amount equal
to the maximum principal amount that may be purchased out of
S-28
<PAGE>
Excess Proceeds, at a purchase price (the "Asset Sale 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 indenture. Upon completion of an Asset Sale Offer, including
payment of the Asset Sale Purchase Price, any surplus Excess Proceeds that
were the subject of such offer shall cease to be Excess Proceeds, and
McLeodUSA may then use such amounts for general corporate purposes.
McLeodUSA will comply with the requirements of Section 14(e) under the
Securities Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
repurchase of notes pursuant to an Asset Sale Offer.
Covenants
Set forth below are several covenants that are contained in the indenture:
Limitation on Consolidated Indebtedness
McLeodUSA will not, and will not permit any Restricted Subsidiary to, Incur
any Indebtedness after the Issue Date unless either:
A. the ratio of:
. the aggregate consolidated principal amount of Indebtedness of
McLeodUSA outstanding as of the most recent available quarterly or
annual balance sheet, after giving pro forma effect to the
Incurrence of such Indebtedness and any other Indebtedness Incurred
since such balance sheet date and the receipt and application of the
proceeds thereof, to
. Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters immediately preceding the Incurrence of such
Indebtedness for which consolidated financial statements of
McLeodUSA have been filed with the SEC or have otherwise become
publicly available, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been
applied at the beginning of such four fiscal quarters
would be less than 5.5 to 1.0 for such four-quarter periods ending
prior to December 31, 2000 and 5.0 to 1.0 for such periods ending
thereafter, or
B. McLeodUSA's Consolidated Capital Ratio as of the most recent quarterly
or annual balance sheet of McLeodUSA that has been filed with the SEC
or has otherwise become publicly available, after giving pro forma
effect to:
. the Incurrence of such Indebtedness and any other Indebtedness
Incurred since such balance sheet date, and
. paid-in capital received since such balance sheet date or
concurrently with the Incurrence of such Indebtedness, and in each
case the receipt and application of the proceeds thereof,
is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, McLeodUSA and any Restricted
Subsidiary may Incur each and all of the following:
1. Indebtedness under Senior Credit Facilities in an aggregate principal
amount outstanding or available at any one time not to exceed $100
million, and any renewal, extension, refinancing or refunding thereof in
an amount which, together with any principal amount remaining
outstanding or available under all Senior Credit Facilities, does not
exceed the aggregate principal amount outstanding or available under all
Senior Credit Facilities immediately before such renewal, extension,
refinancing or refunding
2. Indebtedness under Qualified Receivable Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed
the greater of (x) $150 million or (y) an amount equal to 85% of net
Receivables determined in accordance with GAAP, and any renewal,
extension, refinancing or
S-29
<PAGE>
refunding thereof in an amount which, together with any principal amount
remaining outstanding or available under all Qualified Receivable
Facilities, does not exceed the aggregate principal amount outstanding
or available under all Qualified Receivable Facilities immediately
before such renewal, extension, refinancing or refunding
3. Purchase Money Indebtedness, provided that the amount of such Purchase
Money Indebtedness does not exceed 90% of the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets
4. Indebtedness owed by McLeodUSA to any Wholly-Owned Restricted Subsidiary
of McLeodUSA or Indebtedness owed by a Restricted Subsidiary of
McLeodUSA to McLeodUSA or a Wholly-Owned Restricted Subsidiary of
McLeodUSA; provided that upon either
(x) the transfer or other disposition by such Wholly-Owned Restricted
Subsidiary or McLeodUSA of any Indebtedness so permitted to a
Person other than McLeodUSA or another Wholly-Owned Restricted
Subsidiary of McLeodUSA, or
(y) the issuance, other than directors' qualifying 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 McLeodUSA or another such Wholly-
Owned Restricted Subsidiary,
the provisions of this clause 4 shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been Incurred
at the time of such transfer or other disposition
5. Indebtedness Incurred to renew, extend, refinance or refund (each, a
"refinancing") the notes or Indebtedness outstanding at the date of the
supplemental indenture or Purchase Money Indebtedness Incurred pursuant
to clause 3 above in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Indebtedness
so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the
Indebtedness so refinanced or the amount of any premium reasonably
determined by McLeodUSA as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of McLeodUSA incurred in connection with such refinancing;
provided that Indebtedness the proceeds of which are used to refinance
the notes or Indebtedness which ranks equally to the notes or
Indebtedness which is subordinate in right of payment to the notes shall
only be permitted under this clause 5 if
(A) in the case of any refinancing of the notes or Indebtedness which
ranks equally to the notes, the refinancing Indebtedness is made
equal in rank to the notes or constitutes Subordinated
Indebtedness, and, in the case of any refinancing of Subordinated
Indebtedness, the refinancing Indebtedness constitutes Subordinated
Indebtedness, and
(B) in any case, the refinancing Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is issued,
(x) does not provide for payments of principal of such Indebtedness
at stated maturity or by way of a sinking fund applicable
thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by McLeodUSA, including any
redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required
by virtue of the acceleration of any payment with respect to
such Indebtedness upon any event of default thereunder, in each
case prior to the time the same are required by the terms of
the Indebtedness being refinanced, and
(y) does not permit redemption or other retirement, including
pursuant to an offer to purchase made by McLeodUSA, of such
Indebtedness at the option of the holder thereof prior to the
time the same are required by the terms of the Indebtedness
being refinanced, other than a
S-30
<PAGE>
redemption or other retirement at the option of the holder of
such Indebtedness, including pursuant to an offer to purchase
made by McLeodUSA, which is conditioned upon a change of control
pursuant to provisions substantially similar to those described
under "--Repurchase at the Option of Holders upon a Change of
Control"
6. Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements
7. Indebtedness (A) in respect of performance, surety or appeal bonds
provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of
purchase price for closing balance sheet changes within 90 days after
closing, or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any obligations of
McLeodUSA or any of its Restricted Subsidiaries pursuant to such
agreements, in each case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of McLeodUSA, other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary of McLeodUSA
for the purpose of financing such acquisition, and in an aggregate
principal amount not to exceed the gross proceeds actually received by
McLeodUSA or any Restricted Subsidiary in connection with such
disposition, and
8. Indebtedness not otherwise permitted to be Incurred pursuant to clauses
1 through 7 above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause 8, has an aggregate
principal amount not in excess of $10 million at any time outstanding
Notwithstanding any other provision of this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, the maximum amount of Indebtedness that
McLeodUSA or a Restricted Subsidiary may Incur pursuant to this "--Covenants--
Limitation on Consolidated Indebtedness" covenant shall not be deemed to be
exceeded due solely as the result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Indebtedness under this
"--Covenants--Limitation on Consolidated Indebtedness" covenant:
1. Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and
2. any Liens granted pursuant to the equal and ratable provisions referred
to in the "--Covenants--Limitation on Liens" covenant described below
shall not be treated as Indebtedness
For purposes of determining compliance with this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, McLeodUSA, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries
McLeodUSA will not permit any Restricted Subsidiary of McLeodUSA to Incur
any Indebtedness or issue any Preferred Stock except:
1. Indebtedness or Preferred Stock outstanding on the date of the
supplemental indenture after giving effect to the application of the
proceeds of the notes
2. Indebtedness Incurred or Preferred Stock issued to and held by McLeodUSA
or a Wholly-Owned Restricted Subsidiary of McLeodUSA, provided that such
Indebtedness or Preferred Stock is at all times held by McLeodUSA or a
Wholly-Owned Restricted Subsidiary of McLeodUSA
S-31
<PAGE>
3. Indebtedness Incurred or Preferred Stock issued by a Person prior to the
time (A) such Person became a Restricted Subsidiary of McLeodUSA, (B)
such Person merges into or consolidates with a Restricted Subsidiary of
McLeodUSA or (C) another Restricted Subsidiary of McLeodUSA merges into
or consolidates with such Person in a transaction in which such Person
becomes a Restricted Subsidiary of McLeodUSA, which Indebtedness or
Preferred Stock was not Incurred or issued in anticipation of such
transaction and was outstanding prior to such transaction
4. Indebtedness under a Senior Credit Facility which is permitted to be
outstanding under clause 1 of the second paragraph of "--Covenants--
Limitation on Consolidated Indebtedness"
5. in the case of a Restricted Subsidiary that is a Qualified Receivable
Subsidiary, Indebtedness under a Qualified Receivable Facility which is
permitted to be outstanding under clause 2 of the second paragraph of
"--Covenants--Limitation on Consolidated Indebtedness"
6. Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements
7. Indebtedness (A) in respect of performance, surety and appeal bonds
provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of
purchase price for closing balance sheet changes within 90 days after
closing, or similar obligations, or from Guarantees or letters of
credit, surety bonds or performance bonds securing any obligation of
such Restricted Subsidiary pursuant to such agreements, in each case
Incurred in connection with the disposition of any business, assets or
Restricted Subsidiary of such Restricted Subsidiary, other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any
portion of such business, assets or Restricted Subsidiary for the
purpose of financing such acquisition, and in an aggregate principal
amount not to exceed the gross proceeds actually received by such
Restricted Subsidiary in connection with such disposition
8. Indebtedness or Preferred Stock which is exchanged for, or the proceeds
of which are used to refinance, refund or redeem, any Indebtedness or
Preferred Stock permitted to be outstanding pursuant to clauses 1 and 3
above or any extension or renewal thereof (for purposes hereof, a
"refinancing"), in an aggregate principal amount, in the case of
Indebtedness, or with an aggregate liquidation preference in the case of
Preferred Stock, not to exceed the aggregate principal amount of the
Indebtedness so refinanced or the aggregate liquidation preference of
the Preferred Stock so refinanced, plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Indebtedness or Preferred Stock so refinanced or the amount
of any premium reasonably determined by McLeodUSA as necessary to
accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the amount of expenses of McLeodUSA and the
applicable Restricted Subsidiary, Incurred in connection therewith and
provided the Indebtedness or Preferred Stock Incurred or issued upon
such refinancing by its terms, or by the terms of any agreement or
instrument pursuant to which such Indebtedness or Preferred Stock is
Incurred or issued,
(x) does not provide for payments of principal or liquidation value at
the stated maturity of such Indebtedness or Preferred Stock or by
way of a sinking fund applicable to such Indebtedness or Preferred
Stock or by way of any mandatory redemption, defeasance,
retirement or repurchase of such Indebtedness or Preferred Stock
by McLeodUSA or any Restricted Subsidiary of McLeodUSA, including
any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by
virtue of acceleration of such Indebtedness upon an event of
default thereunder, in each case prior to the time the same are
required by the terms of the Indebtedness or Preferred Stock being
refinanced and
(y) does not permit redemption or other retirement, including under an
offer to purchase made by McLeodUSA or a Restricted Subsidiary of
McLeodUSA, of such Indebtedness or Preferred Stock at the option
of the holder thereof prior to the stated maturity of the
Indebtedness or Preferred Stock being refinanced, other than a
redemption or other retirement at the option of the holder of such
Indebtedness or Preferred Stock, including pursuant to an offer to
purchase made
S-32
<PAGE>
by McLeodUSA or a Restricted Subsidiary of McLeodUSA, which is
conditioned upon the change of control of McLeodUSA pursuant to
provisions substantially similar to those described under "--
Repurchase at the Option of Holders upon a Change of Control" and
provided, further, that in the case of any exchange or redemption of
Preferred Stock of a Restricted Subsidiary of McLeodUSA, such
Preferred Stock may only be exchanged for or redeemed with Preferred
Stock of such Restricted Subsidiary, and
9. Indebtedness Incurred or Preferred Stock issued by a Restricted
Subsidiary, provided that the Fair Market Value of McLeodUSA's
Investment in all Restricted Subsidiaries which Incur Indebtedness or
issue Preferred Stock pursuant to this clause 9 shall not exceed, at any
time, $30 million in the aggregate, provided further, that such
Indebtedness Incurred is otherwise permitted pursuant to the covenant
described under "--Covenants--Limitation on Consolidated Indebtedness."
Limitation on Restricted Payments
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, make any Restricted Payment unless, at the time of
and after giving effect to such proposed Restricted Payment:
. no Default or Event of Default shall have occurred and be continuing or
shall occur as a consequence thereof
. after giving effect, on a pro forma basis, to such Restricted Payment
and the incurrence of any Indebtedness the net proceeds of which are
used to finance such Restricted Payment, McLeodUSA could incur at least
$1.00 of additional Indebtedness pursuant to the first paragraph of "--
Covenants--Limitation on Consolidated Indebtedness" and
. after giving effect to such Restricted Payment on a pro forma basis, the
aggregate amount expended (the amount so expended, if other than cash,
to be determined in good faith by a majority of the disinterested
members of the board of directors, whose determination shall be
conclusive and evidenced by a resolution thereof) or declared for all
Restricted Payments after the Issue Date does not exceed the sum of (A)
50% of the Consolidated Net Income of McLeodUSA (or, if Consolidated Net
Income shall be a deficit, minus 100% of such deficit) for the period
(taken as one accounting period) beginning on the last day of the fiscal
quarter immediately preceding the Issue Date and ending on the last day
of the fiscal quarter for which McLeodUSA's financial statements have
been filed with the SEC or otherwise become publicly available
immediately preceding the date of such Restricted Payment, plus (B) 100%
of the net reduction in Investments, subsequent to the Issue Date, in
any Person, resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of
Property (but only to the extent such interest, dividends, repayments or
other transfers of Property are not included in the calculation of
Consolidated Net Income), in each case to McLeodUSA or any Restricted
Subsidiary from any Person (including, without limitation, from
Unrestricted Subsidiaries) or from redesignations of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided
in the definition of "Investments"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to the Issue
Date by McLeodUSA or any Restricted Subsidiary in such Person and which
was treated as a Restricted Payment
provided that McLeodUSA or a Restricted Subsidiary of McLeodUSA may make any
Restricted Payment with the aggregate net proceeds received after February 22,
1999, including the fair value of property other than cash (determined in good
faith by the Board of Directors as evidenced by a resolution of the Board of
Directors filed with the trustee),
(x) as capital contributions to McLeodUSA,
(y) from the issuance (other than to a Restricted Subsidiary) of Capital
Stock (other than Disqualified Stock) of McLeodUSA and warrants,
rights or options on Capital Stock (other than Disqualified Stock) of
McLeodUSA, or
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<PAGE>
(z) from the conversion of Indebtedness of McLeodUSA into Capital Stock
(other than Disqualified Stock and other than by a Restricted
Subsidiary) of McLeodUSA after the date of the supplemental indenture.
The foregoing limitations shall not prevent McLeodUSA from:
1. paying a dividend on its Capital Stock at any time within 60 days after
the declaration thereof if, on the declaration date, McLeodUSA could
have paid such dividend in compliance with the preceding paragraph
2. retiring (A) any Capital Stock of McLeodUSA or any Restricted Subsidiary
of McLeodUSA, (B) Indebtedness of McLeodUSA that is subordinate to the
notes, or (C) Indebtedness of a Restricted Subsidiary of McLeodUSA, in
exchange for, or out of the proceeds of the substantially concurrent
sale of Qualified Stock of McLeodUSA
3. retiring any Indebtedness of McLeodUSA subordinated in right of payment
to the notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of McLeodUSA (other
than Indebtedness to a Subsidiary of McLeodUSA), provided that such new
Indebtedness (A) is subordinated in right of payment to the notes at
least to the same extent as, (B) has an Average Life at least as long
as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness
so retired
4. retiring any Indebtedness of a Restricted Subsidiary of McLeodUSA in
exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of McLeodUSA or any Restricted Subsidiary
that is permitted under the covenant described under "--Covenants--
Limitation on Consolidated Indebtedness" (in the case of Indebtedness of
McLeodUSA) and "--Covenants--Limitation on Indebtedness and Preferred
Stock of Restricted Subsidiaries" (in the case of Indebtedness of
Restricted Subsidiaries) and that (A) is not secured by any assets of
McLeodUSA or any Restricted Subsidiary to a greater extent than the
retired Indebtedness was so secured, (B) has an Average Life at least as
long as the retired Indebtedness, and (C) is subordinated in right of
payment to the notes at least to the same extent as the retired
Indebtedness
5. retiring any Capital Stock or options to acquire Capital Stock of
McLeodUSA or any Restricted Subsidiary of McLeodUSA held by any
directors, officers or employees of McLeodUSA or any Restricted
Subsidiary, provided that the aggregate price paid for all such retired
Capital Stock shall not exceed, in the aggregate, the sum of $2 million
plus the aggregate cash proceeds received by McLeodUSA subsequent to the
Issue Date from issuances of Capital Stock or options to acquire Capital
Stock by McLeodUSA to directors, officers or employees of McLeodUSA and
its Subsidiaries
6. making payments or distributions to dissenting stockholders pursuant to
applicable law in connection with a consolidation, merger or transfer of
assets permitted under "--Consolidation, Merger, Conveyance, Lease or
Transfer"
7. retiring any Capital Stock of McLeodUSA to the extent necessary (as
determined in good faith by a majority of the disinterested members of
the Board of Directors, whose determination shall be conclusive and
evidenced by a resolution thereof) to prevent the loss, or to secure the
renewal or reinstatement, of any license or franchise held by McLeodUSA
or any Restricted Subsidiary from any governmental agency
8. making Investments in any Person primarily engaged in the
Telecommunications Business; provided, that the aggregate amount of such
Investments does not exceed at any time the sum of (A) $30 million plus
(B) the amount of Net Cash Proceeds received by McLeodUSA after February
22, 1999 as a capital contribution or from the sale of its Capital Stock
(other than Disqualified Stock) to a Person who is not a Subsidiary of
McLeodUSA, except to the extent such Net Cash Proceeds are used to make
Restricted Payments permitted pursuant to clauses (x), (y) and (z) of
the first paragraph,
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or clause 2 above or this clause 8, of this "Limitation on Restricted
Payments" covenant, plus (C) the net reduction in Investments made
pursuant to this clause 8 resulting from distributions on or repayments
of such Investments or from the Net Cash Proceeds from the sale of any
such Investment (except in each case to the extent any such payment or
proceeds are included in the calculation of Consolidated Net Income) or
from such Person becoming a Restricted Subsidiary (valued in each case
as provided in the definition of "Investment"), provided that the net
reduction in any Investment shall not exceed the amount of such
Investment, and
9. making Investments not otherwise permitted in an aggregate amount not to
exceed $15 million at any time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses 2, 3 and 4 above 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), McLeodUSA shall deliver to the trustee an Officers' Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon McLeodUSA's latest available financial statements.
Limitation on Liens
McLeodUSA may not, and may not permit any Restricted Subsidiary of
McLeodUSA, to Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or hereafter acquired to secure any Indebtedness
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the notes (x) equally and ratably with such
Indebtedness as to such property for so long as such Indebtedness will be so
secured or (y) in the event such Indebtedness is Indebtedness of McLeodUSA
which is subordinate in right of payment to the notes, prior to such
Indebtedness as to such property for so long as such Indebtedness will be so
secured.
