<PAGE>
Filed pursuant to Rule 424(b)(4)
Registration No. 333-82851
P R O S P E C T U S S U P P L E M E N T
(To Prospectus dated August 5, 1999)
[LOGO OF McLEODUSA APPEARS HERE]
1,000,000 Shares
McLeodUSA Incorporated
6.75% Series A Cumulative Convertible Preferred Stock
----------------
We are selling 1,000,000 shares of our 6.75% Series A cumulative convertible
preferred stock, liquidation preference $250 per share which are convertible at
the option of the holders into 8,602,890 shares of our Class A common stock at
a conversion price of $29.06 per share of Class A common stock for each share
of Series A preferred stock, equivalent to a conversion rate of 8.60289 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 August 5, 1999 was $23.625 per share. Other terms
described in this prospectus supplement include:
. The quarterly dividend will be $4.21875 per share, payable at our option
in cash or shares of our Class A common stock, beginning November 15,
1999.
. Beginning on August 15, 2001 and prior to August 15, 2002, if the price
of our Class A common stock equals or exceeds 150% of the conversion
price for a specific period, we may redeem, for cash, shares of our
Class A common stock or both, the Series A preferred stock at a
redemption price of 104.5% of the liquidation preference, plus (1)
unpaid dividends and (2) a make whole payment for future dividends.
. Beginning on August 15, 2002, we may redeem, for cash, the Series A
preferred stock at prices declining to the liquidation preference, plus
unpaid dividends.
. On or after August 15, 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.
. The Series A preferred stock has been approved for listing on the Nasdaq
National Market.
----------------
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................................... $250.00 $250,000,000
Underwriting Discount................................... $ 7.50 $ 7,500,000
Proceeds to the Company (before expenses)............... $242.50 $242,500,000
</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 August 11, 1999. The underwriters may purchase up to
150,000 additional shares of Series A preferred stock to cover over-allotments.
----------------
Salomon Smith Barney
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
August 6, 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 $241.5 million in net proceeds from the sale of the Series A
preferred stock
. approximately $523.0 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......................... 1,000,000 Shares
Over-Allotment Option............ We have granted the underwriters an option to purchase up to
150,000 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 $287,500,000,
$8,625,000 and $278,875,000, respectively.
Dividends........................ Holders of Series A preferred stock will be entitled to receive
cumulative dividends at an annual rate of 6.75% of the liquidation
preference payable quarterly on each November 15, February 15,
May 15 and August 15, commencing on November 15, 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--Our Ability to Pay Cash Dividends is Restricted" 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 8.60289
shares of Class A common stock for each share of Series A preferred
stock (representing a conversion price of $29.06 per share of
Class A common stock), subject to adjustment in certain events.
In addition, if on or after August 15, 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........... $250 per share. See "Description of the Series A Preferred Stock
--Liquidation Preference."
Redemption....................... We may redeem, for cash, shares of our Class A common stock or
both, the Series A preferred stock at a redemption price of 104.5% of
the liquidation preference, plus accumulated and unpaid dividends to
the redemption date, on or after August 15, 2001, but prior to
August 15, 2002, if the closing price of our Class A common stock
</TABLE>
S-3
<PAGE>
<TABLE>
<C> <S>
equals or exceeds 150% of the conversion
price, or $43.59 per share (based on the
current conversion price of $29.06 per
share), for a specified trading period,
which we refer to as the provisional
redemption. In addition 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 August 15,
2002.
Except in the circumstances described
above, we may not redeem the Series A
preferred stock prior to August 15, 2002.
Thereafter, each share of Series A
preferred stock may be redeemed, at our
option, initially at a redemption price of
103.375% of the liquidation preference and
thereafter at prices declining to 100% on
and after August 15, 2005, plus in each
case, all accumulated and unpaid dividends.
In addition, we may also redeem the Series
A Preferred Stock under certain other
limited circumstances as provided in our
certificate of incorporation. 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."
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Nasdaq National Market
symbol.......................... MCLDP
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
took 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 received one additional share of our Class A
common stock for each share held. Distribution of the additional shares took
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, $500 million
principal amount of the 8 1/8% senior notes in February 1999 and the issuance
of $250 million aggregate amount of our Series A preferred stock in August 1999
as if they had occurred at the beginning of 1998. The as adjusted information
presented in the balance sheet data in the table includes the effect of the
issuance of our Series A preferred stock as if it had occurred on March 31,
1999.
