<PAGE>
Pursuant to Rule No. 424(b)3
File No. 333-95941
[LOGO OF McLEOD USA] [LOGO OF SPLITROCK]
MERGER PROPOSED-YOUR VOTE IS VERY IMPORTANT
The boards of directors of McLeodUSA Incorporated and Splitrock Services, Inc.
have approved a merger agreement which provides for the strategic merger of the
two companies. We believe the addition of Splitrock to McLeodUSA will create a
stronger and more competitive company with significant potential for long-term
growth, enhanced services and increased revenues.
We cannot complete the merger unless the stockholders of both companies adopt
the proposals presented in this document. Each company will hold a meeting of
stockholders to vote on these matters. Whether or not you plan to attend your
stockholders' meeting, please take the time to vote by completing and mailing
the enclosed proxy card or, if you are a McLeodUSA stockholder, you may also
vote by telephone or through the Internet as instructed on your proxy card. If
you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote in favor of the proposals presented
at your stockholders' meeting. If you do not return your card or you do not
vote by telephone or through the Internet, or you do not instruct your broker
how to vote any shares held for you in "street name," it will have the same
effect as a vote against each of the proposals presented to you that require a
vote of a majority of the outstanding shares.
This document provides you with detailed information about these meetings and
the proposed merger. You can also get information from publicly available
documents filed with the Securities and Exchange Commission. We encourage you
to read this entire document carefully, including the section entitled "Risk
Factors" beginning on page 16.
We strongly support this combination of our companies and join with our boards
of directors in strongly recommending that you vote in favor of the proposals
presented in this joint proxy statement/prospectus.
The dates, times and places of the meetings are as follows:
For McLeodUSA Stockholders: For Splitrock Stockholders:
March 30, 2000 at 9:00 a.m., local time March 30, 2000 at 9:00 a.m., local time
McLeodUSA Technology Park, Bldg. 2 The Woodlands Resort and Conference
6400 C Street SW Center
Cedar Rapids, Iowa The Grand Ballroom I
2301 Milbend Drive
/s/ Clark E. McLeod The Woodlands, Texas
Clark E. McLeod /s/ Kwok Li
Kwok Li
Chairman of the Board Chairman of the Board
McLeodUSA Incorporated Splitrock Services, Inc.
EACH VOTE IS IMPORTANT. PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY.
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved of these securities or passed upon
the adequacy or accuracy of this joint proxy statement/prospectus. Any
representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated February 14, 2000 and it is
first being mailed on or about February 17, 2000.
<PAGE>
[LOGO OF MCLEODUSA]
McLeodUSA INCORPORATED
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Cedar Rapids, Iowa
February 14, 2000
TO THE STOCKHOLDERS OF
McLeodUSA INCORPORATED:
NOTICE IS GIVEN that a special meeting of stockholders of McLeodUSA
Incorporated, a Delaware corporation, will be held on March 30, 2000 at 9:00
a.m., local time, at McLeodUSA Technology Park, Bldg. 2, 6400 C Street SW,
Cedar Rapids, Iowa, for the following purposes:
1. to consider and vote upon a proposal to amend the certificate of
incorporation of McLeodUSA to increase the number of authorized shares
of Class A common stock, par value $.01 per share, to 1,000,000,000 from
250,000,000;
2. to consider and vote upon a proposal to approve the issuance of shares
of McLeodUSA Class A common stock pursuant to the Amended and Restated
Agreement and Plan of Merger by and among McLeodUSA Incorporated,
Southside Acquisition Corporation, a wholly owned subsidiary of
McLeodUSA Incorporated, Splitrock Services, Inc., Splitrock Holdings,
Inc., a wholly owned subsidiary of Splitrock Services, Inc., and
Splitrock Merger Sub, Inc., a wholly owned subsidiary of Splitrock
Holdings, Inc., dated as of February 11, 2000; and
3. to transact other business as may properly come before the special
meeting.
Only holders of record of McLeodUSA Class A common stock at the close of
business on February 8, 2000, which has been fixed as the record date for
notice of the special meeting, are entitled to notice of, and will be entitled
to vote at, the special meeting and any adjournments or postponements of the
special meeting. Each share of McLeodUSA Class A common stock will entitle the
record holder to one vote on each matter put to a vote at the special meeting.
A list of stockholders entitled to receive notice of and vote at the special
meeting will be available for examination by McLeodUSA stockholders at the
offices of the General Counsel of McLeodUSA, located at 6400 C Street SW, Cedar
Rapids, Iowa 52406, during ordinary business hours for the 10-day period before
the special meeting.
Stockholders of McLeodUSA holding approximately 29% of the outstanding
shares of McLeodUSA Class A common stock have agreed to vote all of their
shares in favor of the adoption of the amendment to the certificate of
incorporation of McLeodUSA that will increase the number of authorized shares
of McLeodUSA Class A common stock and in favor of the approval of the issuance
of shares of McLeodUSA Class A common stock in the merger. The approval of both
proposals is required in order for McLeodUSA to consummate the merger.
By Order of the Board of Directors
/s/ Clark E. McLeod
Clark E. McLeod
Chairman of the Board
Whether or not you plan to attend the special meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us or by voting by
telephone or through the Internet as instructed on the proxy card. If you
attend the special meeting, you may vote in person, even if you have previously
returned your proxy card or voted by telephone or through the Internet.
<PAGE>
[LOGO OF SPLITROCK]
SPLITROCK SERVICES, INC.
9012 New Trails Drive
The Woodlands, TX 77381
(281) 465-1200
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 9:00 A.M. ON MARCH 30, 2000
We will hold a special meeting of stockholders of Splitrock Services, Inc.,
a Delaware corporation, at 9:00 a.m., local time on March 30, 2000 at The
Woodlands Resort and Conference Center, The Grand Ballroom I, 2301 Milbend
Drive, The Woodlands, Texas for the following purposes:
1. to consider and vote upon a proposal to approve and adopt the Amended
and Restated Agreement and Plan of Merger by and among McLeodUSA
Incorporated, Southside Acquisition Corporation, a wholly owned
subsidiary of McLeodUSA Incorporated, Splitrock Services, Inc.,
Splitrock Holdings, Inc., a wholly owned subsidiary of Splitrock
Services, Inc., and Splitrock Merger Sub, Inc., a wholly owned
subsidiary of Splitrock Holdings, Inc., dated as of February 11, 2000 as
more fully described in this joint proxy statement/prospectus; and
2. to transact other business as may properly come before the special
meeting.
The board of directors has fixed February 8, 2000 as the record date for
determination of stockholders entitled to notice of, and to vote at, the
meeting, and only holders of Splitrock common stock of record at the close of
business on that day will be entitled to vote.
A complete list of stockholders entitled to vote at the meeting will be
available at the offices of Splitrock during ordinary business hours for the
10-day period before the special meeting for examination by any stockholder for
any purpose germane to the meeting. This list will also be available at the
meeting.
Whether or not you expect to be present at the meeting, please fill in,
date, sign and return the enclosed proxy, which is solicited by the management
of Splitrock. The shares represented by the proxy will be voted according to
your specified response. The proxy is revocable and will not affect your right
to vote in person if you attend the meeting.
Stockholders of Splitrock holding approximately 52.3% of the outstanding
shares of Splitrock common stock have agreed to vote all of their shares in
favor of the approval and adoption of the merger agreement.
By Order of the Board of Directors
/s/ Kwok Li
Kwok Li
Chairman of the Board
The Woodlands, Texas
February 14, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY................................................................... 1
The Companies........................................................... 1
Special Meeting of McLeodUSA Stockholders .............................. 2
Special Meeting of Splitrock Stockholders .............................. 2
The Merger ............................................................. 3
Board of Directors' Recommendations..................................... 6
Opinions of Financial Advisors ......................................... 6
Differences in the Rights of Stockholders .............................. 6
Recent Developments..................................................... 7
Selected Consolidated Financial Data of McLeodUSA....................... 8
Selected Financial Data of Splitrock.................................... 12
Comparative Per Share Data.............................................. 14
Comparative Market Data................................................. 15
RISK FACTORS.............................................................. 16
FORWARD LOOKING STATEMENTS................................................ 24
THE McLEODUSA SPECIAL MEETING............................................. 25
THE SPLITROCK SPECIAL MEETING............................................. 27
THE MERGER................................................................ 29
General................................................................. 29
Background of the Merger................................................ 29
Recommendation of the Splitrock Board of Directors and Reasons for the
Merger................................................................. 33
Opinion of the Splitrock Financial Advisor.............................. 35
Recommendation of the McLeodUSA Board of Directors and Reasons for the
Merger................................................................. 41
Opinion of the McLeodUSA Financial Advisor.............................. 43
Independent Auditors.................................................... 48
Interests of Splitrock Management in the Merger......................... 49
Interests of McLeodUSA Management in the Merger......................... 51
Accounting Treatment.................................................... 51
Listing on The Nasdaq Stock Market...................................... 51
Governmental and Regulatory Approvals................................... 51
Federal Income Tax Consequences......................................... 52
Restrictions on Resales by Affiliates................................... 54
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Appraisal Rights of Dissenting Stockholders............................. 54
Splitrock 11 3/4% Senior Notes due 2008................................ 54
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS.................... 55
General................................................................. 55
Structure of the Reorganization......................................... 55
Structure of the Merger................................................. 56
Conversion of Splitrock Common Stock; Treatment of Options and
Warrants............................................................... 56
Exchange of Certificates................................................ 57
Effective Time.......................................................... 58
Representations and Warranties.......................................... 58
Business of Splitrock and its Subsidiaries Pending the Merger; Other
Agreements............................................................. 61
No Solicitation by Splitrock............................................ 64
Additional Agreements of McLeodUSA...................................... 66
Directors' and Officers' Insurance and Indemnification.................. 66
Conditions to Consummation of the Merger................................ 67
Termination of the Merger Agreement..................................... 69
Expenses; Termination Fee............................................... 70
Waiver and Amendment of the Merger Agreement............................ 71
Voting Agreements....................................................... 71
Stock Option Agreements................................................. 73
Confidentiality, Nonsolicitation and Noncompetition Agreements.......... 75
Terms of Stockholders' Agreements....................................... 76
Credit Agreement........................................................ 77
Master Services Agreement............................................... 78
Letter of Intent Regarding Bandwidth Capacity........................... 79
INFORMATION ABOUT McLEODUSA AND SOUTHSIDE ACQUISITION CORPORATION......... 80
SELECTED CONSOLIDATED FINANCIAL DATA OF McLEODUSA......................... 83
PRO FORMA FINANCIAL DATA.................................................. 87
INFORMATION ABOUT SPLITROCK............................................... 93
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SELECTED FINANCIAL DATA OF SPLITROCK..................................... 95
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND MORE THAN 5% STOCKHOLDERS OF
McLEODUSA............................................................... 97
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND MORE THAN 5% STOCKHOLDERS OF
SPLITROCK............................................................... 100
McLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS............. 102
PROPOSALS TO McLEODUSA STOCKHOLDERS TO BE VOTED ON AT THE McLEODUSA
SPECIAL MEETING......................................................... 118
PROPOSAL TO SPLITROCK STOCKHOLDERS TO BE VOTED ON AT THE SPLITROCK
SPECIAL MEETING......................................................... 122
LEGAL MATTERS............................................................ 123
EXPERTS.................................................................. 123
OTHER MATTERS............................................................ 123
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS............................... 124
WHERE YOU CAN FIND MORE INFORMATION...................................... 124
</TABLE>
APPENDICES
<TABLE>
<S> <C>
Appendix A -- Amended and Restated Agreement and Plan of Merger............ A-1
Appendix B -- Form of Amended and Restated Voting Agreement between
McLeodUSA and various stockholders of Splitrock........................... B-1
Appendix C -- Form of Amended and Restated Voting Agreement between
Splitrock, Splitrock Holdings and various stockholders of McLeodUSA....... C-1
Appendix D -- Form of Amended and Restated Stock Option Agreement.......... D-1
Appendix E -- Opinion of Salomon Smith Barney, dated as of January 6,
2000...................................................................... E-1
Appendix F -- Opinion of Credit Suisse First Boston, dated as of January 6,
2000...................................................................... F-1
Appendix G -- Form of Amended and Restated Section 4.1 of the McLeodUSA
Certificate of Incorporation.............................................. G-1
</TABLE>
(ii)
<PAGE>
QUESTIONS & ANSWERS ABOUT THE MERGER
Q. Why are the companies proposing the transaction?
A. We believe the addition of Splitrock to McLeodUSA will create a stronger and
more competitive company with significant potential for long-term growth,
enhanced services, increased revenues and reduced costs.
Q. How will McLeodUSA be stronger?
A. The transaction will enable McLeodUSA to offer data services, including
Internet access services, to customers in its existing markets using the
newly-acquired network platform and to achieve enhanced data margins and
improved control over the quality of its data services. In addition, through
Splitrock, McLeodUSA will be able to offer those same services on a national
basis (initially on a wholesale basis) outside its current market area. The
transaction will also allow McLeodUSA to accelerate its delivery of data
services, while reducing to a certain degree the capital expenditure
required for network construction, and to save costs for terminating calls
from its markets to areas outside its target market region. The transaction
also will increase the number of customers of the communications services of
McLeodUSA.
Q. What will stockholders receive when the merger occurs?
A.Splitrock Stockholders
A Splitrock stockholder will receive 0.5347 of a share of McLeodUSA Class A
common stock for each share of Splitrock common stock owned. For any
resulting fractional share, a stockholder will receive cash in an amount
equal to the market value of the fractional share. After the merger,
Splitrock stockholders will own approximately 12.6 percent of the
outstanding shares of McLeodUSA Class A common stock on a fully diluted
basis.
For example: If a Splitrock stockholder owns 1,000 shares of Splitrock
common stock, he or she will be entitled to receive after the merger 534
shares of McLeodUSA common stock, plus a check for the market value of
seven-tenths of a share.
McLeodUSA Stockholders
After the merger, a McLeodUSA stockholder will continue to hold the same
number of McLeodUSA shares he or she now owns. These shares, however, will
represent a smaller proportion of the outstanding shares of the combined
company.
Q. What are the federal income tax consequences of the merger?
A. In general, it is expected that Splitrock stockholders will not be required
to pay federal income tax as a result of exchanging Splitrock shares for
McLeodUSA shares, except for taxes on any cash that is received in lieu of
fractional shares.