The foregoing restrictions shall not apply to:
1. Liens existing on the date of the supplemental indenture and securing
Indebtedness outstanding on the date of the indenture or Incurred on or
after the Issue Date pursuant to any Senior Credit Facility or Qualified
Receivable Facility
2. Liens securing Indebtedness in an amount which, together with the
aggregate amount of Indebtedness then outstanding or available under all
Senior Credit Facilities (or under refinancings or amendments of such
Senior Credit Facilities), does not exceed 1.5 times McLeodUSA's
Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters preceding the Incurrence of such Lien for which
McLeodUSA's consolidated financial statements have been filed with the
SEC or become publicly available, determined on a pro forma basis as if
such Indebtedness had been Incurred and the proceeds thereof had been
applied at the beginning of such four fiscal quarters
3. Liens in favor of McLeodUSA or any Wholly-Owned Restricted Subsidiary of
McLeodUSA
4. Liens on Property of McLeodUSA or a Restricted Subsidiary acquired,
constructed or constituting improvements made after the Issue Date of
the notes to secure Purchase Money Indebtedness which is otherwise
permitted under the indenture, provided that (a) the principal amount of
any Indebtedness secured by any such Lien does not exceed 100% of such
purchase price or cost of construction or improvement of the Property
subject to such Lien, (b) such Lien attaches to such property prior to,
at the time of or within 180 days after the acquisition, completion of
construction or commencement of operation of such Property and (c) such
Lien does not extend to or cover any Property other than the specific
item of Property (or portion thereof) acquired, constructed or
constituting the improvements made with the proceeds of such Purchase
Money Indebtedness
5. Liens to secure Acquired Indebtedness, provided that (a) such Lien
attaches to the acquired asset prior to the time of the acquisition of
such asset and (b) such Lien does not extend to or cover any other
Property
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6. Liens to secure Indebtedness Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings),
in whole or in part, Indebtedness secured by any Lien referred to in the
foregoing clauses 1, 2, 4 and 5 so long as such Lien does not extend to
any other Property and the principal amount of Indebtedness so secured
is not increased except as otherwise permitted under clause 5 of the
second paragraph of "--Covenants--Limitation on Consolidated
Indebtedness" (in the case of Indebtedness of McLeodUSA) or clause 8 of
"--Covenants--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries" (in the case of Indebtedness of Restricted
Subsidiaries)
7. Liens not otherwise permitted by the foregoing clauses 1 through 6 in an
aggregate amount not to exceed 5% of McLeodUSA's Consolidated Tangible
Assets
8. Liens granted after the Issue Date pursuant to the immediately preceding
paragraph to secure the notes, and
9. Permitted Liens
Limitation on Sale and Leaseback Transactions
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction (other than a Sale
and Leaseback Transaction between McLeodUSA or a Restricted Subsidiary on the
one hand and a Restricted Subsidiary or McLeodUSA on the other hand), unless:
1. McLeodUSA or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value, as evidenced by a Board Resolution
delivered to the trustee, of the Property subject to such transaction
2. the Attributable Indebtedness of McLeodUSA or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted
by the covenant described under "--Covenants--Limitation on Consolidated
Indebtedness" or "--Covenants--Limitation on Indebtedness and Preferred
Stock of Restricted Subsidiaries," as the case may be
3. McLeodUSA or such Restricted Subsidiary would be permitted to create a
Lien on such Property without securing the notes by the covenant
described under "--Covenants--Limitation on Liens," and
4. the Net Cash Proceeds from such transaction are applied in accordance
with the covenant described under "--Asset Sales,"
provided that McLeodUSA shall be permitted to enter into Sale and Leaseback
Transactions for up to $30 million with respect to construction of McLeodUSA's
headquarters buildings located in Cedar Rapids, Iowa, provided that any such
transaction is entered into within 180 days of the earlier of (x) substantial
completion or (y) occupation of the applicable phase of such headquarters
building.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
Except for the items described below, McLeodUSA will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, cause or suffer to exist
or become effective, or enter into, any encumbrance or restriction, other than
by law or regulation, on the ability of any Restricted Subsidiary to:
1. pay dividends or make any other distributions in respect of its Capital
Stock or pay any Indebtedness or other obligation owed to McLeodUSA or
any Restricted Subsidiary,
2. make loans or advances to McLeodUSA or any Restricted Subsidiary, or
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3. transfer any of its Property to McLeodUSA or any other Restricted
Subsidiary.
The following items are exceptions to the limitations described above:
(a) any encumbrance or restriction existing as of the Issue Date under the
supplemental indenture or any other agreement relating to any Existing
Indebtedness or any Indebtedness under a Qualified Receivable Facility
otherwise permitted under the indenture
(b) any encumbrance or restriction under an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in
any such agreement relate solely to the Property so acquired
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted
Subsidiary is acquired by McLeodUSA or another Restricted Subsidiary
(other than any such Indebtedness Incurred by such Restricted
Subsidiary in connection with or in anticipation of such acquisition)
(d) any encumbrance or restriction under an agreement effecting a permitted
refinancing of Indebtedness issued under an agreement referred to in
the foregoing clauses (a) through (c), so long as the encumbrances and
restrictions contained in any such refinancing agreement are not
materially more restrictive than the encumbrances and restrictions
contained in such agreements
(e) customary provisions (A) that restrict the subletting, assignment or
transfer of any property or asset that is a lease, license, conveyance
or contract or similar property or asset; (B) existing by virtue of any
transfer of, agreement to transfer, option or right with respect to, or
Lien on, any property or assets of McLeodUSA or any Restricted
Subsidiary not otherwise prohibited by the indenture or (C) arising or
agreed to in the ordinary course of business, not relating to any
Indebtedness, and that do not, individually or in the aggregate,
detract from the value of property or assets of McLeodUSA or any
Restricted Subsidiary in any manner material to McLeodUSA or any
Restricted Subsidiary
(f) in the case of clause 3 above, restrictions contained in any security
agreement, including a Capital Lease Obligation, securing Indebtedness
of McLeodUSA or a Restricted Subsidiary otherwise permitted under the
indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement, and
(g) any restriction with respect to a Restricted Subsidiary of McLeodUSA
imposed by an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary, provided that the consummation of such
transaction would not result in an Event of Default or an event that,
with the passing of time or the giving of notice or both, would
constitute an Event of Default, that such restriction terminates if
such transaction is not consummated and that the consummation or
abandonment of such transaction occurs within one year of the date such
agreement was entered into
Nothing contained in this "--Covenants--Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent
McLeodUSA or any Restricted Subsidiary from (1) creating, incurring, assuming
or suffering to exist any Liens otherwise permitted under the "--Covenants--
Limitation on Liens" covenant or (2) restricting the sale or other disposition
of property or assets of McLeodUSA or any of its Restricted Subsidiaries that
secure Indebtedness of McLeodUSA or any of its Restricted Subsidiaries
otherwise permitted under "--Covenants--Limitation on Consolidated
Indebtedness" or "--Covenants--Limitations on Indebtedness and Preferred Stock
of Restricted Subsidiaries," as the case may be.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
McLeodUSA (i) shall not permit any Restricted Subsidiary to issue any Capital
Stock other than to McLeodUSA or a Wholly-Owned Restricted Subsidiary unless
immediately after giving effect thereto such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary and any Investment of McLeodUSA or
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any other Restricted Subsidiary in such Restricted Subsidiary would have been
permitted under "--Covenants--Limitation on Restricted Payments" if made on the
date of such issuance and (ii) shall not permit any Person other than McLeodUSA
or a Wholly-Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, other than directors' qualifying shares and except for:
(a) a sale of 100% of the Capital Stock of a Restricted Subsidiary sold in
a transaction not prohibited by the covenant described under "--Asset
Sales"
(b) a sale of the Capital Stock of a Restricted Subsidiary sold in a
transaction not prohibited by the covenant described under "--Asset
Sales" if, after giving effect thereto, greater than 50% of the
Capital Stock of such Restricted Subsidiary is owned by McLeodUSA or
by a Wholly-Owned Restricted Subsidiary
(c) Capital Stock of a Restricted Subsidiary issued and outstanding on the
Issue Date and held by Persons other than McLeodUSA or any Restricted
Subsidiary
(d) Capital Stock of a Restricted Subsidiary issued and outstanding prior
to the time that such Person becomes a Restricted Subsidiary so long
as such Capital Stock was not issued in anticipation or contemplation
of such Person's becoming a Restricted Subsidiary or otherwise being
acquired by McLeodUSA
(e) any Preferred Stock permitted to be issued under "--Covenants--
Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries," and
(f) ownership by any Person other than McLeodUSA or a Subsidiary of less
than 50% of the Capital Stock of a Person (A) in which McLeodUSA or a
Restricted Subsidiary has made a Permitted Investment pursuant to
clause 3 of the definition of "Permitted Investments," (B) of which
more than 50% of such Person's Capital Stock is owned, directly or
indirectly, by McLeodUSA and (C) as to which McLeodUSA has the power
to direct the policies, management and affairs
Transactions with Affiliates
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, sell, lease, transfer, or otherwise dispose of, any
of its Properties or assets to, or purchase any Property or assets from, or
enter into any contract, agreement, understanding, loan, advance or Guarantee
with or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions is on
terms that are no less favorable to McLeodUSA or such Restricted
Subsidiary than those that would have been obtained in a comparable
arm's-length transaction by McLeodUSA or such Restricted Subsidiary
with a Person that is not an Affiliate (or, in the event that there are
no comparable transactions involving Persons who are not Affiliates of
McLeodUSA or the relevant Restricted Subsidiary to apply for
comparative purposes, is otherwise on terms that, taken as a whole,
McLeodUSA has determined to be fair to McLeodUSA or the relevant
Restricted Subsidiary) and
(b) McLeodUSA delivers to the trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1 million, a
certificate of the chief executive, operating or financial officer of
McLeodUSA evidencing such officer's determination that such Affiliate
Transaction or series of Affiliate Transactions complies with clause
(a) above and is in the best interests of McLeodUSA or such Restricted
Subsidiary and (ii) with respect to any Affiliate Transaction or series
of Affiliate Transactions involving aggregate payments in excess of $5
million, a board resolution certifying that such Affiliate Transaction
or series of Affiliate Transactions complies with clause (a) above and
that such Affiliate Transaction or series of Affiliate Transactions has
been approved by a majority of the disinterested members of the board
of directors who have determined that such Affiliate Transaction or
series of Affiliate Transactions is in the best interest of McLeodUSA
or such Restricted Subsidiary
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provided that the following shall not be deemed Affiliate Transactions:
1. any employment agreement entered into by McLeodUSA or any of its
Restricted Subsidiaries in the ordinary course of business and
consistent with industry practice
2. any agreement or arrangement with respect to the compensation of a
director or officer of McLeodUSA or any Restricted Subsidiary approved
by a majority of the disinterested members of the board of directors and
consistent with industry practice
3. transactions between or among McLeodUSA and its Restricted Subsidiaries
4. transactions permitted by the covenant described under "--Covenants--
Limitation on Restricted Payments"
5. transactions pursuant to any agreement or arrangement existing on the
Issue Date, and
6. transactions with respect to wireline or wireless transmission capacity,
the lease or sharing or other use of cable or fiber optic lines,
equipment, rights-of-way or other access rights, between McLeodUSA or
any Restricted Subsidiary and any other Person
provided, in any case, that such transaction is on terms that are no less
favorable, taken as a whole, to McLeodUSA or the relevant Restricted
Subsidiary than those that could have been obtained in a comparable
transaction by McLeodUSA or such Restricted Subsidiary with Persons who are
not Affiliates of McLeodUSA or the relevant Restricted Subsidiary, or, in the
event that there are no comparable transactions involving Persons who are not
Affiliates of McLeodUSA or the relevant Restricted Subsidiary to apply for
comparative purposes, is otherwise on terms that, taken as a whole, McLeodUSA
has determined to be fair to McLeodUSA or the relevant Restricted Subsidiary.
Restricted and Unrestricted Subsidiaries
(a) McLeodUSA may designate a Subsidiary (including a newly formed or newly
acquired Subsidiary) of McLeodUSA or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any
obligations which, if in Default, would result in a cross default on
Indebtedness of McLeodUSA or a Restricted Subsidiary (other than
Indebtedness to McLeodUSA or a Wholly-Owned Restricted Subsidiary), and
.such Subsidiary has total assets of $1,000 or less,
. such Subsidiary has assets of more than $1,000 and an Investment in
such Subsidiary in an amount equal to the Fair Market Value of such
Subsidiary would then be permitted under the first paragraph of "--
Covenants--Limitation on Restricted Payments" or
. such designation is effective immediately upon such Person becoming
a Subsidiary.
Unless so designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of McLeodUSA or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary thereof.
(b) McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series
of transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness
to McLeodUSA or a Restricted Subsidiary) at the date of determination)
becoming a Restricted Subsidiary (whether through an acquisition, the
redesignation of an Unrestricted Subsidiary or otherwise) unless, after
giving effect to such action, transaction or series of transactions, on
a pro forma basis, (A) McLeodUSA could incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of "--
Covenants--Limitation on Consolidated Indebtedness" and (B) 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
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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.
Consolidation, Merger, Conveyance, Lease or Transfer
The following covenant replaces the covenant under the heading "Merger,
Consolidation or Sale of Assets" in the accompanying prospectus.
McLeodUSA will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person or permit any other
Person to merge with or into McLeodUSA, other than a merger of a Restricted
Subsidiary into McLeodUSA in which McLeodUSA is the continuing corporation, or
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the Property and assets of McLeodUSA and the Restricted
Subsidiaries taken as a whole to any other Person, unless:
. either (a) McLeodUSA shall be the continuing corporation or (b) the
corporation, if other than McLeodUSA, formed by such consolidation or
into which McLeodUSA is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of McLeodUSA and the
Restricted Subsidiaries taken as a whole (such corporation or Person,
the "Surviving Entity"), shall be a corporation organized and validly
existing under the laws of the United States of America, any political
subdivision thereof, any state thereof or the District of Columbia, and
shall expressly assume, by a supplemental indenture, the due and
punctual payment of the principal of (and premium, if any) and interest
on all the notes and the performance of McLeodUSA's covenants and
obligations under the indenture
. 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 Default
or Event of Default shall have occurred and be continuing
. immediately after giving effect to such transaction or series of
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with
or in respect of such transaction or series of transactions, McLeodUSA
(or the Surviving Entity, if McLeodUSA is not continuing) would (A) be
permitted to Incur at least $1.00 of additional Indebtedness pursuant to
the first paragraph of "--Covenants--Limitation on Consolidated
Indebtedness" and (B) have a Consolidated Net Worth that is not less
than the Consolidated Net Worth of McLeodUSA immediately before such
transaction or series of transactions, and
. if as a result of any such transaction, Property of McLeodUSA would
become subject to a Lien prohibited by the provisions of the indenture
described under "--Covenants --Limitation on Liens" above, McLeodUSA or
the successor entity to McLeodUSA shall have secured the notes as
required thereby
Events of Default
Each of the following is an "Event of Default" under the indenture:
(a) default in the payment of interest on any note when the same becomes
due and payable, and the continuance of such default for a period of
30 days
(b) default in the payment of the principal of (or premium, if any, on)
any note at its maturity, upon optional redemption, required
repurchase (including pursuant to a Change of Control Offer or an
Asset Sale Offer), declaration of acceleration or otherwise or the
failure to make an offer to purchase any note as required
(c) failure by McLeodUSA to comply with any of its covenants or
agreements described under "--Repurchase at the Option of the Holders
upon a Change of Control," "--Asset Sales" or "--Consolidation,
Merger, Conveyance, Lease or Transfer"
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(d) default in the performance, or breach, of any covenant or warranty of
McLeodUSA in the indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default
or breach for a period of 60 days after written notice thereof has
been given to McLeodUSA by the trustee or to McLeodUSA and the
trustee by holders of at least 25% of the aggregate principal amount
of the outstanding notes
(e) Indebtedness of McLeodUSA or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is
accelerated by the holders thereof and, in either case, the principal
amount of such unpaid or accelerated Indebtedness exceeds $10 million
(f) the entry by a court of competent jurisdiction of one or more final
judgments against McLeodUSA or any Restricted Subsidiary in an
uninsured or unindemnified aggregate amount in excess of $10 million
which is not discharged, waived, appealed, stayed, bonded or
satisfied for a period of 45 consecutive days
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of McLeodUSA or any Restricted
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy
laws, as now or hereafter constituted, or any other applicable
Federal, state, or foreign bankruptcy, insolvency, or other similar
law or (ii) a decree or order adjudging McLeodUSA or any Restricted
Subsidiary bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or
composition of or in respect of McLeodUSA or any Restricted
Subsidiary under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or similar law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other
similar official of McLeodUSA or any Restricted Subsidiary or of any
substantial part of the Property or assets of McLeodUSA or any
Restricted Subsidiary, or ordering the winding up or liquidation of
the affairs of McLeodUSA or any Restricted Subsidiary, and the
continuance of any such decree or order for relief or any such other
decree or order unstayed and in effect for a period of 60 consecutive
days, or
(h)one or more of the following:
. the commencement by McLeodUSA or any Restricted Subsidiary of a
voluntary case or proceeding under U.S. bankruptcy laws, as now
or hereafter constituted, or any other applicable Federal, state
or foreign bankruptcy, insolvency or other similar law or of any
other case or proceeding to be adjudicated a bankrupt or
insolvent
. the consent by McLeodUSA or any Restricted Subsidiary to the
entry of a decree or order for relief in respect of McLeodUSA or
any Restricted Subsidiary in an involuntary case or proceeding
under U.S. bankruptcy laws, as now or hereafter constituted, or
any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law or to the commencement of any
bankruptcy or insolvency case or proceeding against McLeodUSA or
any Restricted Subsidiary
. the filing by McLeodUSA or any Restricted Subsidiary of a
petition or answer or consent seeking reorganization or relief
under U.S. bankruptcy laws, as now or hereafter constituted, or
any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law
. the consent by McLeodUSA or any Restricted Subsidiary to the
filing of such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee,
trustee, sequestrator or similar official of McLeodUSA or any
Restricted Subsidiary or of any substantial part of the Property
or assets of McLeodUSA or any Restricted Subsidiary, or the
making by McLeodUSA or any Restricted Subsidiary of an assignment
for the benefit of creditors
. the admission by McLeodUSA or any Restricted Subsidiary in
writing of its inability to pay its debts generally as they
become due
. the taking of corporate action by McLeodUSA or any Restricted
Subsidiary in furtherance of any such action.
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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, unless
the principal amount of the outstanding notes has become due and payable, the
trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of the notes may declare the principal amount of the notes and
any accrued and unpaid interest on all the notes then outstanding to be
immediately due and payable by a notice in writing to McLeodUSA (and to the
trustee if given by holders of the notes), and upon any such declaration, such
principal amount and any accrued and unpaid interest will become and be
immediately due and payable. If any Event of Default specified in clause (g) or
(h) above occurs, the principal amount of the notes and any accrued and unpaid
interest on the notes then outstanding shall become immediately due and payable
without notice to McLeodUSA and without any declaration or other act on the
part of the trustee or any holder of any 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 notes has been obtained by the trustee. Under specified circumstances, the
holders of a majority in principal amount of the outstanding notes by notice to
McLeodUSA and the trustee may rescind an acceleration and its consequences.
McLeodUSA will be required to deliver to the trustee annually a statement
regarding compliance with the indenture, and McLeodUSA is required within 30
days after becoming aware of any Default or Event of Default, to deliver to the
trustee a statement describing such Default or Event of Default, its status and
what action McLeodUSA is taking or proposes to take with respect thereto. The
trustee may withhold from holders of the 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 provisions of the indenture may be amended, supplemented or waived under
the conditions set forth in the accompanying prospectus under "Description of
Debt Securities -- Modification of the Indentures."
Satisfaction and Discharge of the Indenture; Defeasance and Covenant Defeasance
The provisions of the base indenture regarding (a) satisfaction and discharge
of McLeodUSA's obligations under the indenture and (b) defeasance and covenant
defeasance are described in the accompanying prospectus under "Description of
Debt Securities -- Satisfaction and Discharge of Indentures" and "-- Defeasance
and Covenant Defeasance," respectively. All such provisions of the base
indenture will apply to the notes. In addition, the covenant defeasance
provisions of the base indenture shall, pursuant to the supplemental indenture,
also apply to the provisions described in this prospectus supplement under
"Description of the Notes-- Repurchase at the Option of Holders upon a Change
of Control," " -- Asset Sales," "-- Covenants" and "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
The Trustee
United States Trust Company of New York is the trustee under the 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 notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to several exceptions. Except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set
forth in the indenture. The indenture provides that in case an Event of Default
shall occur (which shall not be cured or waived), the trustee will be required,
in the exercise of its rights and powers under the 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 indenture at the request of any of the
holders of the notes, unless such holders shall have offered to the trustee
indemnity satisfactory to it against any loss, liability or expense.