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) (73,823) (10,141) (21,204) (23,055)
Other non-operating
income................ 495 1,426 1,997 1,997 687 (1) (1)
Income taxes........... -- -- -- -- -- -- --
-------- -------- --------- --------- -------- -------- --------
Net loss............... (22,346) (79,910) (124,912) (165,887) (30,267) (47,476) (54,419)
Preferred stock
dividends............. -- -- -- (16,875) -- -- (4,219)
-------- -------- --------- --------- -------- -------- --------
Earnings applicable to
common stock.......... $(22,346) $(79,910) $(124,912) $(182,762) $(30,267) $(47,476) $(58,638)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.28) $ (.73) $ (.99) $ (1.34) $ (.24) $ (.36) $ (.41)
======== ======== ========= ========= ======== ======== ========
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............. -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
<CAPTION>
December 31, March 31, 1999
------------------------------ -----------------------
1996 1997 1998 Actual As Adjusted
-------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Balance Sheet Data:
Current assets......... $224,401 $ 517,869 $ 793,192 $ 974,218 $ 1,215,718
Working capital........ $185,968 $ 378,617 $ 613,236 $ 740,191 $ 981,691
Property and equipment,
net................... $ 92,123 $ 373,804 $ 629,746 $ 828,591 $ 828,591
Total assets........... $452,994 $1,345,652 $1,925,197 $ 2,836,380 $ 3,077,880
Long-term debt less
current maturities.... $ 2,573 $ 613,384 $1,245,170 $ 1,776,475 $ 1,776,475
Stockholders' equity... $403,429 $ 559,379 $ 462,806 $ 785,415 $ 1,026,915
</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.
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
$22.54 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 $1.25 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. The Series A preferred stock has been approved for listing on
the Nasdaq National Market; however, no assurance can be given as to the
liquidity of 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 August 5, 1999)................... 33.688 22.750
</TABLE>
On August 5, 1999, the last reported sale price of our Class A common stock
on the Nasdaq National Market was $23.625 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 and
(2) as adjusted to reflect the sale of 1,000,000 shares of our Series A
preferred stock and the application of the proceeds from this offering, 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
Historical Adjusted
---------- ----------
(dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents........................... $ 415,343 $ 656,843
Investments in available-for-sale securities........ 278,676 278,676
---------- ----------
Total cash, cash equivalents and investments in
available-for-sale securities.................. 694,019 935,519
========== ==========
Short-term debt..................................... 10,276 10,276
Long-term debt...................................... 1,776,475 1,776,475
---------- ----------
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
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, 1,150,000 shares authorized; 1,000,000
shares issued and outstanding, as adjusted....... -- 10
Additional paid-in capital........................ 1,078,307 1,319,797
Accumulated deficit............................... (300,868) (300,868)
Accumulated other comprehensive income............ 6,487 6,487
---------- ----------
Total stockholders' equity...................... 785,415 1,026,915
---------- ----------
Total capitalization............................ $2,572,166 $2,813,666
========== ==========
</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 received one additional share of our Class A
common stock for each share held. Distribution of the additional shares took
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, $500 million
principal amount of the 8 1/8% notes in February 1999 and the issuance of $250
million aggregate amount of our Series A preferred stock in August 1999 as if
they had occurred at the beginning of 1998. The as adjusted information
presented in the balance sheet data in the table includes the effect of the
issuance of our Series A preferred stock as if it had occurred on March 31,
1999.
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) (73,823) (10,141) (21,204) (23,055)
Other non-operating
income................ 495 1,426 1,997 1,997 687 (1) (1)
Income taxes........... -- -- -- -- -- -- --
-------- -------- --------- --------- -------- -------- --------
Net loss............... (22,346) (79,910) (124,912) (165,887) (30,267) (47,476) (54,419)
Preferred stock
dividends............. -- -- -- (16,875) -- -- (4,219)
-------- -------- --------- --------- -------- -------- --------
Earnings applicable to
common stock.......... $(22,346) $(79,910) $(124,912) $(182,762) $(30,267) $(47,476) $(58,638)
======== ======== ========= ========= ======== ======== ========
Loss per common share.. $ (.28) $ (.73) $ (.99) $ (1.34) $ (.24) $ (.36) $ (.41)
======== ======== ========= ========= ======== ======== ========
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............. -- -- -- -- -- -- --
======== ======== ========= ========= ======== ======== ========
<CAPTION>
December 31, March 31, 1999
------------------------------ -----------------------
1996 1997 1998 Actual As Adjusted
-------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited)
Balance Sheet Data:
Current assets......... $224,401 $ 517,869 $ 793,192 $ 974,218 $ 1,215,718
Working capital........ $185,968 $ 378,617 $ 613,236 $ 740,191 $ 981,691
Property and equipment,
net................... $ 92,123 $ 373,804 $ 629,746 $ 828,591 $ 828,591
Total assets........... $452,994 $1,345,652 $1,925,197 $ 2,836,380 $ 3,077,880
Long-term debt less
current maturities.... $ 2,573 $ 613,384 $1,245,170 $ 1,776,475 $ 1,776,475
Stockholders' equity... $403,429 $ 559,379 $ 462,806 $ 785,415 $ 1,026,915
</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 issuance of $250 million aggregate amount of our Series A preferred
stock in August 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, the 8 1/8% senior notes and the Series A
preferred stock 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" and the issuance of the Series A preferred stock is referred to as
the "Offering."