The merger will not have federal income tax consequences for McLeodUSA
stockholders, for McLeodUSA or for Splitrock.
Q. What should I do now?
A. You should carefully read and consider the information contained in this
joint proxy statement/prospectus. You should then complete and sign your
proxy card and return it in the enclosed return envelope as soon as possible
so that your shares will be represented at your company's special meeting.
You may also vote in person at the special meeting, or, if you are a
McLeodUSA stockholder, you may vote your shares by telephone or through the
Internet by following the instructions provided on the enclosed proxy card.
Q. Should I send in my Splitrock stock certificate now?
A. No, you should not send in your stock certificate with your proxy. Promptly
after the merger is completed, McLeodUSA will send
(iii)
<PAGE>
written instructions to former Splitrock stockholders describing the process
for exchanging their Splitrock stock certificates for McLeodUSA stock
certificates. McLeodUSA stockholders will not exchange their shares.
Q. Are McLeodUSA and Splitrock stockholders entitled to dissenters' rights?
A. No. Under Delaware law, which governs both companies, neither the McLeodUSA
stockholders nor the Splitrock stockholders are entitled to dissenters'
rights of appraisal.
Q. When do the companies expect the merger to be completed?
A. We are working to complete the merger as quickly as possible. We plan to
complete the merger promptly after the stockholder meetings.
Q. Whom should I call if I have questions?
A. Splitrock stockholders who have questions about the merger or the Splitrock
merger proposal may call Patrick J. McGettigan, Jr., General Counsel of
Splitrock, at (281) 465-1200.
McLeodUSA stockholders who have questions about the merger or the McLeodUSA
proposals may call the Investor Relations department of McLeodUSA at (319)
790-7474.
* * * * *
(iv)
<PAGE>
SUMMARY
This document is a prospectus of McLeodUSA and a joint proxy statement of
McLeodUSA and Splitrock. This summary highlights selected information from this
joint proxy statement/prospectus. It does not contain all of the information
that may be important to you. You should carefully read the entire joint proxy
statement/prospectus and the other documents to which this document refers you.
See "Where You Can Find More Information."
The Companies
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 364-0000
McLeodUSA provides communications services to business and residential
customers in the Midwestern and Rocky Mountain regions of the United States. We
offer local, long distance, Internet access, data, voice mail and paging
services, from a single company on a single bill. We believe we are the first
company in most of our markets to offer one-stop shopping for communications
services tailored to customers' specific needs. As of December 31, 1999, we
served over 678,000 local lines in 592 cities and towns.
In addition to our core business of providing local, long distance and related
communications services in competition with the existing local telephone
companies, 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
. communications facilities and services dedicated for a particular
customer's use
. 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 and paging services
In most of our markets, we compete with the existing local phone company by
leasing its 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 actively developing fiber optic
communications networks in Iowa, Illinois, Wisconsin, Indiana, Missouri,
Minnesota, South Dakota, North Dakota, Arizona, Michigan, Nebraska, Ohio, Utah,
Colorado and Wyoming to carry additional communications traffic on our own
network.
Splitrock Services, Inc.
9012 New Trails Drive
The Woodlands, Texas 77381
(281) 465-1200
Splitrock is a facilities-based provider of advanced data communications
services. Splitrock markets its services to Internet service providers,
telecommunications carriers and other businesses throughout the United States.
The Splitrock services include an array of Internet access and data
communications services delivered over its high capacity, facilities-based
network. The combination of the Splitrock existing network with its pending
acquisition of significant fiber optic facilities positions Splitrock to
deliver a broad range of end-to-end data communications services on its
network, including:
. dial and dedicated Internet access
. Internet access for higher bandwidth services, such as digital
subscriber line and cable modem
1
<PAGE>
. value-added services such as virtual private networks and web hosting
. bandwidth leasing and colocation services
In addition to providing Internet dial access and related services to Prodigy
Communications Corporation, its primary customer, Splitrock provides Internet
dial access, Internet dedicated services, and virtual private network services
to other customers.
Splitrock launched its virtual Internet service (VIS) to Internet service
provider customers in the third quarter of 1999. VIS is marketed to Internet
service providers which desire to outsource certain back office and support
functions, such as billing and customer service, in addition to Internet dial
access services.
Splitrock is currently building its first data center in Houston, Texas to
offer web hosting services, and plans to build three more over the next year.
Revenues from these facilities are expected to commence in the first half of
2000, but we cannot assure you that Splitrock will generate revenues from this
new product line.
As segments of the Splitrock fiber backbone are constructed, Splitrock plans to
use the additional network capacity to offer bandwidth leasing services.
In 1999 Splitrock began to implement its distribution strategy by developing an
in-house direct sales force. Splitrock's direct sales force markets our
services directly to Internet service providers, carriers, value added service
providers, and medium and large businesses. Splitrock also utilizes alternate
distribution channels, such as agents, resellers and wholesalers, to market our
services. As of December 31, 1999, Splitrock's sales and marketing staff
totaled 75 professionals, the majority of which comprised the direct sales
force.
Special Meeting of McLeodUSA
Stockholders (page 25)
The special meeting will be held on March 30, 2000 at 9:00 a.m., local time, at
McLeodUSA Technology Park, Bldg. 2, 6400 C Street SW, Cedar Rapids, Iowa. At
the special meeting, you will be asked to vote to adopt an amendment to the
certificate of incorporation of McLeodUSA to increase the number of authorized
shares of McLeodUSA Class A common stock and to approve the issuance of shares
of McLeodUSA Class A common stock in the merger.
You can vote, or submit a proxy to vote, at the special meeting if you were a
record holder of McLeodUSA Class A common stock at the close of business on
February 8, 2000. You can vote your shares by attending the meeting and voting
in person. You can also vote your shares by marking the enclosed proxy card
with your vote, signing it and mailing it in the enclosed return envelope or by
voting by telephone or through the Internet as instructed on the proxy card.
You can revoke your proxy at any time before it is exercised.
Vote Required (page 26)
The approval of (1) at least a majority of all of the outstanding shares of
McLeodUSA Class A common stock is required to adopt the proposal relating to
the increase in the number of authorized shares of McLeodUSA Class A common
stock and (2) at least a majority of all the votes cast is required to approve
the issuance of shares in the merger. The approval of both proposals is
required in order for McLeodUSA to consummate the merger. There were
159,718,852 shares of McLeodUSA Class A common stock outstanding as of February
8, 2000. Each holder of McLeodUSA Class A common stock is entitled to one vote
per share with respect to all matters on which a vote is to be taken at the
special meeting.
Stockholders owning 46,607,906 shares of McLeodUSA Class A common stock,
representing approximately 29% of the outstanding shares of McLeodUSA Class A
common stock eligible to vote at the special meeting, have agreed to vote in
favor of amending the certificate of incorporation of McLeodUSA to increase the
number of authorized shares of McLeodUSA Class A common stock and in favor of
the issuance of shares of McLeodUSA Class A common stock in the merger. We have
attached the form of this voting agreement as an appendix to this joint proxy
statement/prospectus.
Special Meeting of Splitrock
Stockholders (page 27)
The special meeting will be held on March 30, 2000 at 9:00 a.m., local time, at
The Woodlands Resort and Conference Center, The Grand Ballroom I, 2301 Milbend
Drive, The Woodlands, Texas. At the
2
<PAGE>
special meeting, you will be asked to vote to approve and adopt the merger
agreement.
You can vote, or submit a proxy to vote, at the special meeting if you were a
record holder of Splitrock common stock at the close of business on February 8,
2000. You can vote your shares by attending the meeting and voting in person.
You can also vote your shares by marking the enclosed proxy card with your
vote, signing it and mailing it in the enclosed return envelope. You can revoke
your proxy at any time before it is exercised.
Vote Required (page 27)
The approval of at least a majority of all of the outstanding shares of
Splitrock common stock is
required to adopt the merger agreement. There were 57,202,170 shares of
Splitrock common stock outstanding as of February 8, 2000. Each holder of
Splitrock common stock is entitled to one vote per share with respect to all
matters on which a vote is to be taken at the special meeting.
Stockholders owning 29,940,687 shares of Splitrock common stock, representing
approximately 52.3% of the outstanding shares eligible to vote at the special
meeting, have agreed to vote their shares in favor of the merger agreement and
against any competing transaction. We have attached the form of this voting
agreement as an appendix to this joint proxy statement/prospectus.
The Merger (page 29)
The merger agreement contemplates two distinct but related transactions:
. the holding company reorganization, in which Splitrock Services will
become a wholly owned subsidiary of Splitrock Holdings; and
. the merger, in which Splitrock Holdings will become a wholly owned
subsidiary of McLeodUSA.
McLeodUSA and Splitrock expect that the merger will be consummated as soon as
practicable following the holding company reorganization.
The Reorganization
In the holding company reorganization, Splitrock Merger Sub will be merged
into Splitrock Services and each outstanding share of common stock of Splitrock
Services will be converted into the right to receive a share of common stock of
Splitrock Holdings. The diagram below illustrates the structure of Splitrock
before and after the holding company reorganization.
[Centered in the page is a diagram of Splitrock Services, Inc. and its
subsidiaries, Splitrock Holdings, Inc. and Splitrock Merger Sub, Inc., before
and after the reorganization.]
After the reorganization, references to Splitrock in the merger agreement
and in this joint proxy statement/prospectus should be generally understood to
refer to Splitrock Holdings, the new holding company.
3
<PAGE>
The Merger
In the merger, Southside Acquisition Corporation will be merged with and
into Splitrock Holdings and each right to receive a share of common stock of
Splitrock Holdings will be converted into the right to receive 0.5347 of a
share of McLeodUSA Class A common stock. The diagram below illustrates the
structure of Splitrock and McLeodUSA immediately before and after the merger.
[Centerted in the page is a diagram of McleodUSA Incorporated, Southside
Acquistion Corporation, Splitrock Holdings, Inc. and Splitrock Services, Inc.
depicting the merger of Southside Acquistion Corporation with and into Splitrock
Holdings, Inc.]
McLeodUSA and Splitrock plan to complete the merger promptly after the
stockholder meetings.
The merger agreement is included as Appendix A to this joint proxy
statement/prospectus. It is the legal document that governs the merger.
What Splitrock Stockholders Will Receive in the Merger (page 56)
If the reorganization and the merger are completed as proposed, the outstanding
shares of Splitrock common stock will be cancelled and Splitrock stockholders
will receive 0.5347 of a share of McLeodUSA Class A common stock for each share
of Splitrock common stock that the stockholder owns. A Splitrock stockholder
also will receive a cash payment for any fraction of a share of McLeodUSA Class
A common stock that the stockholder would otherwise be entitled to receive.
Options and Warrants (page 56)
The right to receive shares of Splitrock common stock pursuant to each
outstanding option and warrant to purchase shares of Splitrock common stock
will become the right to purchase a number of shares of McLeodUSA Class A
common stock equal to the number of shares of Splitrock common stock that were
subject to the option or warrant, multiplied by 0.5347 at an exercise price
equal to the current exercise price divided by 0.5347.
Exchange of Splitrock Stock Certificates (page 57)
After the merger occurs, McLeodUSA will send a letter of transmittal to
Splitrock stockholders that will provide instructions on the procedure for
exchanging their Splitrock stock certificates for McLeodUSA stock certificates.
Please do not send any stock certificates at this time.
No Appraisal Rights (page 54)
Under the Delaware General Corporation Law, neither Splitrock stockholders nor
McLeodUSA stockholders are entitled to appraisal rights in connection with any
matter to be considered at the special meetings.
What is Needed to Complete the Merger (page 67)
Several conditions must be satisfied before the merger will be completed. These
include:
. approval and adoption of the merger agreement by the Splitrock
stockholders
4
<PAGE>
. approval of the amendment to the certificate of incorporation of
McLeodUSA that will increase the number of authorized shares of
McLeodUSA Class A common
stock and the approval of the issuance of shares of McLeodUSA Class A
common stock in the merger by the McLeodUSA stockholders
. completion by Splitrock of the holding company reorganization
. receipt by Splitrock of an opinion of its tax counsel that for U.S.
federal income tax purposes, the reorganization and the merger are not
taxable to Splitrock or the Splitrock stockholders
. receipt by McLeodUSA of an opinion of its tax counsel that for U.S.
federal income tax purposes, the merger is not taxable to McLeodUSA or
Southside Acquisition Corporation
. other customary contractual conditions set forth in the merger agreement
If the law permits, McLeodUSA or Splitrock may each waive conditions for the
benefit of their company and stockholders and complete the merger even though
one or more of these conditions has not been met. We cannot assure you that the
conditions will be satisfied or waived or that the merger will occur.
Federal Income Tax Consequences (page 52)
One of the conditions to the consummation of the merger is that the exchange of
Splitrock common stock for McLeodUSA Class A common stock qualify as a tax-free
exchange of stock for U.S. federal income tax purposes. Splitrock stockholders,
however, will be taxed on any cash received for any fraction of a share.
Determining the actual tax consequences of the reorganization and the merger to
a Splitrock stockholder can be complicated. Such consequences will depend on
the stockholder's specific situation and on variables not within the control of
Splitrock or McLeodUSA. Splitrock stockholders should consult with their own
tax advisors for a full understanding of the tax consequences to them of the
reorganization and the merger.
Accounting Treatment (page 51)
McLeodUSA and Splitrock expect to account for the merger using the purchase
method of accounting.
Interests of the Splitrock Directors and Officers in the Merger (page 49)
Some of the Splitrock directors and officers have interests in the merger that
are different from, or in addition to, their interests as Splitrock
stockholders. These interests exist because of employment and other agreements
that the directors and officers have with Splitrock and rights that they have
under benefit and compensation plans. Roy A. Wilkens, a director of both
Splitrock and McLeodUSA, entered into an employment agreement with McLeodUSA on
January 7, 2000 and became the Chief Technology Officer of McLeodUSA. After the
merger, Mr. Wilkens will become the President and Chief Executive Officer of
Data Services operations of McLeodUSA. Other Splitrock officers or directors
may enter into employment, advisory or other agreements or arrangements with
McLeodUSA. The merger agreement requires McLeodUSA to indemnify directors and
officers of Splitrock for events occurring before the merger, including events
that are related to the merger.