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No Personal Liability of Controlling Persons, Directors, Officers, Employees
and Stockholders
No controlling Person, director, officer, employee, incorporator or
stockholder of McLeodUSA, as such, shall have any liability for any covenant,
agreement or other obligations of McLeodUSA under the notes or the 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
McLeodUSA. By accepting a 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 notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has
been the view of the SEC that such a waiver is against public policy.
Transfer and Exchange
The outstanding notes are subject to various restrictions on transfer. A
holder may transfer or exchange notes in accordance with the indenture.
McLeodUSA, the Security Registrar and the trustee may require a holder, among
other things, to furnish appropriate endorsements and transfer documents and
McLeodUSA may require a holder to pay any taxes and fees required by law or
permitted by the indenture.
Definitions
Set forth below is a summary of several of the defined terms used in the
indenture. Reference is made to the 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 McLeodUSA and of each other Subsidiary of McLeodUSA; provided,
further, that neither McLeodUSA nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"under common control with" and "controlled by"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of Voting Stock, by agreement or otherwise.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person
to such Person or a Wholly-Owned Restricted Subsidiary of such Person or by
such Person to a Wholly-Owned Restricted Subsidiary of such Person) of
(1) shares of Capital Stock or other ownership interests of a Restricted
Subsidiary of such Person (other than as permitted by the provisions of
the indenture described above under "--Covenants--Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries")
(2) 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
(3) 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 indenture
applicable to consolidations, mergers, and transfers of all or
substantially all of the assets of the McLeodUSA;
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provided that "Asset Sale" shall not include (A) sales or other dispositions of
inventory, receivables and other current assets in the ordinary course of
business, (B) simultaneous exchanges by McLeodUSA or any Restricted Subsidiary
of Telecommunications Assets for other Telecommunications Assets in the
ordinary course of business; provided that the applicable Telecommunications
Assets received by McLeodUSA or such Restricted Subsidiary have at least
substantially equal Fair Market Value to McLeodUSA or such Restricted
Subsidiary (as determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a Board Resolution), and (C)
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
(1) the capitalized amount in respect of such transaction that would appear
on the balance sheet of such Person in accordance with GAAP, and
(2) 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
(1) 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
(2)the sum of all such principal or redemption payments
"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
(1) the sale, conveyance, transfer or lease of all or substantially all of
the assets of McLeodUSA to any "Person" or "group" (within the meaning
of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act or any
successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities
within the meaning of Rule 13d-5(b)(i) under the Securities Exchange
Act), other than any Permitted Holder (as defined below) or any
Restricted Subsidiary of McLeodUSA, shall have occurred
(2) any "Person" or "group" (within the meaning of Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act or any successor provision to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of
Rule 13d-5(b)(i) under the Securities Exchange Act), other than any
Permitted Holder, becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act) of more than 35% of the total
voting power of all classes of the Voting Stock of McLeodUSA (including
any warrants, options or
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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
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together
with any directors whose election or appointment by the Board of
Directors or whose nomination for election by the stockholders of
McLeodUSA was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office
"Common Stock" means Capital Stock other than Preferred Stock.
"Consolidated Capital Ratio" of any Person as of any date means the ratio of
(A) the aggregate consolidated principal amount of Indebtedness of such Person
then outstanding to (B) the aggregate consolidated paid-in capital of such
Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means the
Consolidated Net Income of McLeodUSA and its Restricted Subsidiaries for such
period increased by the sum of
(1) Consolidated Interest Expense of McLeodUSA and its Restricted
Subsidiaries for such period, plus
(2) Consolidated Income Tax Expense of McLeodUSA and its Restricted
Subsidiaries for such period, plus
(3) the consolidated depreciation and amortization expense included in the
income statement of McLeodUSA and its Restricted Subsidiaries for such
period, plus
(4) any non-cash expense related to the issuance to employees of McLeodUSA
or any Restricted Subsidiary of McLeodUSA of options to purchase
Capital Stock of McLeodUSA or such Restricted Subsidiary, plus
(5) any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness prior to its stated maturity,
plus
(6) any non-cash expense related to a purchase accounting adjustment not
requiring an accrual or reserve and separately disclosed in McLeodUSA's
Consolidated Income Statement,
and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in
accordance with GAAP; provided that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Restricted Subsidiary of McLeodUSA (calculated separately for such Restricted
Subsidiary in the same manner as provided above for McLeodUSA) that is subject
to a restriction which prevents the payment of dividends or the making of
distributions to McLeodUSA or another Restricted Subsidiary of McLeodUSA to the
extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate amounts
of the provisions for income taxes of McLeodUSA and its Restricted Subsidiaries
for such period calculated on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of
McLeodUSA and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of),
(1) the amortization of Indebtedness discount
(2) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities
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(3) fees with respect to interest rate swap or similar agreements or
foreign currency hedge, exchange or similar agreements
(4) Preferred Stock dividends of McLeodUSA and its Restricted Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not
Disqualified Stock) declared and paid or payable
(5) accrued Disqualified Stock dividends of McLeodUSA and its Restricted
Subsidiaries, whether or not declared or paid
(6) interest on Indebtedness guaranteed by McLeodUSA and its Restricted
Subsidiaries, and
(7) 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
(1) all items classified as extraordinary
(2) any net income (or net loss) of any Person other than such Person and
its Restricted Subsidiaries, except to the extent of the amount of
dividends or other distributions actually paid to such Person or its
Restricted Subsidiaries by such other Person during such period
(3) 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
(4) any gain or loss, net of taxes, realized on the termination of any
employee pension benefit plan
(5) net gains (or net losses) in respect of Asset Sales by such Person or
its Restricted Subsidiaries
(6) 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
(7) 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
(8) 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 notes issuable or issued in whole or
in part in the form of one or more global securities, The Depository Trust
Company for so long as it shall be a clearing agency registered under the
Securities Exchange Act, or such successor as McLeodUSA shall designate from
time to time in an Officers' Certificate delivered to the trustee.
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"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the notes.
"Eligible Cash Equivalents" means
(1) 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
(2) 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
(3) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above
entered into with any bank meeting the qualifications specified in
clause (2) above
(4) 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.
(5) commercial paper issued by the parent corporation of any commercial
bank organized in the United States having capital and surplus in
excess of $500 million and commercial paper issued by others having one
of the two highest ratings obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc. and in each case
maturing within 270 calendar days after the date of acquisition
(6) overnight bank deposits and bankers' acceptances at any commercial bank
organized in the United States having capital and surplus in excess of
$500 million
(7) 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
(8) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (1) through (6)
"Existing Indebtedness" means Indebtedness outstanding on the date of the
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.
"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 (A) in the case of any certificated note, the Person in whose
name such certificated note is registered in the Security Register and (B) in
the case of any global security, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such
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Indebtedness or other obligation including by acquisition of Subsidiaries or
the recording, as required pursuant to GAAP or otherwise, of any such
Indebtedness or other obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided that a change in GAAP that results in
an obligation of such Person that exists at such time becoming Indebtedness
shall not be deemed an Incurrence of such Indebtedness and that neither the
accrual of interest nor the accretion of original issue discount shall be
deemed an Incurrence of Indebtedness. Indebtedness otherwise incurred by a
Person before it becomes a Subsidiary of McLeodUSA (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to have been incurred
at the time at which such Person becomes a Subsidiary of McLeodUSA.
"Indebtedness" means, at any time (without duplication), with respect to any
Person, whether recourse as to all or a portion of the assets of such Person,
and whether or not contingent,
(1) any obligation of such Person for money borrowed
(2) 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
(3) any reimbursement obligation of such Person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of such Person
(4) 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)
(5) any Capital Lease Obligation of such Person
(6) 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
(7) every obligation under Interest Rate and Currency Protection Agreements
of such Person
(8) any Attributable Indebtedness with respect to any Sale and Leaseback
Transaction to which such Person is a party and
(9) 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 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, our 10 1/2% senior discount notes) is the face amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
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"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
(1) advance or loan to, Guarantee of any Indebtedness of, extension of
credit or capital contribution to such Person
(2) the acquisition of any shares of Capital Stock, bonds, notes,
debentures or other securities of such Person, or
(3) the acquisition, by purchase or otherwise, of all or substantially all
of the business, assets or stock or other evidence of beneficial
ownership of such Person
provided that Investments shall exclude commercially reasonable extensions of
trade credit. The amount of any Investment shall be the original cost of such
Investment, plus the cost of all additions thereto and minus the amount of any
portion of such Investment repaid to such Person in cash as a repayment of
principal or a return of capital, as the case may be, but without any other
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment. In determining the amount of any
Investment involving a transfer of any Property other than cash, such Property
or asset shall be valued at its Fair Market Value at the time of such transfer.
"Issue Date" means the date on which the outstanding notes are first
authenticated and delivered under the indenture.
"Maturity" means, when used with respect to a note, the date on which the
principal of such note becomes due and payable as provided therein or in the
indenture, whether on the date specified in such note as the fixed date on
which the principal of such note is due and payable, on a Change of Control
Payment Date or an Asset Sale Payment Date, or by declaration of acceleration,
call for redemption or otherwise.
"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
(1) 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
(2) 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
(3) 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
(4) 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
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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 indenture.
"Paying Agent" means any Person authorized by McLeodUSA to make payments of
principal, premium or interest with respect to the notes on behalf of
McLeodUSA.
"Permitted Holders" means IES Industries Inc. and its successors and assigns,
and Clark E. and Mary E. McLeod and Richard A. Lumpkin and foundations and
trusts controlled by any of them, and Affiliates (other than McLeodUSA and the
Restricted Subsidiaries) of each of the foregoing.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Indebtedness Incurred and which shall
have a notional amount no greater than the payments due with respect to the
Indebtedness being hedged thereby and not for purposes of speculation.
"Permitted Investments" means
(1) Eligible Cash Equivalents
(2) Investments in Property used in the ordinary course of business
(3) Investments in any Person as a result of which such Person becomes a
Restricted Subsidiary in compliance with the indenture
(4) Investments pursuant to agreements or obligations of McLeodUSA or a
Restricted Subsidiary, in effect on the Issue Date, to make such
Investments
(5) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits
(6) Permitted Interest Rate or Currency Protection Agreements with respect
to any floating rate Indebtedness that is permitted by the terms of the
indenture to be outstanding
(7) bonds, notes, debentures or other debt securities received as a result
of Asset Sales permitted under the covenant described under "--Asset
Sales"
(8) Investments in existence at the Issue Date
(9) 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
(10) stock, obligations or securities received in satisfaction of judgments,
and
(11) Investments made pursuant to any deferred-compensation plan, including
any Investments made through a trust (including a grantor trust)
established in connection with any such plan, for the benefit of
employees of McLeodUSA or of any Restricted Subsidiary
"Permitted Liens" means
(1) 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
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(2) other Liens incidental to the conduct of McLeodUSA's and its
Restricted Subsidiaries' business or the ownership of its property and
assets not securing any Indebtedness, and which do not in the
aggregate materially detract from the value of McLeodUSA's and its
Restricted Subsidiaries' property or assets when taken as a whole, or
materially impair the use thereof in the operation of its business
(3) Liens with respect to assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to McLeodUSA to secure Indebtedness owing
to McLeodUSA
(4) 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
(5) 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)
(6) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially
detract from the value of the property subject thereto or interfere
with the ordinary conduct of the business of McLeodUSA or its
Restricted Subsidiaries
(7) Liens arising out of judgments or awards against McLeodUSA or any
Restricted Subsidiary with respect to which McLeodUSA or such
Restricted Subsidiary is prosecuting an appeal or proceeding for
review and McLeodUSA or such Restricted Subsidiary is maintaining
adequate reserves in accordance with GAAP
(8) any interest or title of a lessor in the property subject to any lease
other than a Capital Lease
(9) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Issue Date; provided that
(A) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with "--Covenants--Limitation on
Consolidated Indebtedness," (x) 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 (y) to refinance any Indebtedness previously so secured, (B) the
principal amount of the Indebtedness secured by such Lien does not
exceed 100% of such cost and (C) any such Lien shall not extend to or
cover any property or assets other than such item of property or
assets and any improvements on such item
(10) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of McLeodUSA and its Restricted
Subsidiaries
(11) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of McLeodUSA or its
Restricted Subsidiaries relating to such property or assets
(12) Liens arising from filing precautionary Uniform Commercial Code
financing statements regarding leases
(13) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes
a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of McLeodUSA or any
Restricted Subsidiary other than the property or assets acquired
(14) Liens in favor of McLeodUSA or any Restricted Subsidiary
(15) 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
(16) 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
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(17) 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
(18) Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by
McLeodUSA or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of McLeodUSA
and its Restricted Subsidiaries prior to the Issue Date
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.
"Purchase Money Indebtedness" means Indebtedness of McLeodUSA (including
Acquired Indebtedness and Capital Lease Obligations, mortgage financings and
purchase money obligations) incurred for the purpose of financing all or any
part of the cost of construction, acquisition, development or improvement by
McLeodUSA or any Restricted Subsidiary of any Telecommunications Assets of
McLeodUSA or any Restricted Subsidiary and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Qualified Receivable Facility" means Indebtedness of McLeodUSA or any
Subsidiary Incurred from time to time pursuant to either (A) credit facilities
secured by Receivables or (B) receivable purchase facilities, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed solely
for the purpose of obtaining a Qualified Receivable Facility and substantially
all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money and
proceeds and products thereof in each case generated in the ordinary course of
business.
"Restricted Payment" means
(1) a dividend or other distribution declared or paid on the Capital Stock
of McLeodUSA or to McLeodUSA's stockholders (in their capacity as
such), or declared or paid to any Person other than McLeodUSA or a
Restricted Subsidiary of McLeodUSA on the Capital Stock of any
Restricted Subsidiary of McLeodUSA, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of McLeodUSA
or such Restricted Subsidiary
(2) a payment made by McLeodUSA or any of its Restricted Subsidiaries
(other than to McLeodUSA or any Restricted Subsidiary) to purchase,
redeem, acquire or retire any Capital Stock of McLeodUSA or of a
Restricted Subsidiary
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(3) a payment made by McLeodUSA or any of its Restricted Subsidiaries
(other than a payment made solely in Qualified Stock of McLeodUSA) to
redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including
pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment,
Indebtedness of McLeodUSA or such Restricted Subsidiary which is
subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the notes and which was scheduled to mature on or
after the maturity of the notes, or
(4) an Investment in any Person, including an Unrestricted Subsidiary or
the designation of a Subsidiary as an Unrestricted Subsidiary, other
than (a) a Permitted Investment, (b) an Investment by McLeodUSA in a
Wholly-Owned Restricted Subsidiary or (c) an Investment by a Restricted
Subsidiary in McLeodUSA or a Wholly-Owned Restricted Subsidiary of
McLeodUSA
"Restricted Subsidiary" means any Subsidiary of McLeodUSA that has not been
designated as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Senior Credit Facility" means Indebtedness of McLeodUSA and its Subsidiaries
Incurred from time to time pursuant to one or more credit agreements or similar
facilities made available from time to time to McLeodUSA and its Subsidiaries,
whether or not secured, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Stated Maturity" means, with respect to any security, the date specified in
such security as the fixed date on which the payment of principal of such
security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Strategic Equity Investment" means an equity investment made by a Strategic
Investor in McLeodUSA in an aggregate amount of not less than $25 million.
"Strategic Investor" means a Person (other than the Permitted Holders)
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial Investment in McLeodUSA in excess of
$2 billion.
"Subordinated Indebtedness" means Indebtedness of McLeodUSA as to which the
payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the notes to at least the following extent:
(1) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so
long as any default in the payment of principal (or premium, if any) or
interest on the notes exists
(2) in the event that any other default that with the passing of time or the
giving of notice, or both, would constitute an event of default exists
with respect to the notes, upon notice by 25% or more in principal
amount of the notes to the trustee, the trustee shall give notice to
McLeodUSA and the holders of such Indebtedness (or trustees or agents
therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of
such Indebtedness may be made for a period of 179 days from the date of
such notice, and
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(3) such Indebtedness may not (x) provide for payments of principal of such
Indebtedness at the stated maturity thereof or by way of a sinking fund
applicable thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by McLeodUSA (including any redemption,
retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Indebtedness upon an event of default thereunder),
in each case prior to the final Stated Maturity of the notes or
(y) permit redemption or other retirement (including pursuant to an
offer to purchase made by McLeodUSA) of such other Indebtedness at the
option of the holder thereof prior to the final Stated Maturity of the
notes, other than a redemption or other retirement at the option of the
holder of such Indebtedness (including pursuant to an offer to purchase
made by McLeodUSA) which is conditioned upon a change of control of
McLeodUSA pursuant to provisions substantially similar to those
described under "--Repurchase at the Option of Holders upon a Change of
Control" (and which shall provide that such Indebtedness will not be
repurchased pursuant to such provisions prior to McLeodUSA's repurchase
of the notes required to be repurchased by McLeodUSA pursuant to the
provisions described under "--Repurchase at the Option of Holders upon a
Change of Control").
"Subsidiary" means, with respect to any Person, (1) 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,
(2) 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 (3) 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 (1) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (2)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, (3) creating, developing, producing or marketing
audiotext or videotext, (4) publishing or distributing telephone (including
Internet) directories, whether in paper, electronic, audio or video format, (5)
marketing (including direct marketing and telemarketing), or (6) evaluating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (1), (2), (3), (4) or (5) above (in
the case of clauses (3), (4) and (5), however, in a manner consistent with
McLeodUSA's manner of business on the Issue Date), and shall, in any event,
include all businesses in which McLeodUSA or any of its Subsidiaries are
engaged on the Issue Date; provided that the determination of what constitutes
a Telecommunications Business shall be made in good faith by the board of
directors.
"Unrestricted Subsidiary" means any Subsidiary of McLeodUSA that McLeodUSA
has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
indenture.
"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, we completed an offering of $500 million aggregate
principal amount at maturity of our 10 1/2% senior discount notes. Our 10 1/2%
senior discount notes were priced at a discount and we received net proceeds of
approximately $288.9 million from the offering of our 10 1/2% senior discount
notes. Our 10 1/2% senior discount notes will accrete to an aggregate principal
amount of $500 million by March 1, 2002. Interest will not accrue on our 10
1/2% senior discount notes prior to March 1, 2002. Thereafter, interest will
accrue at a rate of 10 1/2% per annum which will be payable in cash semi-
annually in arrears on March 1 and September 1 of each year, commencing
September 1, 2002. Our 10 1/2% senior discount notes rank pari passu in right
of payment with our 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes. Our 10 1/2% senior discount notes will mature on
March 1, 2007 and will be payable prior to the maturity of our 9 1/4% senior
notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes.
On July 21, 1997, we completed an offering of $225 million principal amount
of our 9 1/4% senior notes. We received net proceeds of approximately $217.6
million from the offering of our 9 1/4% senior notes. Our 9 1/4% senior notes
accrue interest at a rate of 9 1/4% per annum which is payable in cash semi-
annually in arrears on July 15 and January 15 of each year, commencing January
15, 1998. Our 9 1/4% senior notes rank pari passu in right of payment with our
10 1/2% senior discount notes, 8 3/8% senior notes, 9 1/2% senior notes and 8
1/8% senior notes. Our 9 1/4% senior notes will mature on July 15, 2007 and
will be payable prior to the maturity of 8 3/8% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes.
On March 16, 1998, we completed an offering of $300 million principal amount
of our 8 3/8% senior notes. We received net proceeds of approximately $291.9
million from the offering of our 8 3/8% senior notes. Our 8 3/8% senior notes
accrue interest at a rate of 8 3/8% per annum which is payable in cash semi-
annually in arrears on March 15 and September 15 of each year, commencing
September 15, 1998. Our 8 3/8% senior notes rank pari passu in right of payment
with our 10 1/2% senior discount notes, 9 1/4% senior notes, 9 1/2% senior
notes and 8 1/8% senior notes. Our 8 3/8% senior notes will mature on March 15,
2008 and will be payable prior to the maturity of our 9 1/2% senior notes and 8
1/8% senior notes.