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 received one additional share of our Class A
common stock for each share held. Distribution of the additional shares took
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 Pro Forma
for the for the for the for the Adjustments
Notes Notes Ovation Ovation for the
McLeodUSA Offerings Offerings Ovation Acquisition Acquisition Offering Total
--------- ----------- --------- ------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 604,146 $ -- $ 604,146 $21,035 $ -- $ 625,181 $ -- $625,181
--------- -------- --------- ------- -------- --------- ------- ---------
Operating expenses:
Cost of service....... 323,208 -- 323,208 6,319 -- 329,527 -- 329,527
Selling, general and
administrative....... 260,931 -- 260,931 13,489 -- 274,420 -- 274,420
Depreciation and
amortization......... 89,107 -- 89,107 5,383 15,230 109,720 -- 109,720
Other................. 5,575 -- 5,575 -- -- 5,575 -- 5,575
--------- -------- --------- ------- -------- --------- ------- ---------
Total operating
expenses............ 678,821 -- 678,821 25,191 15,230 719,242 -- 719,242
--------- -------- --------- ------- -------- --------- ------- ---------
Operating loss......... (74,675) -- (74,675) (4,156) (15,230) (94,061) -- (94,061)
Interest expense, net.. (52,234) (32,056) (84,290) (1,608) -- (85,898) 12,075 (73,823)
Other non-operating
income................ 1,997 -- 1,997 -- -- 1,997 -- 1,997
Income taxes........... -- -- -- -- -- -- -- --
--------- -------- --------- ------- -------- --------- ------- ---------
Net loss............... (124,912) (32,056) (156,968) (5,764) (15,230) (177,962) 12,075 (165,887)
Preferred stock
dividends............. -- -- -- -- -- -- (16,875) (16,875)
--------- -------- --------- ------- -------- --------- ------- ---------
Earnings applicable to
common stock.......... $(124,912) $(32,056) $(156,968) $(5,764) $(15,230) $(177,962) $(4,800) $(182,762)
========= ======== ========= ======= ======== ========= ======= =========
Loss per common share.. $ (0.99) $ (1.25) $ (1.30) $ (1.34)
========= ========= ========= =========
Weighted average common
shares outstanding.... 125,614 125,614 136,808 136,808
========= ========= ========= =========
Other Financial Data:
EBITDA(1).............. $ 20,007 $ -- $ 20,007 $ 1,227 $ -- $ 21,234 $ -- $ 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 Forma Adjustments Pro Forma
for the for the for the for the Adjustments
Notes Notes Ovation Ovation for the
McLeodUSA Offerings Offerings Ovation Acquisition Acquisition Offering Total
--------- ----------- --------- ------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $181,109 $ -- $181,109 $19,696 $ -- $200,805 $ -- $200,805
-------- ------- -------- ------- ------- -------- ------- --------
Operating expenses:
Cost of service....... 92,459 -- 92,459 7,338 -- 99,797 -- 99,797
Selling, general and
administrative....... 79,811 -- 79,811 10,880 -- 90,691 -- 90,691
Depreciation and
amortization......... 35,110 -- 35,110 2,829 3,741 41,680 -- 41,680
Other................. -- -- -- -- -- -- -- --
-------- ------- -------- ------- ------- -------- ------- --------
Total operating
expenses............ 207,380 -- 207,380 21,047 3,741 232,168 -- 232,168
-------- ------- -------- ------- ------- -------- ------- --------
Operating loss......... (26,271) -- (26,271) (1,351) (3,741) (31,363) -- (31,363)
Interest expense, net.. (21,204) (2,487) (23,691) (2,383) -- (26,074) 3,019 (23,055)
Other non-operating
income................ (1) -- (1) -- -- (1) -- (1)
Income taxes........... -- -- -- -- -- -- -- --
-------- ------- -------- ------- ------- -------- ------- --------
Net loss............... $(47,476) $(2,487) $(49,963) $(3,734) $(3,741) $(57,438) 3,019 (54,419)
Preferred stock
dividends............. -- -- -- -- -- -- (4,219) (4,219)
-------- ------- -------- ------- ------- -------- ------- --------
Earnings applicable to
common stock.......... $(47,476) $(2,487) $(49,963) $(3,734) $(3,741) $(57,438) $(1,200) $(58,638)
======== ======= ======== ======= ======= ======== ======= ========
Loss per common share.. $ (0.36) $ (0.38) $ (0.40) $ (0.41)
======== ======== ======== ======= ========
Weighted average common
shares outstanding.... 132,242 132,242 143,436 143,436
======== ======== ======== ======= ========
Other Financial Data:
EBITDA(1).............. $ 8,839 $ -- $ 8,839 $ 1,478 $ -- $ 10,317 $ -- $ 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 1,000,000 shares of our
6.75% Series A Cumulative Convertible Preferred Stock, $0.01 par value per
share, designated as "6.75% 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. The Series A
preferred stock has been 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
Senior 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 Parity Stock or Junior Stock. 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 6.75%
per share on the liquidation preference thereof of $250 per share of Series A
preferred stock (equivalent to $16.875 per share annually). Dividends on the
Series A preferred stock will be payable quarterly on November 15, February 15,