Termination of the Merger Agreement (page 69)
McLeodUSA and Splitrock may mutually agree at any time to terminate the merger
agreement without completing the merger, even if the Splitrock stockholders
have approved it and the McLeodUSA stockholders have approved the amendment to
the McLeodUSA certificate of incorporation and the issuance of shares of
McLeodUSA Class A common stock in the merger. Also, either company may decide,
without the consent of the other, to terminate the merger agreement, subject to
a variety of conditions, in a number of circumstances. These circumstances
include, among others:
. either party breaches the merger agreement, which breaches cannot be
cured
5
<PAGE>
. any court or governmental entity issues a final order or judgment
preventing completion of the merger
. Splitrock stockholders do not approve the merger
. McLeodUSA stockholders do not approve either the amendment to the
certificate of incorporation increasing the number of authorized shares
of McLeodUSA Class A common stock or the issuance of shares of McLeodUSA
Class A common stock in the merger
. the merger has not been completed by July 30, 2000
In addition, McLeodUSA may terminate the merger agreement if the Splitrock
board of directors changes, in a manner adverse to McLeodUSA, its
recommendation of the merger. An adverse change would include the Splitrock
board of directors' withdrawing or qualifying its recommendation or changing
its recommendation in order to support another transaction. Splitrock may
similarly terminate the merger agreement if the McLeodUSA board of directors
changes its recommendation in favor of the amendment to the McLeodUSA
certificate of incorporation to increase the number of authorized shares of
McLeodUSA Class A common stock and the issuance of shares in the merger.
Splitrock agreed to pay McLeodUSA a $68 million termination fee if the merger
agreement is terminated under specified circumstances after a third party makes
a proposal to acquire Splitrock.
Stock Option Agreements (page 73)
In connection with the merger agreement, McLeodUSA and several stockholders of
Splitrock owning in the aggregate 28,908,037 shares of Splitrock common stock,
representing approximately 50.5% of the outstanding Splitrock common stock as
of the record date, entered into stock option agreements under which the
Splitrock stockholders granted to McLeodUSA an option to purchase their
Splitrock shares. The option is exercisable under several circumstances,
including those when Splitrock is required to pay to McLeodUSA the $68 million
termination fee. We have attached the form of this stock option agreement as an
appendix to this joint proxy statement/prospectus.
Board of Directors' Recommendations
McLeodUSA (page 41)
The McLeodUSA board of directors recommends that you vote "FOR" the proposal to
increase the number of authorized shares of McLeodUSA Class A common stock and
"FOR" the proposal to issue shares in the merger.
Splitrock (page 33)
The Splitrock board of directors recommends that you vote "FOR" the proposal to
approve and adopt the merger agreement.
Opinions of Financial Advisors
McLeodUSA (page 43)
Salomon Smith Barney delivered an opinion to the McLeodUSA board of directors
that, as of January 6, 2000, the exchange ratio to be paid in the merger was
fair to McLeodUSA from a financial point of view. We have attached this opinion
as an appendix to this joint proxy statement/prospectus.
Splitrock (page 35)
Credit Suisse First Boston delivered an opinion to the Splitrock board of
directors that, as of January 6, 2000, the exchange ratio to be received in the
merger was fair to the stockholders of Splitrock from a financial point of
view. We have attached this opinion as an appendix to this joint proxy
statement/prospectus.
Differences in the Rights of Stockholders (page 113)
When the reorganization and the merger are completed, Splitrock stockholders
will become stockholders of McLeodUSA. Splitrock stockholders' rights will be
governed by Delaware law and by the McLeodUSA certificate of incorporation and
bylaws, rather than by the Splitrock certificate of incorporation and bylaws.
6
<PAGE>
Recent Developments
McLeodUSA Fourth Quarter and Fiscal Year Results for 1999
On January 26, 2000, McLeodUSA reported results for its fourth quarter and
fiscal year 1999. Its revenues were $908.8 million for the year ended December
31, 1999, compared to $604.1 million for 1998. Competitive telecommunications
revenues, which include local and long distance and private line and data, grew
72% for the year. Loss per share for the year was ($1.61), compared to ($0.99)
for 1998. EBITDA, which represents earnings before interest, taxes,
depreciation and amortization, for the year was a positive $59.0 million,
compared to $20.0 million for 1998.
McLeodUSA reported fourth quarter revenues of $263.9 million, compared to
revenues of $165.5 million for the same quarter of 1998. Competitive
telecommunications revenues grew 94% over the total for the fourth quarter of
1998. Loss per share for the quarter was ($0.43), compared to ($0.25) for the
same quarter in 1998. EBITDA was a positive $24.0 million in the fourth
quarter, compared to $15.1 million in third quarter 1999 and $10.1 million for
fourth quarter 1998.
7
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
The information in the following unaudited table is based on historical
financial information included in the prior SEC filings of McLeodUSA, including
the McLeodUSA annual report on Form 10-K for the fiscal year ended December 31,
1998 and the report on Form 10-Q for the quarter ended September 30, 1999. 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." The audited
historical financial statements of McLeodUSA as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998 were
audited by Arthur Andersen LLP, independent public accountants.
The information in the following table reflects financial information for
the following companies McLeodUSA has 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. These acquisitions affect the
comparability of the financial data for the periods presented.
The pro forma information presented in the operations statement data and
other financial data in the table includes the operations of Ovation and
Splitrock as if they had been acquired at the beginning of the periods
presented and the as adjusted information in the balance sheet data in the
table includes the Ovation and Splitrock financial position as of the date
presented. The 1998 pro forma amounts include adjustments to the Splitrock 1998
historical financial statements to give effect to the July 1998 issuance by
Splitrock of $261 million of 11 3/4% senior notes as if the notes were issued
at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has issued:
<TABLE>
<CAPTION>
Description of Securities Principal Amount Date Issued
------------------------- ---------------- ------------------
<S> <C> <C>
10 1/2% senior discount notes due
March 1, 2007........................ $500 million March 4, 1997
9 1/4% senior notes due July 15,
2007................................. $225 million July 21, 1997
8 3/8% senior notes due March 15,
2008................................. $300 million March 10, 1998
9 1/2% senior notes due November 1,
2008................................. $300 million October 30, 1998
8 1/8% senior notes due February 15,
2009................................. $500 million February 22, 1999
Series A preferred stock.............. $287 million August 23, 1999
Series B preferred stock.............. $687 million September 15, 1999
Series C preferred stock.............. $313 million September 15, 1999
</TABLE>
The operations statement data and other financial data in the table include
the effects of the issuances beginning on the dates the securities were issued.
The balance sheet data in the table include the effects of these issuances at
the end of the periods presented. The pro forma information presented in the
operations statement data and other financial data in the table includes the
effects of the issuance of the 8 3/8% senior notes,
8
<PAGE>
the 9 1/2% senior notes and the 8 1/8% senior notes and the Series A, B and C
preferred stock as if they had occurred at the beginning of 1998.
On June 30, 1999, McLeodUSA announced that its 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
McLeodUSA Class A common stock for each share held. Distribution of the
additional shares took place on July 26, 1999. All information in the selected
consolidated financial data has been adjusted to reflect the two-for-one stock
split.
(table begins on the next page)
9
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- --------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operations Statement
Data:
Revenue................ $ 8,014 $ 28,998 $ 81,323 $267,886 $ 604,146 $ 688,792
-------- -------- -------- -------- --------- ---------
Operating expenses:
Cost of service....... 6,212 19,667 52,624 151,190 323,208 420,731
Selling, general and
administrative....... 12,373 18,054 46,044 148,158 260,931 280,810
Depreciation and
amortization......... 772 1,835 8,485 33,275 89,107 229,549
Other................. -- -- 2,380 4,632 5,575 5,575
-------- -------- -------- -------- --------- ---------
Total operating
expenses ............ 19,357 39,556 109,533 337,255 678,821 936,665
Operating loss......... (11,343) (10,558) (28,210) (69,369) (74,675) (247,873)
Interest Income
(expense), net........ (73) (771) 5,369 (11,967) (52,234) (152,294)
Other income........... -- -- 495 1,426 1,997 1,997
Income taxes........... -- -- -- -- -- --
-------- -------- -------- -------- --------- ---------
Net loss............... (11,416) (11,329) (22,346) (79,910) (124,912) (398,170)
Preferred stock
dividends............. -- -- -- -- -- (54,406)
-------- -------- -------- -------- --------- ---------
Loss applicable to
common stock.......... $(11,416) $(11,329) $(22,346) $(79,910) $(124,912) $(452,576)
======== ======== ======== ======== ========= =========
Loss per common share.. $ (.27) $ (.20) $ (.28) $ (.73) $ (.99) $ (2.71)
======== ======== ======== ======== ========= =========
Weighted average common
shares outstanding.... 42,928 56,008 81,012 109,948 125,614 167,302
======== ======== ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1998 1999 1999
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operations Statement Data:
Revenue................................... $438,642 $ 644,875 $ 722,515
-------- --------- ---------
Operating expenses:
Cost of service.......................... 239,195 327,438 420,281
Selling, general and administrative...... 189,579 282,385 305,673
Depreciation and amortization............ 63,663 130,583 235,506
Other.................................... 5,575 -- --
-------- --------- ---------
Total operating expenses................. 498,012 740,406 961,460
Operating loss............................ (59,370) (95,531) (238,945)
Interest Income (expense), net............ (35,519) (79,326) (105,806)
Other income.............................. 1,789 7,555 7,555
Income taxes.............................. -- -- --
-------- --------- ---------
Net loss.................................. (93,100) (167,302) (337,196)
Preferred stock dividends................. -- (4,125) (40,773)
-------- --------- ---------
Loss applicable to common stock........... $(93,100) $(171,427) $(377,969)
======== ========= =========
Loss per common share..................... $ (.74) $ (1.18) $ (2.11)
======== ========= =========
Weighted average common shares
outstanding.............................. 125,240 144,982 179,207
======== ========= =========
</TABLE>
10
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30, 1999
----------------------------------------------- -----------------------
1994 1995 1996 1997 1998 Actual Pro Forma
------- ------- -------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets......... $ 4,862 $ 8,507 $224,401 $ 517,869 $ 793,192 $1,751,588 $1,893,699
Working capital
(deficit)............. $ 1,659 $(1,208) $185,968 $ 378,617 $ 613,236 $1,479,782 $1,564,836
Property and equipment,
net................... $ 4,716 $16,119 $ 92,123 $ 373,804 $ 629,746 $1,094,965 $1,183,701
Total assets........... $10,687 $28,986 $452,994 $1,345,652 $1,925,197 $4,173,118 $6,404,026
Long-term debt......... $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,801,185 $2,059,525
Redeemable convertible
preferred stock....... $ -- $ -- $ -- $ -- $ -- $1,000,000 $1,000,000
Stockholders' equity... $ 3,291 $14,958 $403,429 $ 559,379 $ 462,806 $1,065,438 $2,978,655
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- ------- -------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures
Property, plant and
equipment............ $ 3,393 $ 5,272 $ 70,290 $151,280 $289,923 $ 379,778
Business
acquisitions......... $ -- $ 9,425 $103,492 $449,857 $ 49,737 $2,700,983
EBITDA(1).............. $(10,571) $(8,723) $(17,345) $(31,462) $ 20,007 $ (12,749)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1998 1999 1999
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures
Property, plant and equipment............ $204,700 $394,100 $ 448,780
Business acquisitions.................... $ 64,400 $677,400 $2,884,617
EBITDA(1)................................. $ 9,868 $ 35,052 $ (3,439)
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
11
<PAGE>
Selected Financial Data of Splitrock
(In thousands, except per share data)
The information in the following table is based on historical financial
information included in the prior SEC filings of Splitrock, including the
Splitrock registration statement on Form S-1 filed on June 3, 1999, as amended,
and the Splitrock quarterly report on Form 10-Q for the quarter ended September
30, 1999. The following 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." The audited
historical financial statements of Splitrock for the period from inception
(March 5, 1997) to December 31, 1997 and for the year ended December 31, 1998
were audited by PricewaterhouseCoopers LLP. The unaudited historical financial
statements of Splitrock for the nine months ended September 30, 1998 and 1999
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such unaudited interim periods.
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997) Nine Months Ended
through Year Ended September 30,
December 31, December 31, ------------------
1997 1998 1998 1999
--------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.................... $ 22,708 $ 63,611 $ 47,592 $ 57,944
Operating expenses:
Cost of service........... 28,166 91,204 63,535 85,505
Selling, general and
administrative........... 1,276 6,390 4,169 12,408
Depreciation and
amortization............. 3,500 13,850 7,711 19,276
-------- -------- -------- --------
Total operating
expenses............... 32,942 111,444 75,415 117,189
-------- -------- -------- --------
Operating loss.............. (10,234) (47,833) (27,823) (59,245)
Interest income (expense),
net........................ 113 (9,997) (4,289) (18,135)
Income taxes................ -- -- -- --
-------- -------- -------- --------
Net loss.................... $(10,121) $(57,830) $(32,112) $(77,380)
======== ======== ======== ========
Loss per common share....... $ (0.42) $ (1.30) $ (0.74) $ (1.59)
======== ======== ======== ========
Weighted average common
shares outstanding......... 24,110 44,389 43,636 48,805
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 7,710 $ 28,330 $ 91,544
Unrestricted investments--short term.......... -- 120,475 33,745
Restricted investments--short term(1)......... 3,472 39,476 25,870
Property and equipment, net................... 38,504 73,899 88,736
Restricted investments--long-term(1).......... -- 19,001 4,038
Total assets.................................. 54,388 296,141 283,276
Long term debt................................ -- 258,217 258,340
Total liabilities............................. 33,981 326,432 302,691
Stockholders' equity (deficit)................ 20,407 (30,291) (19,415)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997) Nine Months Ended
through Year Ended September 30,
December 31, December 31, ------------------
1997 1998 1998 1999
--------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures......... $ 16,969 $ 45,261 $ 17,120 $ 32,683
EBITDA(2).................... (6,734) (33,983) (20,112) (39,969)
Cash provided by (used in):
Operating activities....... (2,233) (735) 2,183 (79,110)
Investing activities....... (17,198) (169,512) (20,795) 60,966
Financing activities....... 27,141 190,867 193,224 81,358
</TABLE>
- --------
(1) Restricted investments as of December 31, 1998 and September 30, 1999
represent escrowed funds that, together with interest received on those
funds, will be sufficient to pay, when due, the semi-annual interest
payments through July 15, 2000 on the outstanding Splitrock 11 3/4% senior
notes due 2008.