On October 30, 1998, we completed an offering of $300 million principal
amount of our 9 1/2% senior notes. We received net proceeds of approximately
$291.9 million from the offering of our 9 1/2% senior notes. Our 9 1/2% senior
notes accrue interest at a rate of 9 1/2% per annum which is payable in cash
semi-annually in arrears on May 1 and November 1 of each year, commencing May
1, 1999. Our 9 1/2% senior notes rank pari passu in right of payment with our
10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes and 8
1/8% senior notes. Our 9 1/2% senior notes will mature on November 1, 2008 and
will be payable prior to the maturity of our 8 1/8% senior notes.
On February 22, 1999, we completed an offering of $500 million principal
amount of our 8 1/8% senior notes. We received net proceeds of approximately
$487.8 million from the offering of our 8 1/8% senior notes. Our 8 1/8% senior
notes accrue interest at a rate of 8 1/8% per annum which is payable in cash
semi-annually in arrears on August 15 and February 15 of each year, commencing
August 15, 1999. Our 8 1/8% senior notes rank pari passu in right of payment
with our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior
notes and 9 1/2% senior notes. Our 8 1/8% senior notes will mature on February
15, 2009 and will be payable prior to the maturity of the notes offered hereby.
The indentures governing our 10 1/2% senior discount notes, 9 1/4% senior
notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes impose
operating and financial restrictions on us and our subsidiaries that are
substantially the same as the restrictions governing the notes. These
restrictions affect, and in some cases significantly limit or prohibit, among
other things, our ability and the ability of our subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of our
or such subsidiaries' capital stock, make other restricted payments, enter into
sale and leaseback transactions, create liens upon assets, enter into
transactions with affiliates or related persons, sell assets, or consolidate,
merge or sell all or substantially
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all of our, or our subsidiaries' assets. There can be no assurance that such
covenants will not adversely affect our ability to finance our future
operations or capital needs or to engage in other business activities that may
be in our interest.
We have received a non-binding commitment from The Chase Manhattan Bank to
lead a syndication to provide a proposed revolving credit facility to a newly
formed, wholly owned subsidiary of McLeodUSA (the "Borrower"). The proposed
revolving credit facility would be guaranteed by us and all of our subsidiaries
and would be secured by a first priority lien on all our, our subsidiaries' and
the Borrower's current and future assets and properties and by a first priority
pledge of the stock of the Borrower and our other subsidiaries. One of the
covenants in the proposed revolving credit facility would restrict our ability
to prepay, redeem or purchase debt and one of the events of default would be
the occurrence of a default by us or the Borrower with respect to other
indebtedness. The Borrower would be obligated to pay interest and fees with
respect to the proposed revolving credit facility at the rates and in the
amounts specified in such commitment. We expect that revisions will be made to
such commitment and that additional matters will be negotiated with the
prospective lenders prior to the finalization of the proposed revolving credit
facility. We cannot assure you that we will complete the proposed revolving
credit facility on acceptable terms or at all.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date hereof, each underwriter has severally agreed to purchase from
us and we have agreed to sell to the underwriters, the principal amount shown
opposite its name below. The obligations of the several underwriters to
purchase these notes are subject to terms and conditions contained in the
underwriting agreement.
<TABLE>
<CAPTION>
Principal
Amount of
Underwriters Notes
------------ -------------
<S> <C>
Salomon Smith Barney Inc. ................................. $
Credit Suisse First Boston Corporation ....................
Lehman Brothers Inc. ......................................
-------------
Total ................................................... $ 400,000,000
=============
</TABLE>
In the underwriting agreement, the underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
principal amount offered hereby (other than those subject to the over-allotment
option described below), if any such notes are purchased. In the event of a
default by any underwriter, the underwriting agreement provides that, in
certain circumstances, the purchase commitments of the non-defaulting
underwriters may be increased or the underwriting agreement may be terminated.
The underwriters, for whom Salomon Smith Barney Inc., Credit Suisse First
Boston Corporation and Lehman Brothers Inc. are acting as representatives,
propose initially to offer the notes to the public at the public offering price
set forth on the cover page of this prospectus, and to some dealers at such
price less a concession not in excess of $ per note. The underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per note
to other dealers. After the public offering, the public offering price and such
concessions may be changed.
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell the notes in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of the notes
in excess of the principal amount to be purchased by the underwriters in the
offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of our notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of bids or purchases of our notes made for the
purpose of preventing or retarding a decline in the market price of our notes
while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
underwriters, in covering syndicate short positions or making stabilizing
purchases, repurchase shares originally sold by that syndicate member.
Any of these activities may cause the price of our notes to be higher than
the price that otherwise would exist in the open market in the absence of such
transactions. These transactions may be effected on the open market, or
otherwise and, if commenced, may be discontinued at any time.
Salomon Smith Barney Inc. and Credit Suisse First Boston Corporation have
performed investment banking and advisory services for us from time to time for
which they have received customary fees and expenses. They may, from time to
time, engage in transactions with and perform services for us in the ordinary
course of their business.
The underwriting agreement provides that we will indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
contribute to payments the underwriters may be required to make in respect of
such liabilities.
We have agreed with the underwriters not to offer, sell or contract to sell,
or otherwise dispose of, directly or indirectly, or announce the offering of,
any debt securities issued or guaranteed by us for a period of 90 days from the
date of this prospectus supplement without the prior written consent of Salomon
Smith Barney Inc.
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LEGAL MATTERS
The legality of the notes offered hereby is being passed upon for us by Hogan
& Hartson L.L.P., Washington, D.C., our special counsel. Certain legal matters
relating to this offering are being passed upon for the underwriters by Mayer,
Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, incorporated by reference in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Ovation Communications, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 incorporated by
reference in this registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon, and are
incorporated by reference herein in reliance upon such report given upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus supplement
forms a part. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about our Class A common
stock. The rules and regulations of the SEC allow us to omit some of the
information included in the registration statement from this prospectus
supplement.
In addition, we have filed reports, proxy statements and other information
with the SEC under the Securities Exchange Act. You may read and copy any of
this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may obtain information on the operation of the SEC's Public Reference
Room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC file
number for our documents filed under the Securities Exchange Act is 0-20763.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information into this
prospectus supplement and accompanying prospectus. This means we can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is
considered to be a part of this prospectus supplement, except for any such
information that is superseded by information included directly in this
document.
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This prospectus supplement incorporates by reference the documents listed
below that we have previously filed or will file with the SEC. They contain
important information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed on March 24, 1999, as amended by Form 10-K/A filed on April
22, 1999
. Our Current Reports on Form 8-K filed on April 15, 1999, April 16, 1999,
June 17, 1999 and July 2, 1999
. All documents filed with the SEC by us under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act after the date of this
prospectus supplement and before the offering is terminated, are
considered to be a part of this prospectus, effective the date such
documents are filed
. The description of our Class A common stock set forth in our registration
statement filed under Section 12 of the Securities Exchange Act on Form
8-A on May 24, 1996, including any amendment or report filed with the SEC
for the purpose of updating such description
. The consolidated financial statements of Ovation Communications, Inc. and
subsidiaries appearing on pages F-1 through F-17 of our definitive
prospectus dated March 24, 1999 and filed with the SEC on March 26, 1999
pursuant to Rule 424(b) under the Securities Act as part of our
Registration Statement on Form S-4 (Registration No. 333-71811).
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated McLeodUSA Technology Park 6400 C Street SW, P.O. Box
3177 Cedar Rapids, IA 52406-3177 Attn: General Counsel Telephone (319) 364-0000
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
S-59
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state or jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated July , 1999
P R O S P
E C T U S
$1,750,000,000
McLeodUSA Incorporated
Class A Common Stock, Preferred Stock, Depositary Shares, Debt Securities,
Warrants, Subscription Rights, Stock Purchase Contracts and Stock Purchase
Units
We may offer, from time to time, in one or more series or classes the
following securities:
. Class A common stock
.preferred stock
.preferred stock represented by depositary shares
.debt securities
.warrants to purchase debt securities, Class A common stock, preferred stock
or depositary shares
.subscription rights to purchase any of the above securities
.stock purchase contracts and stock purchase units
The aggregate initial offering price of these securities will not exceed
$1,750,000,000.
We will provide you with specific terms of the applicable offered securities
in supplements to this prospectus. The terms of the securities will include the
initial offering price, aggregate amount of the offering, listing on any
securities exchange or market, risk factors and the agents, dealers or
underwriters, if any, to be used in connection with the sale of these
securities.
You should read this prospectus and any prospectus supplement carefully
before you decide to invest. This prospectus may not be used to consummate
sales of the offered securities unless it is accompanied by a prospectus
supplement describing the method and terms of the offering of those offered
securities.
Neither the Securities and Exchange Commission nor
any state securities commission has approved or
disapproved of these offered securities or
determined if this prospectus is truthful or
complete. It is illegal for any person to tell you
otherwise.
The date of this Prospectus is July , 1999.
<PAGE>
You should rely only on the information provided or incorporated by reference
in this prospectus or any applicable prospectus supplement. We have not
authorized anyone to provide you with different or inconsistent information.
You should assume that the information in this prospectus or any applicable
prospectus supplement is accurate only as of the date on the front cover of
such documents. Our business, financial information, results of operations and
prospects may have changed since those dates.
If it is against the law in any state to make an offer to sell these
securities (or to solicit an offer from someone to buy these securities), then
this offer does not apply to any person in that state, and no offer or
solicitation is made by this prospectus to any such person.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus....................................................... 1
Where You Can Find More Information......................................... 1
Cautionary Note Regarding Forward-Looking Statements........................ 2
About McLeodUSA............................................................. 3
Coverage Ratios............................................................. 4
Use of Proceeds............................................................. 4
Description of Common Stock................................................. 5
Description of Preferred Stock.............................................. 10
Description of Depositary Shares............................................ 13
Description of Debt Securities.............................................. 16
Description of Warrants..................................................... 27
Description of Stock Purchase Contracts and Stock Purchase Units............ 29
Description of Subscription Rights.......................................... 30
Plan of Distribution........................................................ 31
Legal Matters............................................................... 32
Experts..................................................................... 32
</TABLE>
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
the shelf process, we may sell any combination of the securities described in
this prospectus in one or more offerings up to a total dollar amount of
$1,750,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we sell securities, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement also may add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement, together with the additional information
described below under the heading "Where You Can Find More Information."
As used in this prospectus, "McLeodUSA," "the company," "we," "us," and "our"
refer to McLeodUSA Incorporated, a Delaware corporation, and its subsidiaries.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus forms a part.
The registration statement, including the attached exhibits and schedules,
contains additional relevant information about us and the securities offered by
this prospectus. The rules and regulations of the SEC allow us to omit some of
the information included in the registration statement from this prospectus and
any applicable prospectus supplement.
We file reports, proxy statements and other information with the SEC under
the Securities Exchange Act of 1934. You may read and copy any of this
information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's Public Reference
Room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC file
number for our documents filed under the Securities Exchange Act is 0-20763.
The SEC also maintains an Internet Web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, except for any such information that is superseded by information
included directly in this document or any prospectus supplement.
This prospectus incorporates by reference the documents listed below that we
have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed on March 24, 1999, as amended by Form 10-K/A filed on April
22, 1999
. Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999, filed on May 17, 1999
. Our Current Reports on Form 8-K filed on April 15, 1999, April 16, 1999,
June 17, 1999 and July 2, 1999
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. All documents filed subsequent to the date of this prospectus pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
until all of the securities offered by this prospectus are sold,
effective the date such documents are filed
. The description of our Class A common stock set forth in our
registration statement filed under Section 12 of the Securities Exchange
Act on Form 8-A on May 24, 1996, including any amendment or report filed
with the SEC for the purpose of updating such description
. The consolidated financial statements of Ovation Communications, Inc.
and subsidiaries appearing on pages F-1 through F-17 of our definitive
prospectus dated March 24, 1999 and filed with the SEC on March 26, 1999
pursuant to Rule 424(b) under the Securities Act of 1933 as part of our
Registration Statement on Form S-4 (Registration No. 333-71811)
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 364-0000
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans, our future capital requirements, forecasted demographic and
economic trends relating to our industry, our ability to complete acquisitions,
to realize anticipated cost savings and other benefits from acquisitions and to
recover acquisition-related costs, and similar matters are forward-looking
statements. These statements are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results to differ
materially from the statements. The forward-looking information is based on
various factors and was derived using numerous assumptions. In some cases, you
can identify these statements by our use of forward-looking words such as
"may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe,"
"predict," "potential" or "intend." You should be aware that these statements
only reflect our predictions. Actual events or results may differ
substantially. Important factors that could cause our actual results to be
materially different from our expectations include those discussed in the
applicable prospectus supplement under the caption "Risk Factors." We undertake
no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
2
<PAGE>
ABOUT McLEODUSA
The following summary highlights selected information regarding McLeodUSA. It
does not contain all of the information that is important to you. You should
carefully read this entire prospectus and any prospectus supplement, together
with the other documents to which this prospectus and any prospectus supplement
refers you. In addition, you should carefully consider the factors set forth
under the caption "Risk Factors" in the applicable prospectus supplement.
Unless otherwise indicated, dollar amounts over $1 million have been rounded to
one decimal place and dollar amounts less than $1 million have been rounded to
the nearest thousand.
Our Company
We provide communications services to business and residential customers in
the Midwestern and Rocky Mountain regions of the United States. We offer local,
long distance, Internet access, data, voice mail and paging services, from a
single company on a single bill. We believe we are the first company in many of
our markets to offer one-stop shopping for communications services tailored to
customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their communications needs. It also allows businesses to
receive customized services, such as competitive long distance pricing and
enhanced calling features, that might not otherwise be directly available on a
cost-effective basis.
In addition to our core business of providing competitive local, long
distance and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. special access, private line and data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
mobile radio, paging services and Web site development and hosting
In most of our markets, we compete with the existing local phone company by
leasing its lines and switches. In other markets, primarily in east central
Illinois and southeast South Dakota, we operate our own lines and switches. We
provide long distance services by using our own communications network
facilities and leasing capacity from long distance and local communications
providers. We are constructing fiber optic communications networks in Iowa,
Illinois, Wisconsin, Indiana, Missouri, Michigan, Minnesota, South Dakota,
North Dakota, Colorado and Wyoming to carry additional communications traffic
on our own network.
----------------
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.
3
<PAGE>
COVERAGE RATIOS
For each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32.0 million and $51.7 million, respectively. 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). Because we did not have
any preferred stock outstanding during any of these periods, the ratio of
earnings to fixed charges and preferred stock dividends is the same as the
ratio of earnings to fixed charges.
USE OF PROCEEDS
Unless we specify otherwise in the applicable prospectus supplement, we will
use the net proceeds from the sale of the offered securities for general
corporate purposes, including working capital, the repayment or refinancing of
our indebtedness, future acquisitions and/or capital expenditures. Until we
apply the net proceeds for specific purposes, we may invest such net proceeds
in short-term or marketable securities.
4
<PAGE>
DESCRIPTION OF COMMON STOCK
The following summary description of our capital stock is based on the
provisions of our certificate of incorporation and bylaws and the applicable
provisions of the Delaware General Corporation Law. For information on how to
obtain copies of our certificate of incorporation and bylaws, see "Where You
Can Find More Information."
General
Under our certificate of incorporation, we have authority to issue
274,000,000 shares of capital stock, consisting of 250,000,000 shares of Class
A common stock, 22,000,000 shares of Class B common stock and 2,000,000 shares
of preferred stock. We have declared a two-for-one stock split to be effected
in the form of a stock dividend for our Class A common stock. The record date
for the stock split was July 12, 1999 and distribution of the additional shares
will take place on July 26, 1999. Giving effect to this stock split, we had
issued and outstanding as of July 1, 1999, 150,417,738 shares of our Class A
common stock, no shares of our Class B common stock and no shares of our
preferred stock.
The rights of the holders of our Class A common stock and our Class B common
stock discussed below are subject to such rights as our board of directors may
from time to time confer on holders of our preferred stock that may be issued
in the future. Such rights may adversely affect the rights of holders of our
Class A common stock or our Class B common stock, or both.
Class A Common Stock
Voting Rights. Each holder of our Class A common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of all other classes of stock entitled to vote at such meetings, to
vote upon any matter, including, without limitation, the election of directors.
Holders of our Class A common stock are entitled to one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class A
common stock, the holders of our Class B common stock and the holders of any
class or series of stock entitled to participate with our Class A and Class B
common stock, will become entitled to participate in the distribution of any of
our assets remaining after we have paid, or provided for payment of, all of our
debts and liabilities and after we have paid, or set aside for payment, to the
holders of any class of stock having preference over our Class A common stock
in the event of dissolution, liquidation or winding up, the full preferential
amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on our Class A common stock, our Class B
common stock and on any class or series of stock entitled to participate with
our Class A and Class B common stock when and as declared by our board of
directors. We have never paid, however, any cash dividends and the indentures
governing our outstanding debt securities prohibit us from paying cash
dividends.
No Preemptive or Conversion Rights. The holders of our Class A common stock
have no preemptive or subscription rights to purchase additional securities
issued by us nor any rights to convert their Class A common stock into other of
our securities or to have their shares redeemed by us.
Class B Common Stock
Voting Rights. Each holder of our Class B common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of all other classes of stock entitled to vote at such meetings, to
vote upon any matter or thing, including, without limitation, the election of
directors. Holders of our Class B common stock are entitled to .40 vote per
share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class B
common stock, the holders of our Class A common stock
5
<PAGE>
and the holders of any class or series of stock entitled to participate with
our Class B and Class A common stock, will become entitled to participate in
the distribution of any of our assets remaining after we have paid, or provided
for payment of, all of our debts and liabilities and after we have paid, or set
aside for payment, to the holders of any class of stock having preference over
our Class B common stock in the event of dissolution, liquidation or winding up
the full preferential amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on our Class B common stock, our Class A
common stock and on any class or series of stock entitled to participate with
our Class B and Class A common stock when and as declared by our board of
directors.
Conversion into Our Class A Common Stock; No Other Preemptive or Conversion
Rights. The shares of our Class B common stock may be converted at any time at
the option of the holder into fully paid and nonassessable shares of our Class
A common stock at the rate of one share of our Class A common stock for each
share of Class B common stock, as adjusted for any stock split. Except for this
conversion right, the holders of our Class B common stock have no preemptive or
subscription rights to purchase additional securities issued by us nor any
rights to convert their Class B common stock into other of our securities or to
have their shares redeemed by us.
Certain Charter and Statutory Provisions
Classified Board. Our certificate of incorporation provides for the division
of our board of directors into three classes of directors, serving staggered
three-year terms. Our certificate of incorporation further provides that the
approval of the holders of at least two-thirds of the shares entitled to vote
thereon and the approval of a majority of our entire board of directors are
necessary for the alteration, amendment or repeal of certain sections of our
certificate of incorporation relating to the election and classification of our
board of directors, limitation of director liability, indemnification and the
vote requirements for such amendments to our certificate of incorporation.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company.
Certain Statutory Provisions. We are subject to the provisions of Section 203
of the Delaware General Corporation Law. In general, this statute prohibits a
publicly held Delaware corporation like us from engaging in a business
combination with an interested stockholder for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless
. before such date, the corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction that resulted in such person
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, shares owned by certain directors or
certain employee stock plans, or
. on or after the date the stockholder became an interested stockholder,
the business combination is approved by the corporation's board of
directors and authorized by the affirmative vote, and not by written
consent, of at least two-thirds of the outstanding voting stock of the
corporation excluding that stock owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person, other than the corporation and any direct or indirect
wholly owned subsidiary of the corporation, who together with affiliates and
associates, owns or, as an affiliate or associate, within three years prior,
did own 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the Delaware General Corporation Law, our original
certificate of incorporation provided that it would not be governed by Section
203. Several of our stockholders, including
6
<PAGE>
Clark E. and Mary E. McLeod and Interstate Energy Corporation became interested
stockholders within the meaning of Section 203 while that certificate of
incorporation was in effect. Accordingly, future transactions between us and
any of these stockholders will not be subject to the requirements of Section
203.