May 15
S-25
<PAGE>
and August 15 of each year commencing November 15, 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 immediately 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. No fractional
shares of Class A common stock will be issued as a dividend on the Series A
preferred 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; provided, that if such
fractional shares, when so aggregated, result in a number of shares that
includes a fractional share, the transfer agent shall not sell such remaining
fractional share and McLeodUSA shall in lieu thereof pay to the transfer agent
the cash equivalent of such fractional share (at the same price per share as
the price at which the transfer agent sold the aggregated fractional shares)
and the transfer agent shall include such cash payment in the proceeds
distributed to the holders of the Series A preferred stock. We will pay the
expenses of the transfer agent with respect to such sale, including brokerage
commissions. If we are not entitled to pay cash for fractional shares, we will
pay cash to the holders of the Series A preferred stock for the fractional
shares when we become legally and contractually able to pay such cash. 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.
S-26
<PAGE>
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 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--Our Ability to Pay Cash Dividends is
Restricted."
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 104.5% 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 August 15, 2001, but prior to
August 15, 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 August
15, 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.
If we choose to pay all or a portion of the provisional redemption price
(including any additional payment) through the delivery of shares of Class A
common stock, the number of shares of Class A common stock that we will deliver
for each share of Series A preferred stock will be determined by dividing the
portion of the provisional redemption price (including any additional payment)
that is to be paid in shares of Class A common stock by the Provisional
Redemption Value (as defined below) of the Class A common stock. No fractional
shares of Class A common stock will be delivered in connection with a
Provisional Redemption. The transfer agent is authorized and directed in the
Certificate of Designations to aggregate any fractional shares of Class A
common stock that would otherwise be issued in connection with the Provisional
Redemption, 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; provided, that if such fractional shares, when so
aggregated, result in a number of shares that includes a fractional share, the
transfer agent shall not sell such remaining fractional share and McLeodUSA
shall in lieu thereof pay to the transfer agent the cash equivalent of such
fractional share (at the same price per share as the price at which the
transfer agent sold the aggregated fractional shares) and the transfer agent
shall include such cash payment in the proceeds distributed to the holders of
the Series A preferred stock. We will pay the expenses of the transfer agent
with respect to such sale, including brokerage commissions. If we are not
entitled to pay cash for fractional shares, we will pay cash to the holders of
the Series A preferred stock for the fractional shares when we become legally
and contractually able to pay such cash.
S-27
<PAGE>
The "Provisional Redemption Value" of the Class A common stock with respect
to a Provisional Redemption Date means the product of (y) 97% and (z) 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
preceding the Provisional Redemption 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.
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 Provisional
Redemption Date.
Optional Redemption
Except under the foregoing circumstances for a Provisional Redemption, and
except under certain circumstances set forth in our certificate of
incorporation (as described below), we may not redeem the Series A preferred
stock prior to August 15, 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 (the "Optional Redemption Date") (including a
prorated dividend for any partial dividend period), payable in cash. This type
of redemption is an "Optional Redemption."
If redeemed during the 12-month period commencing on August 15 (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 Optional Redemption prices, expressed as a
percentage of the liquidation preference per share, shall be:
<TABLE>
<CAPTION>
Period Redemption Price
------ ----------------
<S> <C>
2002..................................................... 103.3750%
2003..................................................... 102.2500%
2004..................................................... 101.1250%
2005 and thereafter...................................... 100.0000%
</TABLE>
In the case of any partial Provisional Redemption or 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 Optional 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.