(2) EBITDA is defined as net loss plus net interest expense, provision for
income taxes, depreciation and amortization. Splitrock has included EBITDA
data because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity. EBITDA
is not necessarily comparable with similarly titled measures reported by
other companies.
13
<PAGE>
Comparative Per Share Data
The following table summarizes per share information for McLeodUSA and
Splitrock on a historical, pro forma combined, and equivalent pro forma basis.
The earnings per share were calculated using income (loss) from continuing
operations. The pro forma earnings per share amounts do not include any
adjustments to reflect potential expense reductions or revenue enhancements
that may result from the merger or the effect of repurchases of McLeodUSA Class
A common stock or Splitrock common stock after the stated periods. The pro
forma data do not necessarily indicate the results of future operations or the
actual results that would have occurred had the reorganization and the merger
occurred at the beginning of the periods presented. The pro forma financial
data have been included in accordance with the rules of the SEC and are
provided for comparative purposes only. Options and warrants are not included
in the computation of diluted earnings per share for each company because the
effect is anti-dilutive.
The McLeodUSA pro forma earnings per share data include the adjusted
operations of Splitrock for the year ended December 31, 1998 and the nine
months ended September 30, 1999 and adjustments attributable to the acquisition
of Ovation by McLeodUSA, the issuance by McLeodUSA of the 8 3/8% senior notes,
the 9 1/2% senior notes and the 8 1/8% senior notes and the issuance by
McLeodUSA of its Series A, B and C preferred stock, as if the acquisitions and
issuances had occurred on January 1, 1998. The McLeodUSA "book value per share
at period end" data give effect to the acquisition of Ovation and the
reorganization and merger of Splitrock as if they had occurred at the end of
the applicable periods.
The Splitrock "equivalent" pro forma amounts are calculated by multiplying
the unaudited McLeodUSA pro forma per share amounts by 0.5347. This conversion
ratio represents the number of shares of McLeodUSA Class A common stock that
Splitrock stockholders would have received in exchange for each share of
Splitrock common stock if the reorganization and the merger had been completed
on January 6, 2000.
<TABLE>
<CAPTION>
As of or for the As of or for the
year ended nine months ended
December 31, 1998 September 30, 1999
----------------- ------------------
(unaudited) (unaudited)
<S> <C> <C>
McLeodUSA Class A Common Stock
Loss attributable to shares of common
stock
Basic earnings per share
Historical........................... $(0.99) $(1.18)
Pro forma for the merger............. (2.71) (2.11)
Diluted earnings per share
Historical........................... (0.99) (1.18)
Pro forma for the merger............. (2.71) (2.11)
Book value per share at period end
Historical........................... 3.63 5.02
Pro forma for the merger............. 15.01 14.51
Splitrock Common Stock
Loss attributable to shares of common
stock
Basic earnings per share
Historical........................... $(1.30) $(1.59)
Equivalent pro forma................. (1.45) (1.13)
Diluted earnings per share
Historical........................... (1.30) (1.59)
Equivalent pro forma................. (1.45) (1.13)
Book value per share at period end
Historical........................... (1.22) (.34)
Equivalent pro forma................. 8.03 7.76
</TABLE>
14
<PAGE>
Comparative Market Data
McLeodUSA. McLeodUSA Class A common stock is, and the shares of McLeodUSA
Class A common stock to be issued to Splitrock stockholders are expected to be,
listed on The Nasdaq Stock Market and traded under the symbol "MCLD." The
following table sets forth for the periods indicated the high and low sales
price per share of McLeodUSA Class A common stock as reported by The Nasdaq
Stock Market. Prices per share of McLeodUSA Class A common stock take into
account the two-for-one stock split in the form of a stock dividend effective
July 26, 1999.
Splitrock. Splitrock common stock is listed on The Nasdaq Stock Market and
traded under the symbol "SPLT." Splitrock common stock has been quoted on The
Nasdaq Stock Market since the initial public offering of Splitrock common stock
on August 3, 1999. Before August 3, 1999, no established public trading market
for Splitrock common stock existed. The following table sets forth for the
periods indicated the high and low sales price per share of Splitrock common
stock as reported by The Nasdaq Stock Market.
<TABLE>
<CAPTION>
McLeodUSA Splitrock
--------------- ---------------
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
1997
First Quarter................................. $14.375 $ 8.688 -- --
Second Quarter................................ 17.125 8.188 -- --
Third Quarter................................. 20.000 14.313 -- --
Fourth Quarter................................ 20.875 16.000 -- --
1998
First Quarter................................. $23.188 $15.250 -- --
Second Quarter................................ 24.156 19.000 -- --
Third Quarter................................. 20.063 10.688 -- --
Fourth Quarter................................ 19.250 7.625 -- --
1999
First Quarter................................. $22.125 $15.188 $ -- $ --
Second Quarter................................ 30.938 21.188 -- --
Third Quarter................................. 42.750 22.625 17.125 8.938
Fourth Quarter................................ 63.375 36.625 25.000 14.500
2000
First Quarter (through Feb. 11, 2000)......... $86.563 $49.500 $44.188 $19.125
</TABLE>
On January 6, 2000, the last full trading day before the public announcement
of the proposed merger, the closing price of McLeodUSA Class A common stock was
$52.562 per share and the closing price of Splitrock common stock was $22.125
per share. On February 11, 2000, the last trading day for which information was
available prior to the date of this joint proxy statement/prospectus, the
closing price reported for McLeodUSA Class A common stock was $68.75 per share
and the closing price reported for Splitrock common stock was $35.75 per share.
As of February 8, 2000, there were 4,542 holders of record of McLeodUSA
Class A common stock and there were approximately 181 holders of record of
Splitrock common stock.
Dividends. McLeodUSA has never declared or paid a cash dividend with respect
to McLeodUSA Class A common stock, and Splitrock has never declared or paid a
cash dividend with respect to its common stock. McLeodUSA does not anticipate
paying cash dividends on McLeodUSA Class A common stock in the foreseeable
future. The terms of some debt instruments of both McLeodUSA and Splitrock
limit each company's ability to pay cash dividends.
15
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors relating to the
merger and to ownership of McLeodUSA Class A common stock. You should also
consider the other information in this joint proxy statement/prospectus,
including the matters addressed in "Information in this Document" and in the
other documents considered a part of this joint proxy statement/prospectus.
See "Where You Can Find More Information."
The Value of the McLeodUSA Class A Common Stock Splitrock Stockholders Will
Receive in the Merger Will Depend on its Market Price at the Time of the
Merger.
If the market price of McLeodUSA Class A common stock drops, the value of
the McLeodUSA Class A common stock a Splitrock stockholder will receive as a
result of the reorganization and the merger will also drop, since the formula
for converting Splitrock common stock into McLeodUSA Class A common stock uses
a fixed exchange ratio of 0.5347 of a share of McLeodUSA Class A common stock
for each share of Splitrock common stock. See "Terms of the Merger Agreement
and Related Transactions--Conversion of Splitrock Common Stock; Treatment of
Options and Warrants."
Directors and Officers of Splitrock May Have Conflicts of Interest that
Influence Their Decision to Approve the Merger.
You should be aware of potential conflicts of interest of, and the benefits
available to, directors and executive officers of Splitrock when considering
Splitrock's board's recommendation of the merger agreement. As discussed below
under "Interests of Splitrock Management in the Merger," the directors and
executive officers of Splitrock have interests in the merger that are in
addition to, or different from, their interests as Splitrock stockholders.
These interests include:
. Options. Under the terms of Splitrock's 1997 and 1999 Stock Incentive
Plans, on the consummation of the reorganization and the merger, a total
of 1,225,062 outstanding, non-vested options to purchase Splitrock
common stock held by Splitrock directors and executive officers will
vest and become immediately exercisable. McLeodUSA will issue substitute
stock options to purchase McLeodUSA Class A common stock in replacement
of all unexercised Splitrock stock options outstanding at the effective
time of the merger as described under "Terms of the Merger Agreement and
related Transactions--Conversion of Splitrock Common Stock; Treatment of
Options and Warrants."
. Current Employment Agreements. Splitrock has employment agreements with
William R. Wilson, J. Robert Fugate and David M. Boatner, each of whom
is an executive officer of Splitrock. Under these agreements, if the
executive's employment with Splitrock is terminated by Splitrock without
cause, as defined in the agreements, the executives are entitled to
receive severance compensation and benefits as described under "Terms of
the Merger Agreement and Related Transactions--Interests of Splitrock
Management in the Merger--Current Employment Agreements."
. Directors' and Officers' Insurance; Indemnification of Splitrock's
Directors and Officers. Under the merger agreement, present and former
directors and officers of Splitrock have significant rights to
directors' and officers' insurance coverage and to indemnification with
respect to acts and omissions in their capacities as directors and
officers of Splitrock.
. Excise Tax Agreements. Splitrock has entered into excise tax agreements
with some of its executive officers. Under these agreements, the
executives may be entitled to receive payments as described under "Terms
of the Merger Agreement and Related Transactions--Interests of Splitrock
Management in the Merger--Excise Tax Agreements."
16
<PAGE>
The Termination Fee and the Stock Option Agreements May Discourage Other
Companies from Trying to Acquire Splitrock.
In the merger agreement, Splitrock agreed to pay a termination fee to
McLeodUSA in specified circumstances, including where a third party acquires or
seeks to acquire Splitrock. In the stock option agreements, several
stockholders of Splitrock beneficially owning an aggregate of 50.5% of the
Splitrock common stock outstanding on the record date granted McLeodUSA an
option to purchase their shares of Splitrock common stock. These options are
exercisable under similar circumstances as the payment of the termination fee.
These
agreements could discourage other companies from trying to acquire Splitrock
even though those other companies might be willing to offer greater value to
Splitrock stockholders than McLeodUSA has offered in the merger agreement. In
addition, payment of the termination fee could have an adverse effect on
Splitrock's financial condition.
McLeodUSA May Not Be Able to Successfully Integrate Acquired Companies,
including Splitrock, into its Operations, Which Could Slow its Growth.
The integration of acquired companies, including the proposed acquisition of
Splitrock, into the operations of McLeodUSA involves a number of risks,
including:
. difficulty integrating operations and personnel
. diversion of management attention
. potential disruption of ongoing business
. inability to retain key personnel
. inability to successfully incorporate acquired assets and rights into
the service offerings of McLeodUSA
. 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 the merger or other similar transactions could slow the growth
of McLeodUSA or lower the quality of its services, which could reduce customer
demand and have a negative impact upon the price of the McLeodUSA Class A
common stock that Splitrock stockholders receive in the merger.
Continued Rapid Growth of the McLeodUSA Network, Services and Subscribers Could
Be Slowed if McLeodUSA Cannot Manage this Growth.
McLeodUSA has rapidly expanded and developed its network, services and
subscribers. This has placed and will continue to place, in part as a result of
the merger, significant demands on its management, operational and financial
systems and procedures and controls. McLeodUSA may not be able to manage its
anticipated growth effectively, which would harm its business, results of
operations and financial condition. Further expansion and development will
depend on a number of factors, including:
. cooperation of existing local telephone companies
. regulatory and governmental developments
. changes in the competitive climate in which McLeodUSA operates
. 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
McLeodUSA will need to continue to improve its operational and financial
systems and its procedures and controls as it grows. McLeodUSA must also
develop, train and manage its employees.
McLeodUSA Expects to Incur Significant Losses Over the Next Several Years.
If McLeodUSA does not become profitable in the future, the value of its
shares may fall and it could have difficulty obtaining funds to continue its
operations. McLeodUSA has incurred net losses
17
<PAGE>
every year since it began operations. Since January 1, 1995, McLeodUSA net
losses applicable to common stock have been as follows:
<TABLE>
<CAPTION>
Period Amount
- ------ --------------
<S> <C>
1995............................................................ $ 11.3 million
1996............................................................ $ 22.3 million
1997............................................................ $ 79.9 million
1998............................................................ $124.9 million
First 9 months of 1999.......................................... $171.4 million
</TABLE>
McLeodUSA expects to incur significant operating losses during the next
several years while it develops its businesses, expands its fiber optic
communications network and develops wireless services.
Splitrock has also incurred net operating losses since its inception and
expects to continue to do so for the foreseeable future.
Failure to Raise Necessary Capital Could Restrict the Ability of McLeodUSA to
Develop its Network and Services and Engage in Strategic Acquisitions.
McLeodUSA needs significant capital to continue to expand its operations,
facilities, network and services including, following the merger, the expansion
and operation of Splitrock. McLeodUSA cannot assure you that its capital
resources will permit it to fund its planned network deployment and operations
or achieve operating profitability. Failure to generate or raise sufficient
funds may require McLeodUSA to delay or abandon some of its expansion plans or
expenditures, which could harm its business and competitive position.
As of January 7, 2000, based on the combined McLeodUSA and Splitrock
business plan, capital requirements and growth projections as of that date,
McLeodUSA estimated that it would require approximately $2.5 billion through
2002 to fund its planned capital expenditures and operating expenses. The
estimated aggregate capital requirements of McLeodUSA include the projected
costs of:
. expanding its fiber optic communications network, including national and
intra-city fiber optic networks
. adding voice and ATM switches
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate expenses
. completing recent acquisitions, including the merger
. constructing, acquiring, developing or improving telecommunications
assets
The McLeodUSA estimate of its future capital requirements is a "forward-
looking statement" within the meaning of the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. The actual amount and timing
of the future capital requirements of McLeodUSA may differ substantially from
its estimate due to factors such as:
. strategic acquisition costs and effects of acquisitions on its business
plan, capital requirements and growth projections
. unforeseen delays
. cost overruns
. engineering design changes
. changes in demand for its services
. regulatory, technological or competitive developments
. new opportunities
McLeodUSA also expects to evaluate potential acquisitions, joint ventures
and strategic alliances on an ongoing basis. McLeodUSA may require additional
financing if it pursues any of these opportunities.
The projected additional funding need of McLeodUSA is approximately $900
million through 2002 based on the difference between existing cash balances and
the combined McLeodUSA and Splitrock business plan, capital requirements and
growth projections. This projected additional funding need assumes that the
Splitrock 11 3/4% senior notes due 2008, which are redeemable by the holders
upon a change of control, will remain outstanding at the completion of this
merger. McLeodUSA may meet any additional capital needs by issuing additional
debt or equity securities or borrowing funds from one or more lenders.