Our certificate of incorporation empowers our board of directors to redeem
any of our outstanding capital stock at a price determined by our board of
directors, which price will be at least equal to the lesser of
. fair market value, as determined in accordance with our certificate of
incorporation, or
. in the case of a "Disqualified Holder," such holder's purchase price, if
the stock was purchased within one year of such redemption,
to the extent necessary to prevent the loss or secure the reinstatement of any
license, operating authority or franchise from any governmental agency. A
"Disqualified Holder" is any holder of shares of our capital stock whose
holding of such stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
us or any of our subsidiaries to conduct any portion of our business or the
business of any of our subsidiaries. Under the Telecommunications Act of 1996,
non-U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the Federal
Communications Commission, or FCC, determines that the public interest would be
served by prohibiting such ownership. Additionally, the FCC's rules may under
some conditions limit the size of investments by foreign telecommunications
carriers in U.S. international carriers.
Limitation of Liability and Indemnification
Limitations of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. Although Section
102(b)(7) does not change directors' duty of care, it enables corporations to
limit available relief to equitable remedies such as injunction or rescission.
Our certificate of incorporation limits the liability of our directors to us or
our stockholders to the full extent permitted by Section 102(b)(7).
Specifically, our directors are not personally liable for monetary damages to
us or our stockholders for breach of the director's fiduciary duty as a
director, except for liability for:
.any breach of the director's duty of loyalty to us or our stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law
. any transaction from which the director derived an improper personal
benefit
Indemnification. To the maximum extent permitted by law, our bylaws provide
for mandatory indemnification of our directors and officers against any
expense, liability or loss to which they may become subject, or which they may
incur as a result of being or having been a director or officer of McLeodUSA.
In addition, we must advance or reimburse directors and officers for expenses
incurred by them in connection with indemnifiable claims. We also maintain
directors' and officers' liability insurance.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is Norwest Bank
Minnesota, N.A.
Stockholders' Agreements
On November 18, 1998, we entered into a stockholders' agreement (the
"Stockholders' Agreement") with several of our significant stockholders
consisting of IES Investments Inc. (a subsidiary of Interstate Energy), Clark
E. and Mary E. McLeod, and Richard A. and Gail G. Lumpkin and several other
parties related to the Lumpkins.
7
<PAGE>
The Stockholders' Agreement provides, among other things, that:
. until December 31, 2001, the parties will not sell any of our equity
securities without receiving the prior written consent of our board of
directors, except for transfers specifically permitted by the
Stockholders' Agreement
. our board of directors will determine on a quarterly basis starting with
the quarter ending December 31, 1998 and ending on December 31, 2001, the
aggregate number, if any, of shares of our Class A common stock, not to
exceed in the aggregate 150,000 shares per quarter, that the parties may
sell during designated trading periods following the release of our
quarterly or annual financial results
. to the extent our board of directors grants registration rights to a
party to the agreement in connection with a sale of our securities by
such party, it will grant similar registration rights to the other
parties
. our board of directors will determine on an annual basis commencing with
the year ending December 31, 1999 and ending on December 31, 2001 (each
such year, an "Annual Period"), the aggregate number, if any, of shares
of our Class A common stock, not to exceed in the aggregate on an annual
basis a number of shares equal to 15% of the total number of shares of
Class A common stock beneficially owned by the parties as of December 31,
1998 (the "Registrable Amount"), to be registered by us under the
Securities Act for sale by the parties
. in any underwritten offering of shares of Class A common stock by us,
other than an offering on a registration statement on Form S-4 or Form S-
8 or any other form which would not permit the inclusion of shares of our
Class A common stock owned by the parties, we will undertake to register
the shares of our Class A common stock of such parties up to the
Registrable Amount, if any, as determined by our board of directors
. we may subsequently determine not to register any shares of the parties
under the Securities Act and may either not file a registration statement
or otherwise withdraw or abandon a registration statement previously
filed
The Stockholders' Agreement terminates on December 31, 2001. If during any
Annual Period we have not provided a party a reasonable opportunity to sell an
aggregate number of shares of Class A common stock equal to not less than 15%
of the total number of shares of Class A common stock beneficially owned by
such party as of December 31, 1998, then such party may terminate the
Stockholders' Agreement as it applies to such party.
Under the Stockholders' Agreement, each party also agreed, until such party
owns less than 4 million shares of Class A common stock or until December 31,
2001, whichever occurs first, to vote such party's shares and take all action
within its power to:
. establish the size of our board of directors at up to 11 directors
. cause to be elected to our board of directors one director designated by
Interstate Energy for so long as IES Investments owns at least 4 million
shares of Class A common stock
. cause to be elected to our board of directors three directors who are
executive officers of McLeodUSA designated by Clark McLeod for so long as
Clark and Mary McLeod collectively own at least 4 million shares of Class
A common stock
. cause Richard Lumpkin to be elected to our board of directors for so long
as the former stockholders of Consolidated Communications, Inc. who are a
party to the agreement collectively own at least 4 million shares of
Class A common stock
. cause to be elected to our board of directors up to six non-employee
directors nominated by our board
8
<PAGE>
On January 7, 1999, in connection with the Ovation acquisition, M/C Investors
L.L.C. and Media/Communications Partners III Limited Partnership (collectively,
"M/C") entered into a separate stockholders' agreement (the "Ovation
Stockholders' Agreement") with the parties to the Stockholders' Agreement.
The Ovation Stockholders' Agreement provides that, until December 31, 2001,
M/C will not sell any of our equity securities without receiving the prior
written consent of our board of directors. The Ovation Stockholders' Agreement
also contains various provisions intended to insure that M/C is treated on a
basis similar to the parties to the Stockholders' Agreement in connection with
permitted sales of our securities under the Stockholders' Agreement generally
starting December 31, 1999. In addition, for so long as M/C owns at least 2.5
million shares of our Class A common stock, M/C has agreed to vote its shares
in accordance with the voting agreement contained in the Stockholders'
Agreement and the other partries have agreed to vote their shares to cause to
be elected to our board of directors one director designated by M/C.
The Ovation Stockholders' Agreement terminates on December 31, 2001. In
addition, if (1) during each of the years ending December 31, 2000 and December
31, 2001, we have not provided M/C a reasonable opportunity to register under
the Securities Act for sale an aggregate number of shares of our Class A common
stock equal to not less than 15% of the total number of shares of Class A
common stock beneficially owned by M/C as of March 31, 1999, or (2) after
January 1, 2000, the Stockholders' Agreement has been terminated by all parties
to such agreement, then M/C may terminate the Ovation Stockholders' Agreement.
The Ovation Stockholders' Agreement will be terminated with respect to all
parties other than M/C and us at such time as the Stockholders' Agreement is
terminated.
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DESCRIPTION OF PREFERRED STOCK
The following description is a general summary of the terms of the preferred
stock which we may issue. The description below and in any prospectus
supplement does not purport to be complete and is subject to and qualified in
its entirety by reference to our certificate of incorporation, the applicable
certificate of designations to our certificate of incorporation which will
determine the terms of the related series of preferred stock and our bylaws,
each of which will be made available upon request.
General
Our certificate of incorporation authorizes our board of directors, from time
to time and without further stockholder action, to provide for the issuance of
up to 2,000,000 shares of preferred stock, par value $.01 per share, in one or
more series, and to fix the relative rights and preferences of the shares,
including voting powers, dividend rights, liquidation preferences, redemption
rights and conversion privileges. As of the date of this prospectus, no shares
of preferred stock are outstanding. As a result of its broad discretion with
respect to the creation and issuance of preferred stock without stockholder
approval, the board of directors could adversely affect the voting power of the
holders of our Class A common stock and Class B common stock and, by issuing
shares of preferred stock with certain voting, conversion and/or redemption
rights, may discourage any attempt to obtain control of us.
The rights, preferences, privileges and restrictions of the preferred stock
of each series will be fixed by the certificate of designations relating to
such issues. You should refer to the prospectus supplement relating to the
class or series of preferred stock being offered for the specific terms of that
class or series, including:
(1) the title and stated value of the preferred stock being offered
(2) the number of shares of preferred stock being offered, their
liquidation preference per share, if any, and their purchase price
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculating the payment date(s) applicable to the preferred stock
being offered
(4) whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on the preferred stock being
offered shall accumulate
(5) the procedures for any auction and remarketing, if any, for the
preferred stock being offered
(6) the provisions for a sinking fund, if any, for the preferred stock
being offered
(7) the provisions for redemption, if applicable, of the preferred stock
being offered
(8) any listing of the preferred stock being offered on any securities
exchange or market
(9) the terms and conditions, if applicable, upon which the preferred
stock being offered will be convertible into, or exchangeable for, our
Class A common stock or debt securities, including the conversion or
exchange price, or the manner of calculating the price, and the
conversion or exchange period
(10) voting rights, if any, of the preferred stock being offered
(11) whether interests in the preferred stock being offered will be
represented by depositary shares
(12) a discussion of any material and/or special United States federal
income tax considerations applicable to the preferred stock being
offered
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(13) the relative ranking and preferences of the preferred stock being
offered as to dividend rights and rights upon liquidation,
dissolution or winding up of our affairs
(14) any limitations on the issuance of any class or series of preferred
stock ranking senior to or on a parity with the series of preferred
stock being offered as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs
(15) any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock being offered
Rank
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of McLeodUSA, rank:
(1) senior to all of our classes or series of common stock and to all
equity securities the terms of which specifically provide that such
equity securities rank junior to the preferred stock being offered
(2) on a parity with all equity securities we have issued, other than
those referred to in clauses (1) and (3) of this subheading
(3) junior to all equity securities we have issued, the terms of which
specifically provide that such equity securities rank senior to the
preferred stock being offered
For purposes of this description, the term "equity securities" does not include
convertible debt securities.
Distributions
Holders of the preferred stock of each series will be entitled to receive,
when, as and if declared by our board of directors, out of our assets legally
available for payment to stockholders, cash distributions, or distributions in
kind or in other property if expressly permitted and described in the
applicable prospectus supplement, at such rates and on such dates as will be
set forth in the applicable prospectus supplement. Each such distribution shall
be payable to holders of record as they appear on our stock transfer books on
such record dates as shall be fixed by our board of directors. Distributions on
any series of preferred stock, if cumulative, will be cumulative from and after
the date set forth in the applicable prospectus supplement.
Redemption
The terms and conditions, if any, upon which the preferred stock will be
subject to mandatory redemption or redemption at our option, either in whole or
in part, will be described in the applicable prospectus supplement.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of
our affairs, then, before any distribution or payment shall be made to the
holders of any Class A common stock or Class B common stock or any other class
or series of shares of our capital stock ranking junior to the preferred stock
in the distribution of assets upon any liquidation, dissolution or winding up
of our company, the holders of each series of preferred stock shall be entitled
to receive out of our assets legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference set forth
in the applicable prospectus supplement, plus an amount equal to all
accumulated and unpaid distributions. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of shares of
preferred stock will have no right or claim to any of our remaining assets. If,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
our available assets are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of preferred stock and the
corresponding amounts payable on all shares of other classes or series of our
shares of capital stock ranking on a parity with the preferred stock in the
distribution of assets, then the holders of the preferred stock and all other
such classes or series of shares of capital stock shall share ratably in any
such distribution of assets in proportion to the full liquidating distributions
to which they would otherwise be respectively entitled.
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If liquidating distributions shall have been made in full to all holders of
preferred stock, our remaining assets shall be distributed among the holders of
any other classes or series of shares of capital stock ranking junior to the
preferred stock upon liquidation, dissolution or winding up, according to their
respective rights and preferences and in each case according to their
respective number of shares. For such purposes, our consolidation or merger
with or into any other corporation, trust or entity, or the sale, lease or
conveyance of all or substantially all of our property or business, shall not
be deemed to constitute a liquidation, dissolution or winding up of our
company.
Voting Rights
Holders of preferred stock will have the voting rights as indicated in the
applicable prospectus supplement.
Conversion Rights
The terms and conditions, if any, upon which any series of preferred stock is
convertible into Class A common stock will be set forth in the applicable
prospectus supplement relating thereto. Such terms will include the number of
shares of Class A common stock into which the shares of preferred stock are
convertible, the conversion price or the manner of calculating the conversion
price, the conversion date(s) or period(s), provisions as to whether conversion
will be at the option of the holders of the preferred stock or at our option,
the events requiring an adjustment of the conversion price and provisions
affecting conversion in the event of the redemption of such series of preferred
stock.
Transfer Agent and Registrar
The transfer agent and registrar for the preferred stock will be set forth in
the applicable prospectus supplement.
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DESCRIPTION OF DEPOSITARY SHARES
The following description is a general summary of the terms of the depositary
shares which we may issue. This summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the applicable Deposit Agreement and related depositary receipts.
General
We may issue depositary receipts for depositary shares, each of which will
represent a fractional interest of a share of a particular series of preferred
stock, as specified in the applicable prospectus supplement. Shares of
preferred stock of each series represented by depositary shares will be
deposited under a separate Deposit Agreement between the "depositary" named in
the Deposit Agreement and us. Subject to the terms of the Deposit Agreement,
each owner of a depositary receipt will be entitled, in proportion to the
fractional interest of a share of a particular series of preferred stock
represented by the depositary shares evidenced by that depositary receipt, to
all the rights and preferences of the preferred stock represented by those
depositary shares, including dividend, voting, conversion, redemption and
liquidation rights.
The depositary shares will be evidenced by depositary receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of our preferred stock to the depositary, we will cause
the depositary to issue, on our behalf, the depositary receipts. Copies of the
applicable form of Deposit Agreement and depositary receipt may be obtained
from us upon request, and the statements made in this summary relating to the
Deposit Agreement and the depositary receipts to be issued under the Deposit
Agreement are summaries of provisions of the Deposit Agreement and the related
depositary receipts.
Dividends and Other Distributions
The depositary will distribute all cash dividends or other cash distributions
received in respect of the preferred stock to the record holders of depositary
receipts evidencing the related depositary shares in proportion to the number
of such depositary receipts owned by such holders, subject to the obligations
of holders to file proofs, certificates and other information and to pay some
charges and expenses to the depositary.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
entitled to that property, subject to the obligations of holders to file
proofs, certificates and other information and to pay some charges and expenses
to the depositary, unless the depositary determines that it is not feasible to
make the distribution, in which case the depositary may, with our approval,
sell the property and distribute the net proceeds from the sale to the holders.
No distribution will be made in respect of any depositary share to the extent
that it represents any preferred stock converted into other securities.
Withdrawal of Preferred Stock
Upon surrender of the depositary receipts at the corporate trust office of
the depositary, unless the related depositary shares have previously been
called for redemption or converted into other securities, the holders of those
depositary receipts will be entitled to delivery at the corporate trust office,
to or upon the holder's order, of the number of whole or fractional shares of
the preferred stock and any money or other property represented by the
depositary shares evidenced by the depositary receipts. Holders of depositary
receipts will be entitled to receive whole or fractional shares of the related
preferred stock on the basis of the proportion of preferred stock represented
by the depositary share as specified in the applicable prospectus supplement,
but holders of the shares of preferred stock will not thereafter be entitled to
receive depositary shares therefor. If the depositary receipts delivered by the
holder evidence a number of depositary shares in excess of the number of
depositary shares representing the number of shares of preferred stock to be
withdrawn, the depositary will deliver to the holder at the same time a new
depositary receipt evidencing the excess number of depositary shares.
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Redemption of Depositary Shares
Whenever we redeem shares of preferred stock held by the depositary, the
depositary will redeem, as of the same redemption date, the number of
depositary shares representing shares of the preferred stock so redeemed,
provided we have paid in full to the depositary the redemption price of the
preferred stock to be redeemed plus an amount equal to any accrued and unpaid
dividends thereon to the date fixed for redemption. The redemption price per
depositary share will be equal to the corresponding proportion of the
redemption price and any other amounts per share payable with respect to the
preferred stock. If fewer than all the depositary shares are to be redeemed,
the depositary shares to be redeemed will be selected pro rata, as nearly as
may be practicable without creating fractional depositary shares, or by another
equitable method.
From and after the date fixed for redemption, all dividends in respect of the
shares of preferred stock called for redemption will cease to accrue, the
depositary shares called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the depositary receipts evidencing
the depositary shares called for redemption will cease, except the right to
receive any moneys payable upon the redemption and any money or other property
to which the holders of the depositary receipts were entitled upon the
redemption and surrender thereof to the depositary.
Voting of the Preferred Stock
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in the notice of meeting to the record holders of the depositary receipts
evidencing the depositary shares which represent such preferred stock. Each
record holder of depositary receipts evidencing depositary shares on the record
date, which will be the same date as the record date for the preferred stock,
will be entitled to instruct the depositary as to the exercise of the voting
rights pertaining to the amount of preferred stock represented by the holder's
depositary shares. The depositary will vote the amount of preferred stock
represented by the depositary shares in accordance with the instructions, and
we will agree to take all reasonable action which may be deemed necessary by
the depositary in order to enable the depositary to do so. The depositary will
abstain from voting the amount of preferred stock represented by the depositary
shares to the extent it does not receive specific instructions from the holders
of depositary receipts evidencing the depositary shares. The depositary shall
not be responsible for any failure to carry out any instruction to vote, or for
the manner or effect of any such vote made, as long as such action or non-
action is in good faith and does not result from negligence or willful
misconduct of the depositary.
Liquidation Preference
In the event of our liquidation, dissolution or winding up, whether voluntary
or involuntary, the holders of each depositary receipt will be entitled to the
fraction of the liquidation preference accorded each share of preferred stock
represented by the depositary shares evidenced by such depositary receipt, as
set forth in the applicable prospectus supplement.
Conversion of Preferred Stock
The depositary shares, as such, are not convertible into our common stock or
any of our other securities or property. Nevertheless, if specified in the
applicable prospectus supplement relating to an offering of depositary shares,
the depositary receipts may be surrendered by their holders to the depositary
with written instructions to the depositary to instruct us to cause conversion
of the preferred stock represented by the depositary shares evidenced by the
depositary receipts into whole shares of our Class A common stock, other shares
of our preferred stock or other of our equity or debt securities, and we have
agreed that upon receipt of those instructions and any amounts payable in
respect thereof, we will cause the conversion thereof utilizing the same
procedures as those provided for delivery of preferred stock to effect such
conversion. If the depositary shares evidenced by a depositary receipt are to
be converted in part only, a new depositary receipt or receipts will be issued
for any depositary shares not to be converted. No fractional shares of Class A
common stock will be issued upon conversion, and if such conversion would
result in a fractional share being issued, we will pay an amount in cash equal
to the value of the fractional interest based upon the average of the closing
prices of the Class A common stock for a specified period of time prior to the
conversion.
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Amendment and Termination of the Deposit Agreement
The form of depositary receipt evidencing the depositary shares which
represent the preferred stock and any provision of the Deposit Agreement may
at any time be amended by agreement between the depositary and us. However,
any amendment that materially and adversely alters the rights of the holders
of depositary receipts or that would be materially and adversely inconsistent
with the rights granted to the holders of the related preferred stock will not
be effective unless such amendment has been approved by the existing holders
of at least a majority of the depositary shares evidenced by the depositary
receipts then outstanding. No amendment shall impair the right, subject to
certain exceptions in the Deposit Agreement, of any holder of depositary
receipts to surrender any depositary receipt with instructions to deliver to
the holder the related preferred stock and all money and other property, if
any, represented thereby, except in order to comply with law. Every holder of
an outstanding depositary receipt at the time any such amendment becomes
effective shall be deemed, by continuing to hold such receipt, to consent and
agree to such amendment and to be bound by the Deposit Agreement as amended
thereby.