Notwithstanding any of the foregoing provisions relating to a Provisional
Redemption or an Optional Redemption, our certificate of incorporation provides
that we may redeem shares of any class of our capital stock (thus including the
Series A preferred stock) to the extent necessary to prevent the loss or secure
the reinstatement of any license, operating authority or franchise from any
governmental agency. Any redemption
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of shares of Series A preferred stock under such circumstances will be at the
price, and on the other terms and conditions, specified in our certificate of
incorporation. These provisions are described in the accompanying prospectus
under "Description of Common Stock--Certain Charter and Statutory Provisions--
Certain Statutory Provisions."
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
$250 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.
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.
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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 $29.06 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 August 15, 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, plus payment in lieu of
any fractional share of Class A common stock, 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 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 in respect of such
fraction in an amount equal to the same fraction of the last sales price of
the Class A common stock on the last Trading Day immediately preceding 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
S-30
<PAGE>
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 Class A 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 an exercise price
that is less than the closing price of a share of Class A common stock
on the Nasdaq National Market (or the principal national securities
exchange or other securities market on which the Class A common stock
is then being traded) on the last Trading Day immediately preceding the
date of issuance of such rights, options or warrants; 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 excluding any cash
distributed in a transaction for which clause x, y or z below is
applicable, which specifies that no antidilution adjustment shall be
made, to all holders of shares of Class A common stock (which
distribution is not also being made to the holders of Series A
preferred stock based on the number of shares of Class A common stock
into which the Series A preferred stock is then convertible) 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 pre-
distribution market capitalization (defined as the product of the
closing price of the Class A common stock on the last Trading Day
before the record date for such distribution 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 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 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 on the Trading Day immediately after the expiration of
such tender offer; or
(6) a distribution to all holders of Class A common stock (which
distribution is not also being made to the holders of Series A
preferred stock based on the number of shares of Class A common stock
into which the Series A preferred stock is then convertible) 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.
S-31
<PAGE>
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 2 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 of
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:
(x) 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;
(y) any sale, transfer or other disposition to another person of all or
substantially all of the assets of McLeodUSA (other than the sale,
transfer, assignment or distribution of shares of capital stock or assets
to a subsidiary of McLeodUSA) computed on a consolidated basis; or
(z) any statutory exchange of securities with another person, 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
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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.
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 and its
subsidiaries taken as a whole 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 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.
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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 record
date, the date upon which the holders of the Class A common stock shall have
the right to receive such cash, securities, property or other assets, 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 result 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 $250 and the denominator will be the then current Optional
Redemption price per share or, prior to August 15, 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 Optional 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 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 of 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 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
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<PAGE>
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 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 $15.75 (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 August 5, 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 $15.75 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
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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 any holder of 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 (if not
McLeodUSA) is organized under the laws of the United States, 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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<PAGE>
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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<PAGE>
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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<PAGE>
(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. ...................................... 500,000
Goldman, Sachs & Co. ........................................... 250,000
Morgan Stanley & Co. Incorporated............................... 250,000
---------
Total ........................................................ 1,000,000
=========
</TABLE>
In the underwriting agreement, the underwriters have severally agreed,
subject to the terms and conditions set forth therein, to purchase all of the
shares of 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 & Co. Incorporated 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 $4.50 per share. The underwriters may allow, and such dealers may reallow, a
concession not in excess of $0.50 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 150,000 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 Full
Share No Exercise Exercise
------- ------------ ------------
<S> <C> <C> <C>
Public offering price ................. $250.00 $250,000,000 $287,500,000
Underwriting discount ................. $ 7.50 $ 7,500,000 $ 8,625,000
Proceeds to company ................... $242.50 $242,500,000 $278,875,000
</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.
S-43
<PAGE>
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 $1,000,000.
Salomon Smith Barney Inc. and Morgan Stanley & Co. Incorporated 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 90 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. These
agreements are described in the accompanying prospectus under "Description of
Common Stock--Stockholders' Agreements."
S-44
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LEGAL MATTERS
The validity of our 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, July 2, 1999 and August 4, 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>
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 August 5, 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, July 2, 1999 and August 4, 1999
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<PAGE>
. 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.
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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
took 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.
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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
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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 parties 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.
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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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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.
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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
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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.
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1,000,000 Shares
McLeodUSA Incorporated
6.75% Series A Cumulative Convertible Preferred Stock
[LOGO OF McLEODUSA APPEARS HERE]
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P R O S P E C T U S S U P P L E M E N T
August 6, 1999
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Salomon Smith Barney
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
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