McLeodUSA cannot assure you that it will have timely access to additional
financing sources on acceptable terms. If it does not, McLeodUSA may
18
<PAGE>
not be able to expand its markets, operations, facilities, network and services
through acquisitions as it intends. See "Information About McLeodUSA and
Southside Acquisition Corporation."
The High Level of Debt of McLeodUSA Could Limit its Flexibility in Responding
to Business Developments and Put it at a Competitive Disadvantage.
McLeodUSA has substantial debt, which could adversely affect it in a number
of ways, including:
. limiting its ability to obtain necessary financing in the future
. limiting its flexibility to plan for, or react to, changes in its
business
. requiring it to use a substantial portion of its cash flow from
operations to pay debt rather than for other purposes, such as working
capital or capital expenditures
. making it more highly leveraged than some of its competitors, which may
place it at a competitive disadvantage
. making it more vulnerable to a downturn in its business
As of September 30, 1999, McLeodUSA had $1.8 billion of long-term debt, $1.0
billion of redeemable convertible preferred stock and $1.1 billion of
stockholders' equity. As a result, McLeodUSA expects its fixed charges to
exceed its earnings for the foreseeable future.
Covenants in Debt Instruments Restrict the Capacity of McLeodUSA to Borrow and
Invest, Which Could Impair its Ability to Expand or Finance its Operations.
The indentures governing the terms of the long-term debt of McLeodUSA impose
operating and financial restrictions that limit the discretion of McLeodUSA on
some business matters, which could make it more difficult for McLeodUSA to
expand, finance its operations or engage in other business activities that may
be in its interest. These restrictions limit or prohibit the ability of
McLeodUSA to:
. incur additional debt
. pay dividends or make other distributions
. make investments or other restricted payments
. enter into sale and leaseback transactions
. pledge or mortgage assets
. enter into transactions with related persons
. sell assets
. consolidate, merge or sell all or substantially all of its assets
If McLeodUSA fails to comply with these restrictions, all of the long-term
debt of McLeodUSA could become immediately due and payable.
The Ability of McLeodUSA to Pay Cash Dividends is Restricted.
McLeodUSA has never paid any cash dividends on shares of its Class A common
stock. McLeodUSA does not anticipate paying any cash dividends on shares of its
Class A common stock for the foreseeable future. The indentures governing the
debt of McLeodUSA prohibit McLeodUSA from paying cash dividends. You should
therefore not expect that cash dividends will be paid on the shares of
McLeodUSA Class A common stock you will receive in the merger. In addition, you
should be aware that the shares of Series A preferred stock and Series B
preferred stock of McLeodUSA carry rights to receive a cumulative dividend
before any cash dividend may be paid on the McLeodUSA Class A common stock.
The Dependence of McLeodUSA on Regional Bell Operating Companies to Provide
Most of its Communications Services Could Make it Harder for McLeodUSA to Offer
its Services at a Profit.
McLeodUSA depends on the regional Bell operating companies to provide most
of its core local and some of its long distance services. Today, without using
the communications facilities of these companies, McLeodUSA could not provide
bundled local and long distance services to most of its customers. Because of
this dependence, the McLeodUSA communications services are highly susceptible
to changes in the conditions for access to these facilities and McLeodUSA may
have difficulty offering its services at profitable and competitive rates as a
result.
U S WEST Communications, Inc., Ameritech Corporation and Southwestern Bell
Telephone
19
<PAGE>
Company are the primary suppliers to McLeodUSA of local lines to its customers
and communications services that allow it to transfer and connect calls. Their
communications facilities allow McLeodUSA to provide (1) local service, (2)
long distance service and (3) private lines dedicated to its customers' use. If
these or other companies deny or limit access by McLeodUSA to their
communications network elements or wholesale services, McLeodUSA may not be
able to offer its communications services at profitable rates.
The McLeodUSA plan to provide local service using its own communications
network equipment also depends on the regional Bell operating companies. In
order to interconnect its network equipment and other communications facilities
to network elements controlled by the regional Bell operating companies,
McLeodUSA 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 the ability of
McLeodUSA to obtain interconnection agreements on acceptable terms. McLeodUSA
cannot assure Splitrock stockholders that it will succeed in obtaining
interconnection agreements on terms that would permit it to offer local
services using its own communications network facilities at profitable and
competitive rates.
Actions by U S WEST May Make it More Difficult for McLeodUSA to Offer its
Communications Services.
U S WEST has introduced several measures that may make it more difficult for
McLeodUSA to offer its 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 McLeodUSA to aggregate lines, have control over
several characteristics of those lines and provide a set of standard features
on those lines. McLeodUSA uses U S WEST's Centrex services to provide most of
its 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 the costs
incurred by McLeodUSA in providing communications services in those states.
McLeodUSA has challenged or is challenging these actions by U S WEST before
the FCC or applicable state public utility commissions. McLeodUSA cannot assure
you it will succeed in its challenges to these or other actions by U S WEST
that would prevent or deter McLeodUSA from using U S WEST's Centrex service or
communications network elements. If U S WEST successfully withdraws or limits
access by McLeodUSA to Centrex services in any jurisdiction, McLeodUSA may not
be able to offer communications services in that jurisdiction, which could harm
its business.
McLeodUSA anticipates that U S WEST will also pursue legislation in states
within the McLeodUSA target market area to reduce state regulatory oversight
over its rates and operations. If adopted, these initiatives could make it more
difficult for McLeodUSA to challenge U S WEST's actions in the future.
Competition in the Communications Services Industry Could Cause McLeodUSA to
Lose Customers and Revenue and Could Make it More Difficult for McLeodUSA to
Enter New Markets.
McLeodUSA faces intense competition in all of its markets. This competition
could result in loss of customers and lower revenue for McLeodUSA. It could
also make it more difficult for McLeodUSA 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
various locations.
The McLeodUSA local and long distance services also compete with the
services of other communications services companies competing with the existing
local telephone companies in some markets.
Other competitors may include cable television companies, providers of
communications network facilities dedicated to particular customers,
20
<PAGE>
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 McLeodUSA focuses its
sales efforts, which may create downward pressure on the prices for our
services and negatively impact our returns. Many of the existing and potential
competitors of McLeodUSA have financial and other resources far greater than
those of McLeodUSA. In addition, the trend toward mergers and strategic
alliances in the communications industry may strengthen some of the competitors
of McLeodUSA and could put McLeodUSA at a significant competitive disadvantage.
McLeodUSA May Not Succeed in Developing or Making a Profit from Wireless
Services.
The McLeodUSA plan to offer wireless services involves a high degree of risk
and will impose significant demands on the management and financial resources
of McLeodUSA. Developing wireless services may require McLeodUSA 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. McLeodUSA may not succeed in developing wireless
services. Even if McLeodUSA spends substantial amounts to develop wireless
services, McLeodUSA may not make a profit from wireless operations.
The ability of McLeodUSA to successfully offer wireless services will also
depend on a number of factors beyond its 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 McLeodUSA chooses for its wireless services
Competition in the Wireless Telecommunications Industry Could Make it Harder
for McLeodUSA Successfully to Offer Wireless Services.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it harder for
McLeodUSA to gain a share of the wireless communications market. McLeodUSA
expects up to eight wireless competitors in each of its target wireless
markets. McLeodUSA could face additional competition from mobile satellite
services.
Many of the potential wireless competitors of McLeodUSA have financial and
other resources far greater than those of McLeodUSA 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 McLeodUSA offers only regional wireless
services.
The Success of the Communications Services of McLeodUSA Will Depend on the
Ability of McLeodUSA to Keep Pace with Rapid Technological Changes in its
Industry.
Communications technology is changing rapidly. These changes influence the
demand for the services of McLeodUSA. McLeodUSA needs 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 McLeodUSA can
continue to increase its revenues and number of subscribers and remain
competitive.
The Loss of Key Personnel Could Weaken the Technical and Operational Expertise
of McLeodUSA, Delay its Introduction of New Services or Entry into New Markets
and Lower the Quality of its Service.
McLeodUSA may not be able to attract, develop, motivate and retain
experienced and innovative personnel. There is intense competition for
qualified personnel in the McLeodUSA lines of business. The loss of the
services of key personnel, or the inability to attract additional qualified
personnel, could cause McLeodUSA to make less successful strategic decisions,
which could hinder
21
<PAGE>
the introduction of new services or the entry into new markets. McLeodUSA could
also be less prepared for technological or marketing problems, which could
reduce its ability to serve its customers and lower the quality of its
services. As a result, the financial condition of McLeodUSA could be adversely
affected.
The future success of McLeodUSA depends on the continued employment of its
senior management team, particularly Clark E. McLeod, the Chairman and Chief
Executive Officer of McLeodUSA, Stephen C. Gray, the President and Chief
Executive Officer of the Local Services operations of McLeodUSA, and Roy A.
Wilkens, the Chief Technology Officer of McLeodUSA, who will become the
President and Chief Executive Officer of the Data Services operations of
McLeodUSA after the merger.
Failure to Obtain and Maintain Necessary Permits and Rights-of-Way Could Delay
Installation of McLeodUSA Networks and Interfere with its Operations.
To obtain access to rights-of-way needed to install its fiber optic cable,
McLeodUSA 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 planned McLeodUSA network expansion,
interfere with its operations and harm its business. For example, if McLeodUSA
loses access to a right-of-way, it may need to spend significant sums to remove
and relocate its facilities.
Government Regulation May Increase the Cost to McLeodUSA of Providing Services,
Slow its Expansion into New Markets and Subject its Services to Additional
Competitive Pressures.
McLeodUSA facilities and services are subject to federal, state and local
regulation. The time and expense of complying with these regulations could slow
down the expansion by McLeodUSA into new markets, increase its costs of
providing services and subject it 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
McLeodUSA with opportunities to enter local telephone markets, it also provides
important benefits to the existing local telephone companies, such as the
ability, under specified conditions, to provide out-of-region long distance
service to customers in their respective regions. In addition, McLeodUSA needs
to obtain and maintain licenses, permits and other regulatory approvals in
connection with some of its services. Any of the following could harm the
business of McLeodUSA:
. 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
Management and Principal Stockholders of McLeodUSA Have Significant Ownership
of McLeodUSA and May Have Different Interests Than Those of Other Stockholders.
As of the record date, Alliant Energy Corporation, M/C Investors L.L.C.,
Media/Communications Partners III Limited Partnership, Richard and Gail Lumpkin
and various trusts for the benefit of their family, Clark and Mary McLeod, and
the directors and executive officers of McLeodUSA beneficially owned
approximately 32% of the outstanding McLeodUSA Class A common stock. These
stockholders may be able to control management policy and many 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 other stockholders of McLeodUSA. For example, the fact that
these stockholders hold so much McLeodUSA Class A common stock could make it
more difficult for a third party to acquire McLeodUSA. You should expect these
stockholders to resolve any conflicts in their favor.
22
<PAGE>
Preferred Stockholders May Have Competing Interests.
Holders of McLeodUSA preferred stock have the ability to convert their
shares into over 37 million shares of McLeodUSA Class A common stock. Potential
conflicts of interest may arise between holders of McLeodUSA Class A common
stock and holders of McLeodUSA preferred stock with respect to, among other
things, the payment of dividends, conversion rights, asset dispositions or
liquidation matters, and operation and financial decisions of the McLeodUSA
board of directors. In addition, the holders of McLeodUSA preferred stock have
class voting rights on specified actions requiring McLeodUSA stockholder
approval.
Computer Systems May Malfunction and Interrupt McLeodUSA Services if McLeodUSA
and its Suppliers Have Year 2000 Issues.
McLeodUSA and its major suppliers of communications services and network
elements rely greatly on computer systems and other technological devices.
These may not be capable of recognizing dates during the year 2000. This
problem could cause any or all of the McLeodUSA systems or services to
malfunction or fail. If McLeodUSA, its major vendors, its material service
providers or its customers have not adequately addressed year 2000 issues in a
timely manner, the McLeodUSA business, results of operations and financial
condition could be adversely affected.
Secondary Sales of McLeodUSA Class A Common Stock in the Public Market Could
Adversely Affect its Stock Price.
The market price of McLeodUSA Class A common stock may fluctuate or decline
significantly in the future as a consequence of sales by either existing
holders of McLeodUSA Class A common stock or existing holders of McLeodUSA
preferred stock who convert their shares into shares of McLeodUSA Class A
common stock.
As of December 31, 1999, there were outstanding:
. 157,587,012 million shares of McLeodUSA Class A common stock
. 1,150,000 shares of McLeodUSA Series A preferred stock convertible into
9.9 million shares of McLeodUSA Class A common stock
. 400,000 shares of McLeodUSA Series B and Series C preferred stock
convertible into 27.4 million shares of McLeodUSA Class A common stock,
all of which are held by three partnerships affiliated with Forstmann
Little & Co.
. options to purchase 35,070,056 million shares of McLeodUSA Class A
common stock
. 52,672,934 million shares of McLeodUSA Class A common stock owned by
Alliant Energy, M/C Investors, Media/Communications Partners III,
Richard and Gail Lumpkin and various trusts for the benefit of their
family, Clark and Mary McLeod, and the directors and executive officers
of McLeodUSA, 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
. options held by Alliant Energy to purchase 2,601,376 shares of McLeodUSA
Class B common stock convertible into 2,601,376 shares of McLeodUSA
Class A common stock
After the merger, an additional 30.5 million shares of McLeodUSA Class A
common stock issued to the former stockholders of Splitrock will be
outstanding, as well as options and warrants to purchase an additional 2.8
million shares of McLeodUSA Class A common stock. These options and warrants
will be fully exercisable upon consummation of the merger.
23
<PAGE>
FORWARD LOOKING STATEMENTS
This joint proxy statement/prospectus and the information incorporated by
reference in it include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. McLeodUSA and Splitrock 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 including the
merger of Splitrock into a subsidiary of McLeodUSA, to realize anticipated cost
savings and other benefits from these 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, stockholders of McLeodUSA
and Splitrock can identify these statements by our use of forward-looking words
such as "may," "will," "should," "anticipate," "estimate," "expect," "plan,"
"believe," "predict," "potential," "project" or "intend." Stockholders of
McLeodUSA and Splitrock 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 joint proxy statement/prospectus
under the caption "Risk Factors" as well as those discussed in the Splitrock
registration statement on Form S-1, filed on June 3, 1999, as amended, 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.