Unless specified otherwise in the applicable prospectus supplement, we may
terminate the Deposit Agreement upon not less than 30 days prior written
notice to the depositary if a majority of each class of depositary shares
affected by such termination consents, whereupon the depositary shall deliver
or make available to each holder of depositary receipts, upon surrender of the
depositary receipts held by such holder, such number of whole or fractional
shares of preferred stock as are represented by the depositary shares
evidenced by such depositary receipts together with any other property held by
the depositary with respect to such depositary receipt. In addition, the
Deposit Agreement will automatically terminate if:
(1) all outstanding depositary shares shall have been redeemed
(2) there shall have been a final distribution in respect of the related
preferred stock in connection with any liquidation, dissolution or
winding up of our company and such distribution shall have been
distributed to the holders of depositary receipts evidencing the
depositary shares representing such preferred stock
(3) each share of the related preferred stock shall have been converted
into our securities not represented by depositary shares
Charges of Preferred Stock Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the Deposit Agreement. In addition, we will pay
the fees and expenses of the depositary in connection with the performance of
its duties under the Deposit Agreement. However, holders of depositary
receipts will pay the fees and expenses of the depositary for any duties
requested by such holders to be performed which are outside of those expressly
provided for in the Deposit Agreement.
Miscellaneous
The depositary will forward to holders of depositary receipts any reports
and communications from us which are received by the depositary with respect
to the related preferred stock.
Unless specified otherwise in the applicable prospectus supplement, neither
we nor the depositary will be liable if either of us is prevented from or
delayed in, by law or any circumstances beyond its control, performing its
obligations under the Deposit Agreement. The obligations of the depositary and
our company under the Deposit Agreement will be limited to performing their
duties thereunder in good faith and without negligence, in the case of any
action or inaction in the voting of preferred stock represented by the
depositary shares, gross negligence or willful misconduct, and we and the
depositary will not be obligated to prosecute or defend any legal proceeding
in respect of any depositary receipts, depositary shares or shares of
preferred stock represented thereby unless satisfactory indemnity is
furnished. We and the depositary may rely on written advice of counsel or
accountants, or information provided by persons presenting shares of preferred
stock represented thereby for deposit, holders of depositary receipts or other
persons believed in good faith to be competent to give such information, and
on documents believed in good faith to be genuine and signed by a proper
party.
In the event the depositary shall receive conflicting claims, requests or
instructions from any holders of depositary receipts, on the one hand, and us,
on the other hand, the depositary shall be entitled to act on such claims,
requests or instructions received from us.
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DESCRIPTION OF DEBT SECURITIES
The following discussion describes certain general provisions of the debt
securities to which this prospectus and any applicable prospectus supplement
may relate. The particular terms of the debt securities being offered and the
extent to which these general provisions may apply will be set forth in the
indenture or supplemental indenture under which the particular debt securities
are issued, and will be described in a prospectus supplement relating to such
debt securities. A form of the senior indenture and a form of the subordinated
indenture under which the debt securities may be issued have been filed as
exhibits to the registration statement of which this prospectus is a part. All
section references appearing in this prospectus are to sections of each
indenture unless otherwise indicated, and capitalized terms used but not
defined below shall have the respective meanings set forth in each Indenture.
General
Our debt securities will be unsecured general obligations and may be either
senior debt securities, which we refer to as Senior Securities, or subordinated
debt securities, which we refer to as Subordinated Securities. The debt
securities will be issued pursuant to a written agreement, known as an
Indenture, to be entered into by us and an independent third party, known as a
Trustee, who will be legally obligated to carry out the terms of the Indenture.
Senior Securities and Subordinated Securities will be issued under separate
indentures referred to as a Senior Indenture and a Subordinated Indenture,
respectively, or together referred to as the Indentures. The statements made
under this heading relating to the debt securities and the Indentures are
summaries of their anticipated provisions, do not purport to be complete and
are qualified in their entirety by reference to the Indentures and the debt
securities themselves.
The indebtedness represented by Subordinated Securities will be subordinated
in right of payment to the prior payment in full of our Senior Indebtedness
(which term includes our Senior Securities), as described below under "--
Ranking."
All of our operations are conducted through subsidiaries. Our subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the debt securities or to make
any funds available therefor, whether by dividends, loans or other payments,
other than as expressly provided in a guarantee. The payment of dividends or
the making of loans and advances to us by our subsidiaries may be subject to
contractual, statutory or regulatory restrictions, which, if material, would be
disclosed in the applicable prospectus supplement. Moreover, such payments,
loans and advances would be contingent upon the earnings of the subsidiaries.
Any right we may have to receive assets of any of our subsidiaries upon
liquidation or recapitalization of the subsidiaries (and the consequent right
of the holders of debt securities to participate in those assets) will be
subject to the claims of the subsidiaries' creditors. In the event that we are
recognized as a creditor of a subsidiary, our claims would still be subject to
any security interest in the assets of such subsidiary and any indebtedness of
such subsidiary senior to that of the debt securities, and would be dependent
primarily upon the receipt of funds from our subsidiaries.
Except as set forth in the applicable Indenture or in one or more
supplemental indentures and described in an applicable prospectus supplement,
the debt securities may be issued without limit as to aggregate principal
amount, in one or more series, in each case as established from time to time in
or under authority granted by a resolution of our board of directors or as
established in the applicable Indenture or in one or more supplemental
indentures. All debt securities of one series need not be issued at the same
time and, unless otherwise provided, a series may be reopened, without the
consent of the holders of the debt securities of such series, for issuances of
additional debt securities of such series.
It is expected that each Indenture will provide that there may be more than
one Trustee thereunder, each with respect to one or more series of debt
securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of debt securities, and a successor Trustee may
be appointed to act with
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respect to such series. In the event that two or more persons are acting as
Trustee with respect to different series of debt securities, each such Trustee
will be a trustee of a trust under the applicable Indenture separate and apart
from the trust administered by any other Trustee, and, except as otherwise
provided in the Indenture or supplemental indenture, any action permitted to be
taken by each Trustee may be taken by each such Trustee with respect to, and
only with respect to, the one or more series of debt securities for which it is
Trustee under the applicable Indenture.
The applicable prospectus supplement will describe the specific terms of any
series of debt securities being offered, including:
(1) The title of such debt securities and whether such debt securities are
Senior Securities or Subordinated Securities
(2) The aggregate principal amount of such debt securities and any limit
on such aggregate principal amount
(3) The percentage of the principal amount at which such debt securities
will be issued and, if other than the full principal amount thereof,
the portion of the principal amount payable upon declaration of
acceleration of the maturity thereof
(4) The date or dates, or the method for determining such date or dates,
on which the principal of such debt securities will be payable and the
amount of principal payable thereon
(5) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates will be determined, at which such debt
securities will bear interest, if any
(6) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the dates on which any such
interest will be payable, the regular record dates for such interest
payment dates, or the method by which record dates may be determined,
the persons to whom such interest will be payable, and the basis upon
which interest is to be calculated if other than a 360-day year of
twelve 30-day months
(7) The place or places where the principal of (and premium, if any) and
interest, if any, on such debt securities will be payable, where such
debt securities may be surrendered for registration of transfer or
exchange and where notices or demands to or upon us in respect of such
debt securities and the applicable Indenture may be served
(8) The period or periods within which, the price or prices at which, and
the other terms and conditions upon which, such debt securities may be
redeemed, in whole or in part, at our option if we have such an option
(9) Our obligation, if any, to redeem, repay or purchase such debt
securities pursuant to any sinking fund or analogous provision or at
the option of a holder thereof, and the period or periods within
which, the date and dates on which, the price or prices at which, and
the other terms and conditions upon which, such debt securities will
be redeemed, repaid or purchased, in whole or in part, pursuant to
such obligation
(10) If other than U.S. dollars, the currency or currencies in which such
debt securities are denominated or in which the principal of (and
premium, if any) or interest or Additional Amounts (as defined below),
if any, on the debt securities is payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto
(11) Whether the amount of payments of principal of (and premium, if any)
or interest or Additional Amounts, if any, on such debt securities
may be determined with reference to an index, formula or other method
(which index, formula or method may, but need not be, based on a
currency, currencies, currency unit or units or composite currency or
currencies) and the manner in which such amounts are to be determined
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(12) Whether the principal of (and premium, if any) or interest or
Additional Amounts, if any, on the debt securities are to be payable,
at our election or at the election of a holder thereof, in a currency
or currencies, currency unit or units or composite currency or
currencies other than that in which such debt securities are
denominated or stated to be payable, the period or periods within
which (including the election date), and the terms and conditions
upon which, such election may be made, and the time and manner of,
and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies,
currency unit or units or composite currency or currencies in which
such debt securities are denominated or stated to be payable and the
currency or currencies, currency unit or units or composite currency
or currencies in which such debt securities are to be so payable
(13) Any additions to, modifications of or deletions from the terms of
such debt securities with respect to events of default, amendments,
merger, consolidation and sale of assets or covenants set forth in
the applicable Indenture
(14) Whether such debt securities will be issued in certificate or book-
entry form
(15) Whether such debt securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than
$1,000 and any integral multiple thereof and, if in bearer form, the
denominations thereof if other than $5,000, and terms and conditions
relating thereto
(16) The applicability, if any, of the defeasance and covenant defeasance
provisions of the Indenture and any additional or different terms on
which such series of debt securities may be defeased
(17) Whether and under what circumstances we will pay any additional
amounts (which we refer to as Additional Amounts) on such debt
securities to a holder that is not a United States person in respect
of any tax, assessment or governmental charge and, if so, whether we
will have the option to redeem such debt securities in lieu of making
such payment
(18) Whether and the extent to which the payment of principal of, and
premium, if any and interest on such debt securities are guaranteed
by one or more of our Subsidiaries or by other persons
(19) Whether and under what circumstances the debt securities are
convertible into our Class A common stock, our preferred stock or
other debt securities
(20) If the debt securities are to be issued upon the exercise of debt
warrants, the time, manner and place for such debt securities to be
authenticated and delivered
(21) Any other terms of such debt securities not inconsistent with the
provisions of the applicable Indenture (Section 301)
The debt securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance is
below market rates, which we refer to as Original Issue Discount Securities.
Special U.S. federal income tax, accounting and other considerations applicable
to Original Issue Discount Securities will be described in the applicable
prospectus supplement.
Except as set forth in the applicable Indenture or in one or more
supplemental indentures, the applicable Indenture will not contain any
provisions that would limit our ability to incur indebtedness or that would
afford you protection in the event of a highly leveraged or similar transaction
involving us or in the event of a change of control. You should refer to the
applicable prospectus supplement for information with respect to any deletions
from, modifications of or additions to the Events of Default or our covenants
that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
For the purposes of certain Events of Default described below and any
additional covenants or other provisions that may be set forth in one or more
supplemental indentures, we may designate certain of our Subsidiaries as
"Unrestricted Subsidiaries." All Subsidiaries that are not designated as
Unrestricted Subsidiaries will be "Restricted Subsidiaries." The terms and
conditions, if any, under which a Subsidiary may be designated as an
Unrestricted Subsidiary will be set forth in the applicable supplemental
indenture and described in the applicable prospectus supplement.
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We refer to a corporation, partnership, limited liability company, joint
venture or similar entity in which we or one or more of our other Subsidiaries
own or control, directly or indirectly, a majority of the outstanding voting
stock, partnership interests, membership interests or similar interests, as the
case may be, as a "Subsidiary." For the purposes of this definition, "voting
stock" means stock or other equity interests having voting power for the
election of directors, or comparable governing body, as the case may be,
whether at all times or only so long as no senior class of stock has such
voting power by reason of any contingency.
Denomination, Interest, Registration and Transfer
Unless otherwise described in the applicable prospectus supplement, dollar-
denominated debt securities that are in registered form will be issuable in
denominations of $1,000 and any integral multiple thereof (except for
registered debt securities issued in global form, which may be of any
denomination), and dollar-denominated debt securities that are in bearer form
will be issuable in denominations of $5,000 (except for bearer debt securities
issued in global form, which may be of any denomination) (Section 302).
Unless otherwise specified in the applicable prospectus supplement, the
principal of (and applicable premium, if any) and interest (and Additional
Amounts, if any) on any series of debt securities that are in registered form
will be payable at the corporate trust office of the Trustee, the address of
which will be stated in the applicable prospectus supplement. At our option,
payment of interest on debt securities that are in registered form may be made
by check mailed to the address of the person entitled thereto as it appears in
the applicable register for such debt securities or by wire transfer of funds
to such person at an account maintained within the United States. Unless
otherwise specified in the applicable prospectus supplement, payment of the
principal of (and applicable premium, if any) and interest (and Additional
Amounts, if any) on any debt securities that are in bearer form will be made
only at an office or agency of ours located outside the United States (Sections
301, 305, 306, 307 and 1002).
Any interest not punctually paid or duly provided for on any interest payment
date with respect to a debt security, which we refer to as Defaulted Interest,
will forthwith cease to be payable to the holder on the applicable regular
record date and may either be paid to the person in whose name such debt
security is registered at the close of business on a special record date, which
we refer to as the Special Record Date, for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof is to be given to the
holder of such debt security not less than ten days before such Special Record
Date, or may be paid at any time in any other lawful manner, all as more
completely described in the applicable Indenture or supplemental indenture
(Section 307).
Subject to certain limitations imposed upon debt securities issued in book-
entry form, the debt securities of any series will be exchangeable for other
debt securities of the same series and of a like aggregate principal amount and
tenor of different authorized denominations upon surrender of such debt
securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations imposed upon debt securities issued in
book-entry form, the debt securities of any series may be surrendered for
registration of transfer or exchange thereof at the corporate trust office of
the applicable Trustee. Every debt security surrendered for registration of
transfer or exchange must be duly endorsed or accompanied by a written
instrument of transfer. No service charge will be made for any registration of
transfer or exchange of any debt securities, but we may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith (Section 305). If the applicable prospectus supplement
refers to any transfer agent (in addition to the applicable Trustee) initially
designated by us with respect to any series of debt securities, we may at any
time rescind the designation of such transfer agent or approve a change in the
location through which any such transfer agent acts, except that we will be
required to maintain a transfer agent in each place of payment for such series.
We may at any time designate additional transfer agents with respect to any
series of debt securities (Section 1002).
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Neither we nor any Trustee will be required to:
(1) issue, register the transfer of or exchange debt securities of any
series during a period beginning at the opening of business 15 days
before any selection of debt securities of that series to be redeemed
and ending at the close of business on the day of mailing of the
relevant notice of redemption
(2) register the transfer of or exchange any debt security, or portion
thereof, called for redemption, except the unredeemed portion of any
debt security being redeemed in part, or
(3) issue, register the transfer of or exchange any debt security that has
been surrendered for repayment at the option of the holder, except the
portion, if any, of such debt security not to be repaid (Section 305)
Merger, Consolidation or Sale of Assets
We will be permitted to consolidate with, or sell, lease or convey all or
substantially all of our assets to, or merge with or into, any other entity,
provided that:
(1) either we are the continuing entity, or the successor entity (if other
than us) formed by or resulting from any such consolidation or merger
or which has received the transfer of such assets is an entity
organized or existing under the laws of the United States, any state
thereof or the District of Columbia and expressly assumes payment of
the principal of (and premium, if any), interest on, and all other
amounts payable in connection with, all of the outstanding debt
securities and the due and punctual performance and observance of all
of the covenants and conditions contained in each Indenture
(2) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of us or any Subsidiary as a
result thereof as having been incurred by us or such Subsidiary at the
time of such transaction, no Event of Default under the Indentures or
supplemental indentures, and no event which, after notice or the lapse
of time, or both, would become such an Event of Default, will have
occurred and be continuing, and
(3) an officer's certificate and legal opinion covering such conditions
are delivered to each Trustee (Sections 801 and 803)
Certain Covenants
Existence. Except as described above under "Merger, Consolidation or Sale of
Assets," we will be required to do or cause to be done all things necessary to
preserve and keep in full force and effect our existence, rights (by
certificate of incorporation, by-laws and statute) and franchises, and those of
our Restricted Subsidiaries, but we and any such Restricted Subsidiary will not
be required to preserve the existence of a Restricted Subsidiary or any such
right or franchise if we determine that the preservation of such existence,
right or franchise is no longer desirable in the conduct of our business and
that the loss of such right or franchise is not disadvantageous in any material
respect to the holders of the debt securities. Furthermore, any Restricted
Subsidiary may consolidate with, merge into, or sell, convey, lease or
otherwise dispose of all of its property and assets to us or any wholly owned
Restricted Subsidiary (Section 1004).
Maintenance of Properties. We will be required to cause all of our properties
used or useful in the conduct of our business or the business of any Restricted
Subsidiary and material to us and our Restricted Subsidiaries taken as a whole
to be maintained and kept in good condition, repair and working order and
supplied with all necessary equipment and to cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as
in our judgment may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times, but we and
our Restricted Subsidiaries will not be prevented from discontinuing the
operation or maintenance of any of such property if such discontinuance is in
our judgment, desirable on the conduct of our business or the business of any
of our Restricted Subsidiaries (Section 1005).
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Payment of Taxes and Other Claims. We will be required to pay or discharge or
cause to be paid or discharged, before the same become delinquent:
(1) all material taxes, assessments and governmental charges levied or
imposed upon us or any Restricted Subsidiary or upon our income,
profits or property or that of any Restricted Subsidiary and
(2) all material lawful claims for labor, materials and supplies that, if
unpaid, might by law become a lien upon our property or that of any
Restricted Subsidiary; but we will not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in
good faith in appropriate proceedings upon stay of execution or the
enforcement thereof and for which adequate reserves in accordance with
GAAP or other appropriate provision has been made. (Section 1007).
Additional Covenants and/or Modifications to the Covenants Described Above
Any additional covenants and/or modifications to the covenants described
above with respect to any series of our debt securities, including any
covenants relating to limitations on incurrence of indebtedness or other
financial covenants, will be set forth in the applicable Indenture or
supplemental indenture and described in the related prospectus supplement.
Events of Default, Notice and Waiver
Each Indenture may provide that some or all of the following events are
"Events of Default" with respect to any series of debt securities issued
thereunder, subject to any modifications, additions or deletions provided in
any supplemental indenture with respect to any series of debt securities:
(1) default for 30 days in the payment of any installment of interest on
or any Additional Amounts payable in respect of any debt security of
such series
(2) default in the payment of principal of (or premium, if any, on) any
debt security of such series when such amount becomes due and payable,
whether upon its maturity, declaration of acceleration, call for
redemption or otherwise
(3) default in making any sinking fund payment as required for any debt
security of such series
(4) default in the performance, or breach, of any of our other covenants
or warranties contained in the applicable Indenture (other than any
covenant or warranty otherwise provided for in the provisions relating
to Events of Default), continued for 60 days after written notice as
provided in the applicable Indenture
(5) certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of us or any
Restricted Subsidiary or either of their property
(6) any other Event of Default provided with respect to a particular
series of debt securities (Section 501)
If an Event of Default under an Indenture (other than an Event of Default
described in clause 5 above) with respect to debt securities of any series at
the time outstanding occurs and is continuing, then in every such case, unless
the principal amount of all of the outstanding debt securities of such series
has already become due and payable, the applicable Trustee or, generally, the
holders of not less than 25% of the principal amount of the outstanding debt
securities of that series will have the right to declare the principal amount
(or, if the debt securities of that series are Original Issue Discount
Securities or indexed securities, such portion of the principal amount as may
be specified in the terms thereof) of all the debt securities of that series,
and any accrued and unpaid interest thereon, to be due and payable immediately
by written notice thereof to us (and to the applicable Trustee if given by the
holders) and upon any such declaration such principal or specified portion
thereof and any accrued and unpaid interest thereon shall become immediately
due and payable. If an Event of Default described in clause 5 above occurs with
respect to the debt securities of any series, then the principal amount of all
debt securities of that series and any accrued and unpaid interest thereon
shall become immediately due and payable without any act on the part of the
Trustee or any holder of such debt securities. At any time after such a
declaration of acceleration with respect to debt securities of such series (or
of all debt securities then outstanding under any Indenture, as the case may
be)
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has been made, but before a judgment or decree for payment of the money due has
been obtained by the applicable Trustee, however, the holders of not less than
a majority in principal amount of the outstanding debt securities of such
series (or of all debt securities then outstanding under the applicable
Indenture, as the case may be) may rescind and annul such declaration and its
consequences if:
(1) we have deposited with the applicable Trustee all required payments of
the principal of (and premium, if any) and interest and Additional
Amounts, if any, on the debt securities of such series (or of all debt
securities then outstanding under the applicable Indenture, as the
case may be), plus certain fees, expenses, disbursements and advances
of the applicable Trustee, and
(2) all Events of Default, other than the non-payment of accelerated
principal (or specified portion thereof), with respect to debt
securities of such series (or of all debt securities then outstanding
under the applicable Indenture, as the case may be) have been cured or
waived as provided in such Indenture (Section 502)
Each Indenture also will provide that the holders of not less than a majority
in principal amount of the outstanding debt securities of any series (or of all
debt securities then outstanding under the applicable Indenture, as the case
may be) may waive any past default with respect to such series and its
consequences, except a default:
(1) in the payment of the principal of (or premium, if any) or interest or
Additional Amounts, if any, on any debt security of such series, or
(2) in respect of a covenant or provision contained in the applicable
Indenture that cannot be modified or amended without the consent of
the holder of each outstanding debt security affected thereby (Section
513)
Each Trustee will be required to give notice to the holders of the applicable
debt securities within 90 days of a default under the applicable Indenture
unless such default has been cured or waived; but the Trustee may withhold
notice of any default (except a default in the payment of the principal of (or
premium, if any) or interest or Additional Amounts, if any, on such debt
securities or in the payment of any sinking fund installment in respect of such
debt securities) if specified responsible officers of such Trustee consider
such withholding to be in the interest of such holders (Section 601).
Each Indenture will provide that no holders of debt securities of any series
may institute any proceedings, judicial or otherwise, with respect to such
Indenture or for any remedy thereunder, except in the cases of failure of the
applicable Trustee, for 60 days, to act after it has received a written request
to institute proceedings in respect of an Event of Default from the holders of
not less than 25% in principal amount of the outstanding debt securities of
such series, as well as an offer of indemnity reasonably satisfactory to it
(Section 507). This provision will not prevent any holder of debt securities
from instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest and Additional Amounts, if any, on such debt
securities at the respective due dates thereof (Section 508).
Subject to provisions in each Indenture relating to its duties in case of
default, no Trustee will be under any obligation to exercise any of its rights
or powers under an Indenture at the request or direction of any holders of any
series of debt securities then outstanding under such Indenture, unless such
holders offer to the Trustee reasonable security or indemnity (Section 602).
The holders of not less than a majority in principal amount of the outstanding
debt securities of any series (or of all debt securities then outstanding under
an Indenture, as the case may be) will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
applicable Trustee, or of exercising any trust or power conferred upon such
Trustee. A Trustee may refuse, however, to follow any direction that is in
conflict with any law or with the applicable Indenture or that may involve such
Trustee in personal liability or may be unduly prejudicial to the holders of
debt securities of such series not joining therein (Section 512).
Within 120 days after the close of each fiscal year, we will be required to
deliver to each Trustee a certificate, signed by one of several specified
officers, stating whether or not such officer has knowledge of any default
under the applicable Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1008).
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Modification of the Indentures
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding debt securities issued under such Indenture that are
affected by such modification or amendment; but no such modification or
amendment may, without the consent of the holder of each such debt security
affected thereby:
(1) change the stated maturity of the principal of (or the premium, if
any), or any installment of interest (or Additional Amounts, if any)
on, any such debt security
(2) reduce the principal amount of, or the rate or amount of interest on,
or any premium payable on redemption of, or any Additional Amounts
payable with respect to, any such debt security, or reduce the amount
of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof
or would be provable in bankruptcy, or adversely affect any right of
repayment of the holder of any such debt security
(3) change the place of payment, or the coin or currency for payment, of
principal (or premium, if any) or interest or Additional Amounts, if
any, on any such debt security
(4) impair the right to institute suit for the enforcement of any payment
on or with respect to any such debt security
(5) release any guarantors from their guarantees of any such debt
securities, or, except as contemplated in any supplemental indenture,
make any change in a guarantee of such debt securities that would
adversely affect the interests of the holders thereof
(6) reduce the percentage in principal amount of outstanding debt
securities of any series necessary to modify or amend the Indenture, to
wave compliance with certain provisions thereof or certain defaults or
consequences thereunder or to reduce the quorum or voting requirements
in the Indenture, or
(7) modify the ranking or priority of such debt securities (Section 902)
The holders of not less than a majority in principal amount of the
outstanding debt securities of each series affected thereby will have the right
to waive compliance by us with certain covenants in such Indenture (Section
1010).
Modifications and amendments of an Indenture will be permitted to be made by
us and the Trustee thereunder without the consent of any holder of debt
securities for any of the following purposes:
(1) to evidence the succession of another person to us as obligor under
such Indenture
(2) to add to our covenants for the benefit of the holders of all or any
series of debt securities or to surrender any right or power conferred
upon us in the Indenture
(3) to add Events of Default for the benefit of the holders of all or any
series of debt securities
(4) to add or change any provisions of an Indenture to facilitate the
issuance of, or to liberalize certain terms of, debt securities in
bearer form, or to permit or facilitate the issuance of debt
securities in uncertificated form, provided that such action shall not
adversely affect the interests of the holders of the debt securities
of any series in any material respect
(5) to change or eliminate any provisions of an Indenture, if such change
or elimination becomes effective only when there are no debt
securities outstanding of any series created prior thereto that are
entitled to the benefit of such provision
(6) to secure the debt securities
(7) to establish the form or terms of debt securities of any series
(8) to provide for the acceptance of appointment by a successor Trustee or
facilitate the administration of the trusts under an Indenture by more
than one Trustee
(9) to cure any ambiguity, defect or inconsistency in an Indenture,
provided that such modifications shall not adversely affect the
interests of the holders of debt securities of any series
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(10) to supplement any of the provisions of an Indenture to the extent
necessary to permit or facilitate defeasance and discharge of any
series of such debt securities, if such action does not adversely
affect the interests of the holders of the debt securities of any
series in any material respect
(11) to make any change that does not adversely affect the legal rights
under an Indenture of any holder of debt securities of any series
issued thereunder
(12) to add a guarantor of the securities of any series, or
(13) to comply with the requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture
Act (Section 901)
Ranking
The Senior Securities will constitute part of our Senior Indebtedness (as
defined below) and will rank pari passu with all of our outstanding senior
debt. Except as set forth in the applicable prospectus supplement, the
Subordinated Securities will be subordinated, in right of payment, to the prior
payment in full of the Senior Indebtedness, including the Senior Securities.
However, our obligation to pay the principal of (and premium, if any) and
interest and Additional Amounts (if any) on such Subordinated Securities will
not otherwise be impaired (Section 1603 of the Subordinated Indenture).
In the event of any distribution of our assets in connection with any
dissolution, winding up, liquidation or reorganization of us, whether in a
bankruptcy, insolvency, reorganization or receivership proceeding or upon an
assignment for the benefit of creditors or any other marshalling of our assets
and liabilities or otherwise, except a distribution in connection with a
merger, consolidation or sale of assets that complies with the requirements
described above under "Merger, Consolidation or Sale of Assets," the holders of
all Senior Indebtedness will first be entitled to receive payment of the full
amount due thereon before the holders of any of the Subordinated Securities
will be entitled to receive any payment in respect of the Subordinated
Securities. If a payment default occurs and is continuing with respect to any
amount payable in respect of any Senior Indebtedness, or if any event occurs
that would permit the holders of any Senior Indebtedness to accelerate the
maturity thereof, the holders of all Senior Indebtedness will first be entitled
to receive payment of the full amount due thereon before the holders of any of
the Subordinated Securities will be entitled to receive any payment in respect
of the Subordinated Securities. If the principal amount of the Subordinated
Securities of any series is declared due and payable pursuant to the
Subordinated Indenture and such declaration has not been rescinded and
annulled, the holders of all Senior Indebtedness outstanding at the time of
such declaration will first be entitled to receive payment of the full amount
due thereon before the holders of any of the Subordinated Securities will be
entitled to receive any payment in respect of the Subordinated Securities
(Section 1601 of the Subordinated Indenture).
After all Senior Indebtedness is paid in full and until the Subordinated
Securities are paid in full, holders of Subordinated Securities will be
subrogated to the right of holders of Senior Indebtedness to the extent that
distributions otherwise payable to holders of Subordinated Securities have been
applied to the payment of Senior Indebtedness (Section 1602 of the Subordinated
Indenture). By reason of such subordination, in the event of a distribution of
assets upon insolvency, certain of our general creditors may recover more,
ratably, than holders of Subordinated Securities.
Senior Indebtedness will be defined in the Subordinated Indenture as the
principal of (and premium, if any) and interest and Additional Amounts, if any,
on, or substantially similar payments to be made by us in respect of, the
following, whether outstanding at the date of execution of the applicable
Indenture or thereafter incurred, created, guaranteed or assumed, and whether
or not contingent:
(1) any obligation for money borrowed
(2) any obligation 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
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(3) any reimbursement obligation with respect to letters of credit,
bankers' acceptances or similar facilities
(4) any obligation 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)
(5) any capital lease obligation
(6) the maximum fixed redemption or repurchase price of capital stock
which, by its terms, matures, is mandatorily redeemable or redeemable
at the option of the holder thereof, or is exchangeable for
indebtedness at any time, and, to the extent held by persons other than
us or our Restricted Subsidiaries, the maximum fixed redemption or
repurchase price of any such stock of our Restricted Subsidiaries, at
the time of determination
(7) every obligation under interest rate and currency protection agreements
(8) any attributable indebtedness with respect to any sale and leaseback
transaction and
(9) any obligation of the type referred to in clauses (1) through (8) of
another person and all dividends and distributions of another person
the payment of which, in either case, we have guaranteed or are
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise
in each case other than (i) any such indebtedness, obligation or liability
referred to in clauses (1) through (9) above as to which, in the instrument
creating or evidencing the same pursuant to which the same is outstanding, it
is provided that such indebtedness, obligation or liability is not superior in
right of payment to the Subordinated Securities or ranks equally with the
Subordinated Securities, (ii) any such indebtedness, obligation or liability
which is subordinated to our indebtedness to substantially the same extent as
or to a greater extent than the Subordinated Securities are subordinated, and
(iii) the Subordinated Securities.
Satisfaction and Discharge of the Indentures
We may terminate our obligations under either Indenture with respect to debt
securities of any series when:
(1) either (A) all outstanding debt securities of such series have been
delivered to the Trustee for cancellation or (B) all debt securities of
such series not theretofore delivered to the Trustee for cancellation
have become due and payable, will become due and payable at their
Stated Maturity within one year or, if redeemable at our option, are to
be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by
the Trustee in our name and at our expense, and we have irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire indebtedness on such debt
securities not theretofore delivered to the Trustee for cancellation,
for the principal of (and premium, if any,) and interest and Additional
Amounts, if any, to the date of deposit or Stated Maturity or date of
redemption,
(2) we have paid or caused to be paid all sums payable by us under such
Indenture, and
(3) we have delivered a Company Certificate and an Opinion of Counsel
relating to compliance with the conditions set forth in such Indenture
(Section 401).
Defeasance and Covenant Defeasance
Each Indenture will provide that, if the provisions relating to defeasance or
covenant defeasance or both are made applicable to the debt securities of or
within any series, we may elect either:
(1) to defease and be deemed to have paid and be discharged from any and
all obligations with respect to such debt securities, which we refer to
as defeasance (except for the obligation to pay additional amounts, if
any, upon the occurrence of certain events of tax, assessment or
governmental charge
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with respect to payments on such debt securities, and the obligations to
register the transfer or exchange of such debt securities, to replace
temporary or mutilated, destroyed, lost or stolen debt securities, to
maintain an office or agency in respect of such debt securities and to
hold moneys for payment in trust) (Section 1402), or
(2) to be released from our obligations with respect to such debt
securities under certain specified covenants contained in Article Ten
of such Indenture and, if so specified in any supplemental indenture
relating to a series of debt securities, from any obligations arising
under additional covenants applicable to such series of debt
securities, all as described in the applicable prospectus supplement,
and any omission to comply with such obligations shall not constitute
an Event of Default with respect to such debt securities, which we
refer to as covenant defeasance (Section 1403)
in either case upon the irrevocable deposit by us with the applicable Trustee,
in trust, of an amount, in such currency or currencies, currency unit or units
or composite currency or currencies in which such debt securities are payable
at stated maturity, or government obligations, or both, applicable to such debt
securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient without
reinvestment to pay the principal of (and premium, if any) and interest and
Additional Amounts, if any, on such debt securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other things,
we have delivered to the applicable Trustee an opinion of counsel (as specified
in the applicable Indenture) to the effect that the holders of such debt
securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such opinion of counsel, in the case of
defeasance, will be required to refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable U.S. federal income tax law
occurring after the date of the Indenture (Section 1404).
The applicable prospectus supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the debt
securities of or within a particular series.
Conversion and Exchange
The terms, if any, on which debt securities of any series are convertible
into or exchangeable for Class A common stock, preferred stock, or other debt
securities, including the initial conversion price or conversion rate, any
adjustments to such conversion price or conversion rate and the conversion
period, and the conditions upon which such conversion will be effected, will be
set forth in the applicable prospectus supplement. Such terms may include
provisions for conversion or exchange to be either mandatory or at the option
of the holders or ourselves.
Redemption and Repurchase
The debt securities may be redeemable at our option, may be subject to
mandatory redemption pursuant to a sinking fund or otherwise, or may be subject
to repurchase by us at the option of the holders, in each case upon the terms,
at the times and at the prices set forth in the applicable prospectus
supplement.
Global Securities
The debt securities of a series may be issued in whole or in part in the form
of one or more global securities, which we refer to as the Global Securities,
to be deposited with, or on behalf of, a depository identified in the
applicable prospectus supplement relating to such series. Global Securities may
be issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depository arrangement with respect
to a series of debt securities will be described in the applicable prospectus
supplement relating to such series.
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DESCRIPTION OF WARRANTS
General
We may issue, together with other securities or separately, warrants to
purchase our debt securities, Class A common stock, Class B common stock,
preferred stock or depositary shares. We will issue the warrants under Warrant
Agreements to be entered into between us and a bank or trust company, as
warrant agent, all as shall be set forth in the applicable prospectus
supplement. The warrant agent will act solely as our agent in connection with
the warrants of the series being offered and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners
of warrants.
The applicable prospectus supplement will describe the following terms,
where applicable, of warrants in respect of which this prospectus is being
delivered:
(1) the title of the warrants
(2) the designation, amount and terms of the securities for which the
warrants are exercisable and the procedures and conditions relating to
the exercise of such warrants
(3) the designation and terms of the other securities, if any, with which
the warrants are to be issued and the number of warrants issued with
each such security
(4) the price or prices at which the warrants will be issued
(5) the aggregate number of warrants
(6) any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants
(7) the price or prices at which the securities purchasable upon exercise
of the warrants may be purchased
(8) if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be
separately transferable
(9) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of the warrants
(10) any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants
(11) the date on which the right to exercise the warrants shall commence,
and the date on which the right shall expire
(12) the maximum or minimum number of warrants which may be exercised at
any time
(13) information with respect to book-entry procedures, if any
Exercise of Warrants
Each warrant will entitle the holder thereof to purchase for cash the amount
of debt securities, shares of preferred stock, shares of Class A common stock,
shares of Class B common stock or depositary shares at the exercise price as
shall in each case be set forth in, or be determinable as set forth in, the
applicable prospectus supplement. Warrants may be exercised at any time up to
the close of business on the expiration date set forth in the applicable
prospectus supplement. After the close of business on the expiration date,
unexercised warrants will become void.
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Warrants may be exercised as set forth in the applicable prospectus
supplement relating to the warrants offered thereby. Upon receipt of payment
and the warrant certificate properly completed and duly executed at the
corporate trust office of the warrant agent or any other office indicated in
the applicable prospectus supplement, we will, as soon as practicable, forward
the purchased securities. If less than all of the warrants represented by the
warrant certificate are exercised, a new warrant certificate will be issued for
the remaining warrants.
28
<PAGE>
DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
We may issue stock purchase contracts, including contracts obligating holders
to purchase from us, and obligating us to sell to the holders, a specified
number of shares of Class A common stock, Class B common stock or preferred
stock at a future date or dates. The price per share of Class A common stock,
Class B common stock or preferred stock may be fixed at the time the stock
purchase contracts are issued or may be determined by a specific reference to a
formula set forth in the stock purchase contracts. The stock purchase contracts
may be issued separately or as part of stock purchase units consisting of (1) a
stock purchase contract and (2) debt securities, preferred securities or debt
obligations of third parties, including U.S. Treasury securities, securing the
holders' obligations to purchase the Class A common stock, Class B common stock
or the preferred stock under the stock purchase contracts. The stock purchase
contracts may require us to make periodic payments to the holders of the stock
purchase units or vice versa, and such payments may be unsecured or prefunded
on some basis. The stock purchase contracts may require holders to secure their
obligations thereunder in a specified manner.
Unless otherwise specified in the applicable prospectus supplement, the
securities related to the stock purchase contracts will be pledged to a
collateral agent, for our benefit, pursuant to a pledge agreement. The pledged
securities will secure the obligations of holders of stock purchase contracts
to purchase Class A common stock, Class B common stock or preferred stock under
the related stock purchase contracts. The rights of holders of stock purchase
contracts to the related pledged securities will be subject to our security
interest in those pledged securities. That security interest will be created by
the pledge agreement. No holder of stock purchase contracts will be permitted
to withdraw the pledged securities related to such stock purchase contracts
from the pledge arrangement except upon the termination or early settlement of
the related stock purchase contracts. Subject to that security interest and the
terms of the purchase contract agreement and the pledge agreement, each holder
of a stock purchase contract will retain full beneficial ownership of the
related pledged securities.
Except as described in the applicable prospectus supplement, the collateral
agent will, upon receipt of distributions on the pledged securities, distribute
such payments to us or a purchase contract agent, as provided in the pledge
agreement. The purchase contract agent will in turn distribute payments it
receives as provided in the stock purchase contract. The applicable prospectus
supplement will describe the terms of any stock purchase contracts or stock
purchase units.
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<PAGE>
DESCRIPTION OF SUBSCRIPTION RIGHTS
General
We may issue subscription rights to purchase our debt securities, Class A
common stock, Class B common stock, preferred stock, depositary shares or
warrants to purchase debt securities, preferred stock, Class A common stock or
Class B common stock. We may issue subscription rights independently or
together with any other offered security. The subscription rights may or may
not be transferable by the purchaser receiving the subscription rights. In
connection with any subscription rights offering to our stockholders, we may
enter into a standby underwriting arrangement with one or more underwriters
pursuant to which the underwriter(s) will purchase any offered securities
remaining unsubscribed for after the subscription rights offering. In
connection with a subscription rights offering to our stockholders,
certificates evidencing the subscription rights and a prospectus supplement
will be distributed to our stockholders on the record date for receiving
subscription rights in the subscription rights offering set by us.
The applicable prospectus supplement will describe the following terms of
subscription rights in respect of which this prospectus is being delivered:
(1) the title of the subscription rights
(2) the securities for which the subscription rights are exercisable
(3) the exercise price for the subscription rights
(4) the number of subscription rights issued to each stockholder
(5) the extent to which the subscription rights are transferable
(6) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of
the subscription rights
(7) any other terms of the subscription rights, including terms,
procedures and limitations relating to the exchange and exercise of
the subscription rights
(8) the date on which the right to exercise the subscription rights shall
commence, and the date on which the right shall expire
(9) the extent to which the subscription rights include an over-
subscription privilege with respect to unsubscribed securities
(10) if applicable, the material terms of any standby underwriting
arrangement entered into by us in connection with the subscription
rights offering
Exercise Of Subscription Rights
Each subscription right will entitle the holder of subscription rights to
purchase for cash the principal amount of debt securities, shares of preferred
stock, depositary shares, Class A common stock, Class B common stock, warrants
or any combination thereof, at the exercise price as shall in each case be set
forth in, or be determinable as set forth in, the applicable prospectus
supplement. Subscription rights may be exercised at any time up to the close of
business on the expiration date for such subscription rights set forth in the
applicable prospectus supplement. After the close of business on the expiration
date, all unexercised subscription rights will become void.