24
<PAGE>
THE McLEODUSA SPECIAL MEETING
This joint proxy statement/prospectus is first being mailed or delivered by
McLeodUSA to its stockholders on or about February 17, 2000, in connection with
the solicitation of proxies by the McLeodUSA board of directors for use at the
McLeodUSA special meeting and at any adjournments or postponements of the
special meeting. You should read this document carefully before voting your
shares.
Date, Time and Place; Matters to Be Considered
The McLeodUSA special meeting is scheduled to be held on March 30, 2000 at
9:00 a.m., local time, at McLeodUSA Technology Park, Bldg. 2, 6400 C Street SW,
Cedar Rapids, Iowa. At the McLeodUSA special meeting, McLeodUSA stockholders
will be asked to consider and vote upon:
(1) a proposal to amend the certificate of incorporation of McLeodUSA to
increase the number of authorized shares of McLeodUSA Class A common stock
to 1,000,000,000 from 250,000,000, and
(2) a proposal to approve the issuance of shares of McLeodUSA Class A
common stock pursuant to the Amended and Restated Agreement and Plan of
Merger by and among McLeodUSA Incorporated, Southside Acquisition
Corporation, a wholly owned subsidiary of McLeodUSA, Splitrock Services,
Inc., Splitrock Holdings, Inc., a wholly owned subsidiary of Splitrock
Services, Inc., and Splitrock Merger Sub, Inc., a wholly owned subsidiary
of Splitrock Holdings, Inc., dated as of February 11, 2000.
The approval of both proposals is required in order for McLeodUSA to
consummate the merger.
For more information regarding the proposals described above, see "Proposals
to McLeodUSA Stockholders to be Voted on at the McLeodUSA Special Meeting."
Proxies
The accompanying form of proxy is for the use of McLeodUSA stockholders to
allow them to vote at the McLeodUSA special meeting if they cannot or do not
wish to attend and vote in person. McLeodUSA stockholders may also vote by
telephone or through the Internet by following the instructions on the proxy
card accompanying this joint proxy statement/prospectus. A McLeodUSA
stockholder may revoke a previously granted proxy at any time before it is
exercised, by submitting to the Corporate Secretary of McLeodUSA written notice
of revocation or a properly executed proxy with a later date, or by attending
the McLeodUSA special meeting and voting in person. Written notices of
revocation and other communications with respect to the revocation of proxies
should be addressed to McLeodUSA Incorporated, 6400 C Street SW, Cedar Rapids,
Iowa 52406, Attention: Corporate Secretary. All shares represented by valid
proxies received and not revoked before they are exercised will be voted in the
manner specified in such proxies. If no specification is made, such shares will
be voted in favor of the amendment to the McLeodUSA certificate of
incorporation to increase the authorized number of shares of McLeodUSA Class A
common stock and the issuance of shares of McLeodUSA Class A common stock in
the merger.
The McLeodUSA board of directors is not currently aware of any other matters
which will come before the McLeodUSA special meeting. If any other matter
should be presented at the McLeodUSA special meeting for action, the persons
named in the accompanying proxy card will vote the proxy in their own
discretion.
Solicitation of Proxies
McLeodUSA and Splitrock have agreed that all expenses incurred in connection
with the filing, printing and mailing of this joint proxy statement/prospectus
and the registration statement of which it is a part shall be shared equally by
McLeodUSA and Splitrock. Other than these expenses, McLeodUSA will bear the
entire cost of soliciting proxies from McLeodUSA stockholders. In addition to
soliciting proxies by mail, McLeodUSA will request banks, brokers and other
record holders to send proxies and proxy material to the beneficial owners of
McLeodUSA Class A common stock and secure their voting instructions. McLeodUSA
will reimburse such
25
<PAGE>
record holders for their reasonable expenses in so doing. McLeodUSA intends to
use several of its officers and regular employees, who will not be specially
compensated, to solicit proxies from stockholders, either personally or by
telephone, telegram, facsimile or electronic or United States mail.
Record Date and Voting Rights
The McLeodUSA board of directors has selected the close of business on
February 8, 2000 as the record date for the McLeodUSA special meeting. Under
the Delaware General Corporation Law and the bylaws of McLeodUSA, only holders
of record of shares of McLeodUSA Class A common stock on the record date will
be entitled to notice of and to vote at the McLeodUSA special meeting.
159,718,852 shares of McLeodUSA Class A common stock are entitled to vote at
the McLeodUSA special meeting. On the record date, there were 4,542 record
holders of McLeodUSA Class A common stock.
Each share of McLeodUSA Class A common stock entitles its holder to one
vote. The affirmative vote of at least a majority of all of the outstanding
shares of McLeodUSA Class A common stock is required to amend the McLeodUSA
certificate of incorporation to increase the number of authorized shares of
McLeodUSA Class A common stock to 1,000,000,000 from 250,000,000 and the
affirmative vote of at least a majority of all the votes cast is required to
approve the issuance of shares of McLeodUSA Class A common stock in the merger.
The approval of both proposals is required in order for McLeodUSA to consummate
the merger.
Shares of McLeodUSA Class A common stock present in person at the special
meeting but not voting, and shares of McLeodUSA Class A common stock for which
McLeodUSA has received proxies but with respect to which holders of such shares
have abstained, will be counted as present at the special meeting for purposes
of determining the presence of a quorum for transacting business. Brokers who
hold shares of McLeodUSA Class A common stock in nominee or street name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote shares held for these customers with respect to the
matters to be voted upon at the special meeting without specific instructions
from these customers. Shares represented by proxies returned by a broker
holding the shares in street name will be counted for purposes of determining
whether a quorum exists, even if the shares are not voted in matters where
discretionary voting by the broker is not allowed. Abstentions and broker non-
votes will have the same effect as a vote against the proposal to amend the
McLeodUSA certificate of incorporation to increase the number of authorized
shares of McLeodUSA Class A common stock and no effect on the proposal to
approve the issuance of shares of McLeodUSA Class A common stock in the merger.
Several directors, executive officers and stockholders of McLeodUSA have
entered into voting agreements with Splitrock by which these persons have
agreed to vote their shares in favor of amending the certificate of
incorporation of McLeodUSA to increase the number of authorized shares of
McLeodUSA Class A common stock and in favor of the issuance of shares of
McLeodUSA Class A common stock in the merger. The 46,607,906 shares of
McLeodUSA Class A common stock subject to these agreements represent
approximately 29% of the outstanding shares entitled to vote at the McLeodUSA
special meeting.
For additional information about beneficial ownership of McLeodUSA Class A
common stock by stockholders owning more than 5% of McLeodUSA Class A common
stock and by directors and executive officers of McLeodUSA, see "Stock
Ownership of Management, Directors and More Than 5% Stockholders of McLeodUSA."
Recommendation of the McLeodUSA Board of Directors
The McLeodUSA board of directors has determined that the merger and the
share issuance in the merger are fair to and in the best interests of McLeodUSA
and its stockholders, and, therefore, has approved the merger agreement. The
McLeodUSA board of directors recommends that the stockholders of McLeodUSA vote
"FOR" the increase in the authorized number of shares of McLeodUSA Class A
common stock and "FOR" the issuance of shares in the merger. See "The Merger--
Recommendation of the McLeodUSA Board of Directors and Reasons for the Merger."
26
<PAGE>
THE SPLITROCK SPECIAL MEETING
This joint proxy statement/prospectus is first being mailed or delivered by
Splitrock to its stockholders on or about February 17, 2000 in connection with
the solicitation of proxies by the Splitrock board of directors for use at the
Splitrock special meeting and at any adjournments or postponements of the
special meeting. This document is also a prospectus for the McLeodUSA Class A
common stock to be issued in the merger. You should read this document
carefully before voting your shares.
Date, Time and Place; Matters to be Considered
The Splitrock special meeting will be on March 30, 2000 at 9:00 a.m., local
time at The Woodlands Resort and Conference Center, The Grand Ballroom I, 2301
Milbend Drive, The Woodlands, Texas. At the Splitrock special meeting,
Splitrock stockholders will be asked to consider and vote on a proposal to
approve and adopt the Amended and Restated Agreement and Plan of Merger by and
among McLeodUSA Incorporated, Southside Acquisition Corporation, a wholly owned
subsidiary of McLeodUSA Incorporated, Splitrock Services, Inc., Splitrock
Holdings, Inc., a wholly owned subsidiary of Splitrock Services, Inc., and
Splitrock Merger Sub, Inc., a wholly owned subsidiary of Splitrock Holdings,
Inc., dated as of February 11, 2000.
The approval of this proposal is required in order for Splitrock to
consummate the reorganization and the merger.
Proxies
The accompanying form of proxy is for the use of Splitrock stockholders to
allow them to vote at the Splitrock special meeting if they cannot or do not
wish to attend and vote in person. A Splitrock stockholder may revoke a
previously granted proxy at any time before it is exercised, by:
. submitting to the Corporate Secretary of Splitrock written notice of
revocation or a properly executed proxy with a later date, or
. by attending the Splitrock special meeting and voting in person.
Written notices of revocation and other communications with respect to the
revocation of proxies should be addressed to Splitrock Services, Inc., 9012 New
Trails Drive, The Woodlands, Texas 77381, Attention: Corporate Secretary. All
shares represented by valid proxies received and not revoked before they are
exercised will be voted in the manner specified in such proxies. If no
specification is made, such shares will be voted in favor of the proposal to
approve and adopt the merger agreement.
The Splitrock board of directors is not currently aware of any other matters
which will come before the Splitrock special meeting. If any other matter
should be presented at the Splitrock special meeting for action, the persons
named in the accompanying proxy card will vote the proxy in their own
discretion.
Solicitation of Proxies
McLeodUSA and Splitrock have agreed that all expenses incurred in connection
with the filing, printing and mailing of this joint proxy statement/prospectus
and the registration statement of which it is a part shall be shared equally by
McLeodUSA and Splitrock. Other than these expenses, Splitrock will bear the
entire cost of soliciting proxies from Splitrock stockholders. In addition to
soliciting proxies by mail, Splitrock will request banks, brokers and other
record holders to send proxies and proxy material to the beneficial owners of
Splitrock common stock and secure their voting instructions. Splitrock will
reimburse such record holders for their reasonable expenses in so doing.
Splitrock intends to use several of its officers and regular employees, who
will not be specially compensated, to solicit proxies from stockholders, either
personally or by telephone, telegram, facsimile or electronic or United States
mail.
Record Date and Voting Rights
The Splitrock board of directors has selected the close of business on
February 8, 2000 as the record date for the Splitrock special meeting. Under
the Delaware General Corporation Law and the bylaws of Splitrock,
27
<PAGE>
only holders of record of shares of Splitrock common stock on the record date
will be entitled to notice of and to vote at the Splitrock special meeting.
57,202,170 shares of Splitrock common stock are entitled to vote at the
Splitrock special meeting. On the record date, there were 181 record holders of
Splitrock common stock.
Each share of Splitrock common stock entitles its holder to one vote. The
affirmative vote of at least a majority of all of the outstanding shares of
Splitrock common stock is required to approve and adopt the merger agreement.
The approval of the merger proposal is required in order for Splitrock to
consummate the reorganization and the merger.
Shares of Splitrock common stock present in person at the special meeting
but not voting, and shares of Splitrock common stock for which Splitrock has
received proxies but with respect to which holders of such shares have
abstained, will be counted as present at the special meeting for purposes of
determining the presence of a quorum for transacting business. Brokers who hold
shares of Splitrock common stock in nominee or street name for customers who
are the beneficial owners of such shares are prohibited from giving a proxy to
vote shares held for these customers with respect to the matters to be voted
upon at the special meeting without specific instructions from these customers.
Shares represented by proxies returned by a broker holding these shares in
street name will be counted for purposes of determining whether a quorum
exists, even if these shares are not voted in matters where discretionary
voting by the broker is not allowed. Abstentions and broker non-votes will have
the same effect as a vote against the proposal to approve and adopt the merger
agreement.
Several directors, executive officers and stockholders of Splitrock entered
into voting agreements with McLeodUSA by which they have agreed to vote their
shares in favor of the merger proposal. The 29,940,687 shares of Splitrock
common stock subject to these agreements represent approximately 52.3% of the
outstanding shares entitled to vote at the Splitrock special meeting.
In accordance with the terms of the voting agreements, Splitrock is assured
of receiving the requisite votes in favor of the merger proposal.
For additional information about beneficial ownership of Splitrock common
stock by stockholders owning more than 5% of Splitrock common stock and by
directors and executive officers of Splitrock, see "Stock Ownership of
Management, Directors and More Than 5% Stockholders of Splitrock."
Recommendation of the Splitrock Board of Directors
The Splitrock board of directors has determined that the merger agreement
and the reorganization and the merger are fair and in the best interests of
Splitrock and its stockholders. The Splitrock board of directors recommends
that the stockholders of Splitrock vote "FOR" approval and adoption of the
merger agreement. See "The Merger--Recommendation of the Splitrock Board of
Directors and Reasons for the Merger."
28
<PAGE>
THE MERGER
General
The boards of directors of McLeodUSA, Splitrock, Splitrock Holdings,
Splitrock Merger Sub and Southside Acquisition Corporation have each approved
the merger agreement, which provides for two distinct but related transactions:
. the holding company reorganization, whereby Splitrock Services, Inc.,
will become a wholly owned subsidiary of Splitrock Holdings, Inc.; and
. the merger, whereby Splitrock Holdings, Inc., will become a wholly owned
subsidiary of McLeodUSA.
As a result of the reorganization and the merger, each share of Splitrock
common stock will be converted into the right to receive 0.5347 of a share of
McLeodUSA Class A common stock, as described under "Terms of the Merger
Agreement and Related Transactions--Conversion of Splitrock Common Stock;
Treatment of Options and Warrants." Fractional shares of McLeodUSA Class A
common stock will not be issued in the merger, and Splitrock stockholders
otherwise entitled to a fractional share will be paid cash for such fractional
shares, in the manner described under "Terms of the Merger Agreement and
Related Transactions--Exchange of Certificates." McLeodUSA and Splitrock expect
that the merger will be consummated as soon as practicable following the
holding company reorganization.
Background of the Merger
Both McLeodUSA and Splitrock regularly evaluate different strategies to
improve their competitive positions and enhance their respective stockholder
values, including opportunities for acquisitions of other companies or their
assets, possible partnerships or alliances and other significant transactions.
Splitrock and McLeodUSA have been familiar with each other's businesses for
several years. Several individuals have held or continue to hold director or
officer positions at each of the companies. Clark E. McLeod, Chairman and Chief
Executive Officer of McLeodUSA, was a member of the Splitrock board of
directors from May 1998 until May 1999. Roy A. Wilkens, who has been a member
of the Splitrock board of directors since April 1998, became a member of the
McLeodUSA board of directors in June 1999 and became Chief Technology Officer
of McLeodUSA on January 7, 2000. David M. Boatner, who joined Splitrock as
Executive Vice President and Chief Marketing Officer in March 1999, had
previously served as an executive officer of McLeodUSA in various capacities
from February 1996 until joining Splitrock.
Since his departure from the Splitrock board of directors, Mr. McLeod
maintained periodic, informal contacts with Splitrock. In a telephone
conversation on or about December 6, 1999, Mr. McLeod spoke with Kwok Li,
Chairman of the Splitrock board of directors and Chief Technical Officer of
Splitrock, to explore any interest in a strategic combination with McLeodUSA.
On December 10, 1999, Mr. McLeod met with Mr. Wilkens to discuss whether Mr.
Wilkens would be interested in joining McLeodUSA as an employee to lead the
data operations and strategy of McLeodUSA. During this conversation, Messrs.
McLeod and Wilkens discussed whether a business combination between McLeodUSA
and Splitrock might be mutually beneficial. In a telephone conversation on or
about December 13, 1999, Mr. McLeod expressed to Mr. Li a firm interest in a
strategic combination of McLeodUSA and Splitrock.
On December 16, 1999, Mr. Wilkens met with Mr. Li and William R. Wilson,
President and Chief Executive Officer of Splitrock. Mr. Wilkens expressed the
firm interest of McLeodUSA in acquiring Splitrock in order to expand the
services of McLeodUSA in the broadband voice, video and data communications
areas. Mr. Wilkens did not propose any specific terms of the transaction but he
and Mr. Li had a preliminary discussion of a range of values for Splitrock. Mr.
Wilkens also indicated that he had agreed to become the head of data operations
and strategy of McLeodUSA, which would include Splitrock, if acquired. Messrs.
Li and Wilson both indicated an interest in a possible transaction. Mr. Li
agreed to meet with Mr. McLeod to discuss a possible business combination
between Splitrock and McLeodUSA.
29
<PAGE>
On December 17, 1999, at a regularly scheduled meeting of the board of
directors of McLeodUSA, Mr. McLeod and Stephen C. Gray, President and Chief
Operating Officer of McLeodUSA, informed the board of management's interest in
pursuing the possible acquisition of Splitrock and their recommendation to hire
Mr. Wilkens. The board of directors authorized Messrs. McLeod and Gray to
further investigate the merits of a possible transaction with Splitrock, to
proceed with the hiring of Mr. Wilkens, to accelerate implementation of the
McLeodUSA data strategy and to pursue a business combination with Splitrock if
it would be beneficial to the data strategy. (Mr. Wilkens did not participate
in these discussions or the authorization decision).
On December 20, 1999, Mr. Li met with Messrs. McLeod and Gray. They
discussed general price and structure terms of a potential business combination
transaction, including the form of consideration to be received by the
Splitrock stockholders. Mr. Li and Mr. Gray each indicated the respective price
levels at which their companies might be interested in proceeding with a
transaction. After discussion, Mr. Gray proposed a merger in which each
Splitrock share would be exchanged for a fraction of a share of McLeodUSA with
a value between $30.00 and $31.00 based on the average closing price of
McLeodUSA Class A common stock for a five trading day period. Messrs. McLeod
and Gray indicated that if the parties were to proceed with the negotiation of
a transaction, it was their desire to sign definitive agreements and to
announce the transaction on January 5, 2000. Mr. Li indicated that, given
capital and other transactions then being considered by Splitrock, a
transaction between the two companies should be promptly evaluated and
considered.
Mr. Li participated in a meeting of the Splitrock board of directors on
December 20, 1999, to brief the board members on his meetings with Messrs.
McLeod and Gray. The Splitrock board of directors weighed the relative merits
of Splitrock remaining independent and implementing its own acquisition
strategy and capital raising program versus pursuing a business combination
with McLeodUSA. Recognizing the potential strong strategic fit between
Splitrock and McLeodUSA, the Splitrock board of directors authorized Mr. Wilson
to negotiate with McLeodUSA and to approve the prior engagement of financial
and legal advisors in connection with these discussions. From December 20,
1999, through the execution of the definitive merger agreement in the evening
of January 6, 2000, the Splitrock board of directors met frequently and had
extensive discussions with their financial and legal advisors to evaluate the
proposed transaction and review the status of the negotiations with McLeodUSA
and the results of the Splitrock business, legal, accounting and financial due
diligence analysis of McLeodUSA. Mr. Wilkens recused himself from all of the
Splitrock board meetings because of his role as a member of the McLeodUSA board
of directors and its representative.
On December 22, 1999, Splitrock and McLeodUSA executed a mutual
confidentiality agreement. Representatives of the two companies began
exchanging financial, business and other information. During the period from
this date until execution of the definitive merger agreement on January 6,
2000, each party and its legal, financial and accounting advisors conducted a
business, legal, accounting and financial due diligence review of the other
party.
On December 24, 1999, McLeodUSA legal counsel sent Splitrock legal counsel
and other advisors drafts of a merger agreement, voting agreement and option
agreement. On December 27, 1999, the Splitrock board of directors held a
meeting at which Splitrock legal counsel, Fried, Frank, Harris, Shriver &
Jacobson, briefed them on the principal terms of the draft merger, voting and
option agreements and advised the board of directors with respect to its
fiduciary duties to the Splitrock stockholders in connection with the proposed
transaction. The Splitrock financial advisors, Credit Suisse First Boston
Corporation, made a presentation to the Splitrock board members regarding the
preliminary results of their financial and valuation analyses of McLeodUSA and
the proposed transaction. Together with Credit Suisse First Boston, the
Splitrock board members considered the relative benefits and risks of alternate
ways to structure the consideration Splitrock stockholders would receive in the
merger.
On December 28, 1999, Mr. Wilson and representatives from Credit Suisse
First Boston met with Messrs. McLeod and Gray in separate meetings to discuss
the strategic vision of the combined company and the various business,
financial and operational issues that would be involved if the two companies
were to combine. In addition, after discussing the pricing structure of the
proposed transaction, Mr. Wilson and Mr. McLeod agreed
30
<PAGE>
to use a floating price/fixed exchange ratio price structure without a collar.
J. Robert Fugate, the Splitrock Chief Financial Officer, and the accounting and
financial advisors of Splitrock also went to the headquarters of McLeodUSA on
this date to conduct business, financial and accounting due diligence.
On December 29 and 30, 1999, Mr. Wilson and his legal and financial advisors
met with Blake O. Fisher, Jr., Group Vice President of McLeodUSA, and Randall
Rings, Vice President and General Counsel of McLeodUSA, and their legal and
financial advisors, to negotiate the principal terms of the proposed
acquisition, including, among other things, (1) the amount of any termination
fee, (2) the representations and warranties to be made under, and the
conditions to closing of, the merger agreement and (3) the termination rights
under the merger agreement. McLeodUSA conditioned its offer to Splitrock on
Messrs. Li and Wilson and Linsang Partners, LLC, a limited liability company
controlled by Mr. Li, all three of which collectively beneficially own
approximately 52.3% of the outstanding Splitrock common stock, entering into
voting agreements requiring them to vote for the proposed merger and option
agreements granting McLeodUSA the right to purchase their Splitrock common
stock in specified circumstances. Splitrock conditioned its consideration of
the McLeodUSA offer on, among other things, (1) the negotiation of arrangements
satisfactory to Splitrock that would provide Splitrock with sufficient funds to
implement its business plan through the fiscal year 2000 and that would prevent
Splitrock from depending on the completion of the proposed merger, (2) a
recasting of the proposed option agreements to give Messrs. Li and Wilson a
significant economic incentive to consider a superior proposal, (3) a reduced
termination fee payable to McLeodUSA and (4) a majority of the members of the
McLeodUSA board of directors entering into voting agreements requiring them to
vote for the McLeodUSA stockholder actions necessary to accomplish the proposed
merger.
On December 29, 1999, the McLeodUSA board of directors held a special
meeting at which representatives of the McLeodUSA financial advisors, Salomon
Smith Barney, made a presentation to the McLeodUSA board of directors regarding
the preliminary results of their financial and valuation analysis of Splitrock
and the proposed transaction. The McLeodUSA board of directors was briefed by
senior management on the strategic benefits, both near and long term, available
from the merger, as well as on the status of the discussions with Splitrock.
Mr. Wilkens was not present at this meeting.
On December 30, 1999, representatives from McLeodUSA, including J. Lyle
Patrick, the McLeodUSA Chief Financial Officer, and Salomon Smith Barney went
to Splitrock headquarters to conduct business, financial and accounting due
diligence.
The Splitrock board of directors held a special meeting on the evening of
December 30, 1999. Mr. Wilson briefed the board on the status of the
negotiations with McLeodUSA. Together with their financial advisors and legal
counsel, the board reviewed and considered the strategic rationale for the
proposed business combination and their fiduciary duties and responsibilities
to the Splitrock stockholders with respect to the proposed business
combination.
On December 31, 1999, McLeodUSA presented to Splitrock a revised draft of a
proposed merger agreement, together with related agreements. On January 2,
2000, Splitrock identified to McLeodUSA a list of remaining threshold issues to
be resolved in order to proceed with the transaction including the form of
financing proposed by McLeodUSA, the terms of the proposed option and voting
agreements and specific provisions in the draft merger agreement relating to
representations and warranties, indemnification and the proposed termination
fee.
On the morning of January 3, 2000, Mr. Wilson met with Mr. Fisher to
determine whether each party would be able to meet the other's conditions for
proceeding with the proposed transaction. During this meeting, Mr. Wilson and
Mr. Fisher were able to agree, among other things, on the principal terms of
the option and voting agreements as they affected Splitrock, the number of
trading days in the period which would be used to determine the per share value
of McLeodUSA Class A common stock for purposes of calculating the exchange
ratio and a reduced termination fee. Mr. Wilson and Mr. Fisher also agreed to
negotiate agreements that would both assure Splitrock had the funds necessary
to implement its business plan and fulfill the requirements of McLeodUSA for
bandwidth and Internet dial-access services. Throughout the day on January 3,
2000, senior
31
<PAGE>
management of both companies, together with their respective financial and
legal advisors, negotiated the principal terms of the credit agreement, the
bandwidth letter of intent and the master services agreement. The Splitrock
board of directors met on the evening of January 3, 2000 with their financial
advisors and legal counsel to review the status of the negotiations with
McLeodUSA.
On January 4, 2000, representatives of Fried, Frank, Harris, Shriver &
Jacobson met with representatives of Hogan & Hartson L.L.P. to negotiate the
remaining principal terms of the merger agreement, including, among other
things, (1) the ability of Splitrock, under the terms of the merger agreement,
to enter into negotiations with a third party that had made a superior proposal
and (2) the conditions under which a termination fee would be payable by
Splitrock to McLeodUSA.
Between January 4, 2000 and January 6, 2000, representatives of the two
companies and their respective advisors negotiated the final terms of the
merger agreement, option agreement, voting agreement, credit agreement, master
services agreement, bandwidth letter of intent and related agreements and
completed their due diligence analyses. During this time, Mr. Li and legal
counsel for Mr. Li and Linsang Partners negotiated with Mr. Fisher and
McLeodUSA legal counsel the terms of a stockholders' agreement and a non-
competition agreement that Mr. Li and Linsang Partners will sign at or prior to
the closing. Mr. Wilson and his legal counsel separately negotiated during this
period with Mr. Fisher and McLeodUSA legal counsel the terms of a stockholder
agreement and a non-competition agreement that Mr. Wilson will sign at or prior
to the closing.
The Splitrock board of directors held a special meeting on the evening of
January 6, 2000. Together with its financial advisors and legal counsel, the
Splitrock board of directors reviewed the final terms of the proposed
transaction. Fried, Frank, Harris, Shriver & Jacobson made a presentation to
the board regarding the principal terms of the final merger agreement, the
option agreements, the credit agreement, the master services agreement and the
bandwidth letter of intent and updated the board on how the key remaining legal
issues had been resolved. Credit Suisse First Boston presented the final
results of its financial and valuation analyses of Splitrock and McLeodUSA and
the proposed transaction. Credit Suisse First Boston delivered its oral
opinion, later confirmed in writing, that as of January 6, 2000, the exchange
ratio was fair, from a financial point of view, to the Splitrock stockholders.
After further discussion, the Splitrock board of directors approved the merger
agreement, the option agreement, the credit agreement, the master services
agreement, the bandwidth letter of intent and the other matters contemplated by
these agreements.
Also on the evening of January 6, 2000, the McLeodUSA board of directors
held a special meeting. Mr. Wilkens was not present at this meeting. At the
meeting, the McLeodUSA board of directors received a presentation from senior
management on the material terms and conditions of the merger agreement, the
voting agreements, the option agreements, the credit agreements and related
agreements and an update on how certain of the remaining open issues had been
resolved. The McLeodUSA board of directors then received an update of the
financial presentation from Salomon Smith Barney and received Salomon Smith
Barney's oral opinion as to the fairness to McLeodUSA stockholders, from a
financial point of view, of the exchange ratio. The oral fairness opinion was
subsequently confirmed in writing. The McLeodUSA board of directors discussed
the information presented by senior management and by its financial advisors.
After discussion and due consideration, and after Mr. McLeod left the meeting,
the McLeodUSA board of directors approved the merger agreement and related
agreements and the credit agreement and related agreements.
McLeodUSA and Splitrock issued a joint press release to announce the merger
agreement and related transactions on the morning of January 7, 2000.