Subscription rights may be exercised as set forth in the applicable
prospectus supplement. Upon receipt of payment and the subscription rights
certificate properly completed and duly executed at the corporate trust office
of the subscription rights agent or any other office indicated in the
prospectus supplement, we will, as soon as practicable, forward the debt
securities, shares of preferred stock, Class A common stock or Class B common
stock, depositary shares or warrants purchasable upon such exercise. In the
event that not all of the subscription rights issued in any offering are
exercised, we may determine to offer any unsubscribed offered securities
directly to persons other than stockholders, to or through agents, underwriters
or dealers or through a combination of such methods, including pursuant to
standby underwriting arrangements, as set forth in the applicable prospectus
supplement.
30
<PAGE>
PLAN OF DISTRIBUTION
The following summary of our plan for distributing the securities offered
under this prospectus will be supplemented by a description of our specific
plan for each offering in the applicable prospectus supplement relating to
such offering. Such description will include, among other things, the terms of
the underwriting arrangements applicable to such offering.
We may sell the securities in any of the following ways, or in any
combination thereof, as follows:
. through underwriters or dealers
. directly to one or more purchasers
. through agents
A prospectus supplement will set forth the terms of the offering of the
securities offered thereby, including:
. the name or names of any underwriters and the respective amounts of such
securities underwritten or purchased by each of them
. the purchase price of such securities and the proceeds to us
. any discounts, commissions or concessions allowed or paid to dealers
constituting underwriters' compensation, to the purchase price
. any securities exchanges or markets on which such securities may be listed or
quoted
If underwriters are used in the sale of any securities, such securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time
of sale. Such securities may be either offered to the public through
underwriting syndicates represented by one or more managing underwriters, or
directly by one or more underwriters. Only underwriters named in such
prospectus supplement are deemed to be underwriters in connection with the
securities offered thereby. Unless otherwise set forth in the applicable
prospectus supplement, the obligations of the underwriters to purchase such
securities will be subject to certain conditions precedent and the
underwriters will be obligated to purchase all of such securities if any are
purchased. Any purchase price and any discounts or concessions allowed or paid
to dealers may be changed from time to time.
The securities may be sold directly by us or through agents designated by us
from time to time. Any agent involved in the offer or sale of the securities
in respect of which a prospectus supplement is delivered will be named, and
any commissions payable by us to such agent will be set forth, in the
prospectus supplement. Unless otherwise indicated in the prospectus
supplement, any such agent will be acting on a best efforts basis for the
period of its appointment.
If so indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by institutional investors
to purchase the securities from us at the public offering price set forth in
the prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. There may be
limitations on the minimum amount which may be purchased by any such
institutional investor or on the portion of the aggregate principal amount of
the particular securities which may be sold pursuant to such arrangements.
Institutional investors to which such offers may be made, when authorized,
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and such other
institutions as may be approved by us. The obligations of any such purchasers
pursuant to such delayed delivery and payment arrangements will be subject
only to those
31
<PAGE>
conditions set forth in the prospectus supplement, and the prospectus
supplement will set forth the commission payable for solicitation of such
contracts. Underwriters, dealers or agents will not have any responsibility in
respect of the validity of such arrangements or the performance of McLeodUSA or
such institutional investors thereunder.
Securities offered other than Class A common stock may be a new issue of
securities with no established trading market. Unless otherwise indicated in
the applicable prospectus supplement, we do not intend to list any offered
securities other than our Class A common stock on any securities exchange or
other market. Any underwriters to whom such securities are sold by us for
public offering and sale may make a market in such securities, but such
underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the
liquidity of or the trading markets for any such securities.
Agents and underwriters may be entitled under agreements entered into with us
to indemnification by us against certain civil liabilities, including
liabilities under the Securities Act of 1933, or to contribution with respect
to payments which the agents, dealers or underwriters may be required to make
in respect thereof. Agents, dealers and underwriters may be customers of,
engage in transactions with, or perform services for us in the ordinary course
of business.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
McLeodUSA.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, incorporated by reference in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Ovation Communications, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 incorporated by
reference in this registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report, and are incorporated
by reference herein in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
32
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the issuance and distribution of the securities being
registered.
<TABLE>
<S> <C>
SEC Registration Fee............................................. $486,500
Fees of Rating Agencies.......................................... 20,000
Printing and Duplicating Expenses................................ 150,000
Legal Fees and Expenses.......................................... 150,000
Accounting Fees and Expenses..................................... 50,000
NASD Fees........................................................ 35,000
Blue Sky Fees and Expenses....................................... 15,000
Miscellaneous.................................................... 43,500
--------
Total.......................................................... $950,000
</TABLE>
Item 15. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and
its former directors, officers, employees and agents and those who serve, at
the corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In
addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of the Company (the
"Restated Certificate") contains provisions that provide that no director of
the Company shall be liable for breach of fiduciary duty as a director except
for (1) any breach of the directors' duty of loyalty to the Company or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director
derived an improper personal benefit. The Restated Certificate contains
provisions that further provide for the indemnification of directors and
officers to the fullest extent permitted by the DGCL. Under the Bylaws of the
Company, the Company is required to advance expenses incurred by an officer or
director in defending any such action if the director or officer undertakes to
repay such amount if it is determined that the director or officer is not
entitled to indemnification. In addition, the Company has entered into
indemnity agreements with each of its directors pursuant to which the Company
has agreed to indemnify the directors as permitted by the DGCL. The Company
has obtained directors and officers liability insurance against certain
liabilities, including liabilities under the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
*1.1 Form of Debt Securities Underwriting Agreement.
*1.2 Form of Common Stock Underwriting Agreement.
*1.3 Form of Preferred Stock Underwriting Agreement.
*1.4 Form of Depositary Shares Underwriting Agreement.
*1.5 Form of Warrants Underwriting Agreement.
*1.6 Form of Subscription Rights Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Registration Statement on Form S-1, File No.
333-3112 ("Initial Form S-1"), and incorporated herein by reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the "November
1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4"),
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on
Form 10-K, File No. 0-20763, filed with the Commission on March 6,
1998 (the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10 1/2% Senior
Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2 to
Annual Report on Form 10-K, File No. 0-20763, filed with the
Commission on March 31, 1997 (the "1996 Form 10-K") and incorporated
herein by reference).
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
4.5 Investor Agreement dated as of April 1, 1996 among McLeod, Inc., IES
Investments Inc., Midwest Capital Group Inc., MWR Investments Inc.,
Clark and Mary McLeod, and certain other stockholders. (Filed as
Exhibit 4.8 to Initial Form S-1 and incorporated herein by
reference).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod.
(Filed as Exhibit 4.3 to the November 1996 Form S-1 and incorporated
herein by reference).
4.7 Form of 10 1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9 1/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed as
Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
reference).
4.9 Form of Initial Global 9 1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
4.10 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard A.
Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.11 Amendment No. 1 to Stockholders' Agreement dated as of September 19,
1997 by and among McLeodUSA Incorporated, IES Investments Inc.,
Midwest Capital Group, Inc., MWR Investments Inc., Clark E. McLeod,
Mary E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in Schedule I
thereto. (Filed as Exhibit 4.1 to the Quarterly Report on Form 10-Q,
File No. 0-20763, filed with the Commission on November 14, 1997 and
incorporated herein by reference).
4.12 Form of 9 1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 8 3/8% Senior Notes Due 2008 of McLeodUSA Incorporated. (Filed as
Exhibit 4.15 to Registration Statement on Form S-4, File No. 333-
52793 (the "May 1998 Form S-4") and incorporated herein by
reference).
4.14 Form of Global 8 3/8% Senior Note Due 2008 of McLeodUSA Incorporated
(Filed as Exhibit 4.16 to the May 1998 Form S-4 and incorporated
herein by reference).
4.15 Stockholders' Agreement dated as of November 18, 1998 by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary
E. McLeod and Richard A. Lumpkin, Gail G. Lumpkin and certain of the
former shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders in each
case who are listed in Schedule I thereto. (Filed as Exhibit 99.1 to
the Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on November 19, 1998 and incorporated herein by
reference).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9 1/2% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
Exhibit 4.19 to Registration Statement on Form S-4, File No. 333-
69621 (the "December 1998 Form S-4") and incorporated herein by
reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated
(Filed as Exhibit 4.20 to the December 1998 Form S-4 and incorporated
herein by reference).
4.18 Stockholders' Agreement dated as of January 7, 1999, by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary
E. McLeod, Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors L.L.C.
and Media/Communications Partners III Limited Partnership (Filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the Commission on January 14, 1999 and incorporated herein
by reference).
4.19 Indenture dated as of February 22, 1999 between McLeodUSA
Incorporated and United States Trust Company of New York, as Trustee,
relating to the 8 1/8% Senior Notes Due 2009 of McLeodUSA
Incorporated (Filed as Exhibit 4.22 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, File No. 0-20763,
filed with the Commission on March 24, 1999 (the "1998 Form 10-K")
and incorporated herein by reference).
4.20 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA Incorporated
(Filed as Exhibit 4.23 to the 1998 Form 10-K and incorporated herein
by reference).
**4.21 Form of Senior Debt Securities Indenture.
**4.22 Form of Subordinated Debt Securities Indenture.
*4.23 Form of Deposit Agreement.
**5.1 Opinion of Hogan & Hartson L.L.P.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- -------------------
<C> <S>
11.1 Statement regarding Computation of Per Share Earnings (Filed as
Exhibit 11.1 to the Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on May 13, 1998 and incorporated herein by
reference).
21.1 Subsidiaries of McLeodUSA Incorporated (Filed as Exhibit 21.1 to the
1998 Form 10-K and incorporated herein by reference).
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
24.1 Power of attorney (included on signature page).
*24.2 Statement on Form T-1 of Eligibility of Trustee.
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Quarterly Report
on Form 10-Q, File No. 0-20763, filed with the Commission on May 13,
1998 and incorporated herein by reference).
</TABLE>
- --------
* To be incorporated by reference herein in connection with the offering of
each series of securities.
** To be filed by amendment.
(b) Financial Statement Schedules.
The following financial statement schedule was filed with the Company's
Annual Report on Form 10-K (File No. 0-20763), filed with the Commission on
March 24, 1999, as amended by Form 10-K/A filed on April 22, 1999 and is
incorporated herein by reference:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the Consolidated Financial Statements of the
Company or notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement;
provided, however, that subparagraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in the periodic reports filed by the Registrant
pursuant to Section 13 or Section 15(d) of the Securities Act of 1934 that are
incorporated by reference in this registration statement.
(2) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the Securities offered herein, and the
offering of such Securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the Securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in this
registration statement shall be
II-4
<PAGE>
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of
the subscription offer, the transactions by the underwriters during the
subscription period, the amount of unsubscribed securities to be purchased by
the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from
those set forth on the cover page of the prospectus, a post-effective
amendment will be filed to set forth the terms of such offering.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance under Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 15 above or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of each issue.
The undersigned Registrant hereby undertakes to file an application for
purposes of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act in accordance with the rules and
regulations prescribed by the Commission under Section 305(b)(2) of the Act.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cedar Rapids, Iowa, on
this 21st day of July, 1999.
McLeodUSA Incorporated
/s/ Stephen C. Gray
By: _________________________________
Stephen C. Gray
President and Chief Operating
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons, in the capacities
indicated below, on this 21st day of July, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* Chairman, Chief Executive Officer
______________________________________ and Director (Principal Executive
Clark E. McLeod Officer)
* Vice Chairman and Director
______________________________________
Richard A. Lumpkin
/s/ Stephen C. Gray President, Chief Operating Officer
______________________________________ and Director
Stephen C. Gray
* Group Vice President and Director
______________________________________
Blake O. Fisher, Jr.
* Group Vice President, Chief
______________________________________ Financial Officer and Treasurer
J. Lyle Patrick (Principal Financial Officer and
Principal Accounting Officer)
Director
______________________________________
Anne K. Bingaman
* Director
______________________________________
Peter H.O. Claudy
* Director
______________________________________
Thomas M. Collins
* Director
______________________________________
Robert J. Currey
* Director
______________________________________
Lee Liu
* Director
______________________________________
Paul D. Rhines
* Director
______________________________________
Roy A. Wilkens
</TABLE>
*By:
/s/ Stephen C. Gray
-------------------------------
Stephen C. Gray Attorney-In-
Fact
II-6
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INDEX TO EXHIBITS
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Exhibit
Number Exhibit Description
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*1.1 Form of Debt Securities Underwriting Agreement.
*1.2 Form of Common Stock Underwriting Agreement.
*1.3 Form of Preferred Stock Underwriting Agreement.
*1.4 Form of Depositary Shares Underwriting Agreement.
*1.5 Form of Warrants Underwriting Agreement.
*1.6 Form of Subscription Rights Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(Filed as Exhibit 3.1 to Registration Statement on Form S-1, File No.
333-3112 ("Initial Form S-1"), and incorporated herein by reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (Filed as Exhibit 3.2 to
Registration Statement on Form S-1, File No. 333-13885 (the "November
1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod Inc. (Filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-4"),
and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA Incorporated. (Filed as Exhibit 3.4 to Annual Report on
Form 10-K, File No. 0-20763, filed with the Commission on March 6,
1998 (the "1997 Form 10-K") and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (Filed as
Exhibit 4.1 to Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United States
Trust Company of New York, as Trustee, relating to the 10 1/2% Senior
Discount Notes Due 2007 of McLeod, Inc. (Filed as Exhibit 4.2 to
Annual Report on Form 10-K, File No. 0-20763, filed with the
Commission on March 31, 1997 (the "1996 Form 10-K") and incorporated
herein by reference).
4.3 Initial Global 10 1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997. (Filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10 1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc. (Filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
4.5 Investor Agreement dated as of April 1, 1996 among McLeod, Inc., IES
Investments Inc., Midwest Capital Group Inc., MWR Investments Inc.,
Clark and Mary McLeod, and certain other stockholders. (Filed as
Exhibit 4.8 to Initial Form S-1 and incorporated herein by
reference).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23, 1996 by
and among McLeod, Inc., IES Investments Inc., Midwest Capital Group
Inc., MWR Investments Inc., Clark E. McLeod and Mary E. McLeod.
(Filed as Exhibit 4.3 to the November 1996 Form S-1 and incorporated
herein by reference).
4.7 Form of 10 1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9 1/4% Senior Notes Due 2007 of McLeodUSA Incorporated. (Filed as
Exhibit 4.9 to the July 1997 Form S-4 and incorporated herein by
reference).
4.9 Form of Initial Global 9 1/4% Senior Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.10 to the July 1997 Form S-4 and
incorporated herein by reference).
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Exhibit
Number Exhibit Description
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4.10 Stockholders' Agreement dated June 14, 1997 among McLeodUSA
Incorporated, IES Investments Inc., Midwest Capital Group, Inc., MWR
Investments Inc., Clark E. McLeod, Mary E. McLeod and Richard A.
Lumpkin on behalf of each of the shareholders of Consolidated
Communications Inc. listed on Schedule 1 of the Stockholders'
Agreement. (Filed as Exhibit 4.12 to the July 1997 Form S-4 and
incorporated herein by reference).
4.11 Amendment No. 1 to Stockholders' Agreement dated as of September 19,
1997 by and among McLeodUSA Incorporated, IES Investments Inc.,
Midwest Capital Group, Inc., MWR Investments Inc., Clark E. McLeod,
Mary E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in Schedule I
thereto. (Filed as Exhibit 4.1 to the Quarterly Report on Form 10-Q,
File No. 0-20763, filed with the Commission on November 14, 1997 and
incorporated herein by reference).
4.12 Form of 9 1/4% Senior Exchange Note Due 2007 of McLeodUSA
Incorporated. (Filed as Exhibit 4.14 to the 1997 Form 10-K and
incorporated herein by reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 8 3/8% Senior Notes Due 2008 of McLeodUSA Incorporated. (Filed as
Exhibit 4.15 to Registration Statement on Form S-4, File No. 333-
52793 (the "May 1998 Form S-4") and incorporated herein by
reference).
4.14 Form of Global 8 3/8% Senior Note Due 2008 of McLeodUSA Incorporated
(Filed as Exhibit 4.16 to the May 1998 Form S-4 and incorporated
herein by reference).
4.15 Stockholders' Agreement dated as of November 18, 1998 by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary
E. McLeod and Richard A. Lumpkin, Gail G. Lumpkin and certain of the
former shareholders of Consolidated Communications Inc. ("CCI") and
certain permitted transferees of the former CCI shareholders in each
case who are listed in Schedule I thereto. (Filed as Exhibit 99.1 to
the Current Report on Form 8-K, File No. 0-20763, filed with the
Commission on November 19, 1998 and incorporated herein by
reference).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA Incorporated
and United States Trust Company of New York, as Trustee, relating to
the 9 1/2% Senior Notes Due 2008 of McLeodUSA Incorporated (Filed as
Exhibit 4.19 to Registration Statement on Form S-4, File No. 333-
69621 (the "December 1998 Form S-4") and incorporated herein by
reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA Incorporated
(Filed as Exhibit 4.20 to the December 1998 Form S-4 and incorporated
herein by reference).
4.18 Stockholders' Agreement dated as of January 7, 1999, by and among
McLeodUSA Incorporated, IES Investments Inc., Clark E. McLeod, Mary
E. McLeod, Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors L.L.C.
and Media/Communications Partners III Limited Partnership (Filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the Commission on January 14, 1999 and incorporated herein
by reference).
4.19 Indenture dated as of February 22, 1999 between McLeodUSA
Incorporated and United States Trust Company of New York, as Trustee,
relating to the 8 1/8% Senior Notes Due 2009 of McLeodUSA
Incorporated (Filed as Exhibit 4.22 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998, File No. 0-20763,
filed with the Commission on March 24, 1999 (the "1998 Form 10-K")
and incorporated herein by reference).
4.20 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA Incorporated
(Filed as Exhibit 4.23 to the 1998 Form 10-K and incorporated herein
by reference).
**4.21 Form of Senior Debt Securities Indenture.
**4.22 Form of Subordinated Debt Securities Indenture.
*4.23 Form of Deposit Agreement.
**5.1 Opinion of Hogan & Hartson L.L.P.
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Exhibit
Number Exhibit Description
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11.1 Statement regarding Computation of Per Share Earnings (Filed as
Exhibit 11.1 to the Quarterly Report on Form 10-Q, File No. 0-20763,
filed with the Commission on May 13, 1998 and incorporated herein by
reference).
21.1 Subsidiaries of McLeodUSA Incorporated (Filed as Exhibit 21.1 to the
1998 Form 10-K and incorporated herein by reference).
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Ernst & Young LLP.
24.1 Power of attorney (included on signature page).
*24.2 Statement on Form T-1 of Eligibility of Trustee.
27.1 Financial Data Schedule (Filed as Exhibit 27.1 to the Quarterly Report
on Form 10-Q, File No. 0-20763, filed with the Commission on May 13,
1998 and incorporated herein by reference).
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* To be incorporated by reference herein in connection with the offering of
each series of securities.
** To be filed by amendment.
3
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Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Amendment No. 1 to the Form S-3 Registration Statement of our
McLeodUSA Incorporated reports dated January 27, 1999 (except with respect to
the matter discussed in Note 16, as to which the date is March 5, 1999) and to
all references to our Firm included in or made a part of this Registration
Statement.
/s/ Arthur Andersen LLP
Chicago, Illinois
July 20, 1999
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Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" included in
Amendment No. 1 to Registration Statement (Form S-3) and related Prospectus of
McLeodUSA Incorporated and to the incorporation by reference therein of our
report dated February 26, 1999, with respect to the consolidated financial
statements of Ovation Communications, Inc. as of December 31, 1998 and 1997 and
for the period from March 27, 1997 (inception) to December 31, 1997 and the year
ended December 31, 1998, included in the Registration Statement on Form S-4 (No.
333-71811) of McLeodUSA Incorporated filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
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Minneapolis, Minnesota
July 21, 1999