McLeodUSA and Splitrock subsequently decided to amend and restate the merger
agreement to provide that Splitrock would complete the reorganization as soon
as practicable before the merger. On February 7, 2000, the McLeodUSA board of
directors held a special meeting. Mr. McLeod and Mr. Wilkens recused themselves
from this meeting. After discussion, the McLeodUSA board of directors approved
the amended and restated merger agreement and related agreements. On February
9, 2000, the Splitrock board of directors held a special meeting. Mr. Wilkens
recused himself from this meeting. Fried, Frank, Harris, Shriver & Jacobson
32
<PAGE>
made a presentation to the board regarding the amended and restated merger
agreement. After discussion, the Splitrock board of directors approved the
amended and restated merger agreement and the transactions contemplated by the
merger agreement.
Recommendation of the Splitrock Board of Directors and Reasons for the Merger
The Splitrock board of directors has determined that the terms of the merger
agreement are fair to and in the best interests of Splitrock and its
stockholders. The Splitrock board of directors approved the merger agreement
and directed that the merger agreement be submitted to the Splitrock
stockholders for adoption. The Splitrock board of directors recommends that
Splitrock stockholders vote "FOR" the merger proposal.
In reaching its determination to approve the transaction, and to recommend
that the Splitrock stockholders vote to adopt the merger proposal, the
Splitrock board identified several potential benefits of the reorganization and
the merger for Splitrock and its stockholders, including:
. Splitrock stockholders will have the opportunity to participate in the
potential for growth of the combined company after the merger
. McLeodUSA is more diversified, and has a significantly larger market
capitalization, than Splitrock; as a result, Splitrock stockholders who
exchange their Splitrock common stock for McLeodUSA Class A common stock
in the merger would be expected to obtain a less volatile, more liquid
investment
. the reorganization and the merger will be tax-free to Splitrock U.S.
stockholders (except to the extent they receive cash for any fractional
shares)
. as a result of the strategic fit between the Splitrock and McLeodUSA
operations, the merger will provide the opportunity to create a
nationwide telecommunications company with the ability to bundle basic
local and long distance telephone services with advanced broadband
voice, video and data communications services
. the financial resources of McLeodUSA, and the financings entered into in
connection with the merger agreement, will permit Splitrock to achieve
its nationwide, fiber strand build-out without having to raise
additional capital, in the form of equity or debt, which could have been
significantly dilutive to Splitrock stockholders
. the combined company will have the opportunity to realize significant
synergies by leveraging the combined company's network to reduce local
access charges, wholesale carriage costs and operating costs and take
advantage of potential significant growth in data traffic
. the integrated products and services offerings of the combined company
will create and enhance cross-selling opportunities to the existing
customer bases of each of Splitrock and McLeodUSA, resulting in new
opportunities to generate revenue
. as part of McLeodUSA, Splitrock will benefit from substantially greater
financial and sales and marketing resources and will be better able to
compete in the highly competitive market for Splitrock products and
services
The Splitrock board consulted with Splitrock senior management, as well as
its financial advisors, independent accountants and legal counsel, in reaching
its decision to approve the merger agreement. Among the factors the Splitrock
board considered in its deliberations were the following:
. the benefits described above
. the familiarity of the Splitrock board with the business, properties and
prospects of Splitrock, including the opportunities and acquisition
alternatives available to Splitrock if the proposed merger did not occur
. the exchange ratio negotiated with McLeodUSA and the implied premium
over recent and historical market prices of Splitrock common stock, as
well as how this premium compared to price premiums in several recent
comparable transactions involving communications companies
33
<PAGE>
. the opinion of Credit Suisse First Boston that, based on and subject to
matters stated in the opinion, as of January 6, 2000, the exchange ratio
was fair, from a financial point of view, to the Splitrock stockholders
(a copy of Credit Suisse First Boston's written opinion is attached as
an appendix to this joint proxy statement/prospectus)
. information and presentations by Splitrock management and legal and
financial advisors concerning the business, technology, products,
operations, financial condition, organizational structure and industry
position of Splitrock and McLeodUSA, on both an historical and
prospective basis
. current financial market conditions and historical market prices,
volatility and trading information about Splitrock common stock and
McLeodUSA Class A common stock
. the potential benefits of the merger to customers, suppliers and
employees
. the terms and conditions of the merger agreement, including the
termination fee payable to McLeodUSA under specified circumstances and
the ability of Splitrock to negotiate other unsolicited strategic
transaction proposals if the Splitrock board believes in good faith,
after consultation with its financial and legal advisors, that a
proposal is more favorable financially to the Splitrock stockholders
than the merger and negotiations are appropriate for the board to comply
with its fiduciary duties to the Splitrock stockholders
. the terms and conditions of voting agreements of stockholders of
Splitrock who own approximately 52.3% of the outstanding Splitrock
common stock which require them to vote their shares of Splitrock in
favor of the merger agreement
. the terms and conditions of option agreements of Kwok and Felice Li,
William R. Wilson, Claudia Wilson, as trustee of the William R. Wilson
Grantor Retained Annuity Trust, and Linsang Partners, LLC, granting
McLeodUSA an option to purchase up to approximately 50.5% of the
Splitrock outstanding common stock under specified circumstances
including their economic incentive to consider a superior proposal
. the decision by McLeodUSA to execute a purchase accounting transaction
The Splitrock board of directors also considered opportunities that might
exist to pursue other potential business combinations, but did not solicit or
receive any offers other than from McLeodUSA.
The Splitrock board of directors also identified and considered a variety of
potentially negative factors in its deliberations concerning the merger
agreement, including the following:
. the risk that the per share value of the consideration to be received in
the merger could decline significantly from the value immediately prior
to the announcement of the merger because the exchange ratio will not be
adjusted for changes in the market price of Splitrock common stock or
McLeodUSA Class A common stock
. the possibility that the merger might not be consummated and the
potential adverse effects of the failure to consummate the merger on:
. Splitrock operating results
. the ability of Splitrock to implement its business plan
. the overall competitive position and prospects of Splitrock
. the decreased likelihood of a third party acquisition proposal because
of the termination fee and the option agreements described above, and,
to a lesser extent, the voting agreements described above
. the risk that the potential benefits of the merger may not be realized
. other applicable risks described in this joint proxy
statement/prospectus under "Risk Factors"
34
<PAGE>
After due consideration, the Splitrock board of directors concluded that the
potential benefits to Splitrock and its stockholders of the merger outweighed
the risks associated with the merger.
This discussion is not exhaustive of all the factors considered by the
Splitrock board of directors. In view of the wide variety of factors considered
in connection with the board's evaluation of the merger and the complexity of
these matters, the Splitrock board of directors did not quantify or otherwise
assign relative weights to the factors described above. Rather, the Splitrock
board made its determination based on the totality of the information it
considered. The members of the board were aware that, as described below under
"--Interests of Splitrock Management in the Merger," directors and officers of
Splitrock have interests in the merger in addition to, or different from, their
interests as stockholders in Splitrock, and the board considered this in
determining to recommend the transaction.
Splitrock and McLeodUSA cannot assure you that any of the expected results,
synergies, opportunities or other benefits described in this section will be
achieved as a result of the merger.
Opinion of the Splitrock Financial Advisor
Credit Suisse First Boston has acted as the Splitrock financial advisor in
connection with the merger. Splitrock selected Credit Suisse First Boston based
on Credit Suisse First Boston's experience, expertise and reputation and
familiarity with the Splitrock business. Credit Suisse First Boston is an
internationally recognized investment banking firm and is regularly engaged in
the valuation of businesses and securities in connection with mergers and
acquisitions, leveraged buyouts, negotiated underwritings, competitive
biddings, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes.
In connection with Credit Suisse First Boston's engagement, Splitrock
requested that Credit Suisse First Boston evaluate the fairness, from a
financial point of view, to the holders of Splitrock common stock of the
exchange ratio provided for in the merger agreement. On January 6, 2000, at a
meeting of the Splitrock board of directors held to consider the merger, Credit
Suisse First Boston rendered to the Splitrock board of directors an oral
opinion, which opinion was confirmed by delivery of a written opinion dated
January 6, 2000, to the effect that, as of that date and based on and subject
to the matters described in its opinion, the exchange ratio was fair, from a
financial point of view, to the holders of Splitrock common stock.
The full text of Credit Suisse First Boston's written opinion, which sets
forth the procedures followed, assumptions made, matters considered and
limitations on the review undertaken by Credit Suisse First Boston, is attached
as Appendix F to this joint proxy statement/prospectus and is incorporated by
reference. Splitrock stockholders are urged to read this opinion carefully in
its entirety. Credit Suisse First Boston's opinion is addressed to the
Splitrock board of directors and relates only to the fairness of the exchange
ratio from a financial point of view. The opinion does not address any other
aspect of the proposed merger or any related transaction and does not
constitute a recommendation to any stockholder as to any matter relating to the
merger. The summary of Credit Suisse First Boston's opinion in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion.
In arriving at its opinion, Credit Suisse First Boston reviewed the merger
agreement and related documents, as well as publicly available business and
financial information relating to Splitrock and McLeodUSA. Credit Suisse First
Boston also reviewed other information relating to Splitrock and McLeodUSA,
including financial forecasts, which Splitrock and McLeodUSA provided to or
discussed with Credit Suisse First Boston, and met with the management of
Splitrock and of McLeodUSA to discuss the businesses and prospects of Splitrock
and McLeodUSA.
Credit Suisse First Boston also considered financial and stock market data
of Splitrock and McLeodUSA and compared those data with similar data for other
publicly held companies in businesses similar to Splitrock and McLeodUSA and
considered, to the extent publicly available, the financial terms of other
business
35
<PAGE>
combinations and other transactions recently effected. Credit Suisse First
Boston also considered other information, financial studies, analyses and
investigations and financial, economic and market criteria that it deemed
relevant.
In connection with its review, Credit Suisse First Boston did not assume any
responsibility for independent verification of any of the information that was
provided to or otherwise reviewed by it and relied on that information being
complete and accurate in all material respects. With respect to financial
forecasts, Credit Suisse First Boston assumed that the forecasts were
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the management of Splitrock and of McLeodUSA as to the future
financial performance of Splitrock and McLeodUSA. Credit Suisse First Boston
assumed, with the consent of Splitrock, that the merger would be consummated in
accordance with the merger agreement and that the merger will be treated as a
tax-free reorganization for U.S. federal income tax purposes. In addition,
Credit Suisse First Boston assumed that in the course of obtaining the
necessary regulatory and third party consents for the proposed merger and
related transactions, no delay or restriction will be imposed that will have a
material adverse effect on the contemplated benefits of the proposed merger or
related transactions.
Credit Suisse First Boston was not requested to, and did not, make an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of Splitrock or McLeodUSA, and was not furnished with any
evaluations or appraisals. Credit Suisse First Boston's opinion was based on
information available to, and financial, economic, market and other conditions
as they existed and could be evaluated by, Credit Suisse First Boston on the
date of its opinion. Credit Suisse First Boston did not express any opinion as
to the actual value of McLeodUSA common stock when issued in the merger or the
prices at which shares of McLeodUSA common stock will trade after the merger.
In connection with its engagement, Credit Suisse First Boston was not requested
to, and did not, solicit third party indications of interest in the possible
acquisition of all or a part of Splitrock. Although Credit Suisse First Boston
evaluated the exchange ratio from a financial point of view, Credit Suisse
First Boston was not requested to, and did not, recommend the specific
consideration payable in the merger, which consideration was determined by
Splitrock and McLeodUSA. No other limitations were imposed on Credit Suisse
First Boston with respect to the investigations made or procedures followed in
rendering its opinion.
In preparing its opinion to the Splitrock board of directors, Credit Suisse
First Boston performed a variety of financial and comparative analyses,
including those described below. This summary of Credit Suisse First Boston's
analyses is not a complete description of the analyses underlying Credit Suisse
First Boston's opinion or the presentation made to the Splitrock board of
directors. The preparation of a fairness opinion is a complex analytical
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances, and, therefore, a fairness opinion is not readily
susceptible to partial analysis or summary description. In arriving at its
opinion, Credit Suisse First Boston made qualitative judgments as to the
significance and relevance of each analysis and factor that it considered.
Accordingly, Credit Suisse First Boston believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors
or focusing on information presented in tabular format, without considering all
analyses and factors or the narrative description of the analyses, could create
a misleading or incomplete view of the processes underlying its analyses and
opinion.
In its analyses, Credit Suisse First Boston considered industry performance,
regulatory, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of Splitrock and McLeodUSA.
No company, transaction or business used in Credit Suisse First Boston's
analyses as a comparison is identical to Splitrock or McLeodUSA or the proposed
merger, and an evaluation of the results of those analyses is not entirely
mathematical. Rather, the analyses involve complex considerations and judgments
concerning financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the companies,
business segments or transactions analyzed.
The estimates contained in Credit Suisse First Boston's analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or
36
<PAGE>
values, which may be significantly more or less favorable than those suggested
by the analyses. In addition, analyses relating to the value of businesses or
securities do not purport to be appraisals or to reflect the prices at which
businesses or securities actually may be sold. Accordingly, Credit Suisse First
Boston's analyses and estimates are inherently subject to substantial
uncertainty.
Credit Suisse First Boston's opinion and financial analyses were not the
only factors considered by the Splitrock board of directors in its evaluation
of the proposed merger and should not be viewed as necessarily determinative of
the views of the Splitrock board of directors with respect to the merger or the
exchange ratio.
The following is a summary of the material analyses underlying Credit Suisse
First Boston's opinion dated January 6, 2000 delivered to the Splitrock board
of directors in connection with the merger. The financial analyses summarized
below include information presented in tabular format. In order to fully
understand Credit Suisse First Boston's financial analyses, the tables must be
read together with the text of each summary. The tables alone do not constitute
a complete description of the financial analyses. Considering the data set
forth in the tables below without considering the full narrative description of
the financial analyses, including the methodologies and assumptions underlying
the analyses, could create a misleading or incomplete view of Credit Suisse
First Boston's financial analyses.
Discounted Cash Flow Analysis. Credit Suisse First Boston estimated the
present value of the stand-alone, unlevered after-tax free cash flows that each
of Splitrock and McLeodUSA could produce over calendar years 2000 through 2009.
Credit Suisse First Boston performed its analysis based on two scenarios, a
management case and an adjusted management case.
The management cases for Splitrock and McLeodUSA were based on financial
forecasts provided to Credit Suisse First Boston by the respective managements
of Splitrock and McLeodUSA. The adjusted management cases were based on
adjustments to the management case for each company developed by, or discussed
with and reviewed by, Splitrock management to reflect, among other things:
. in the case of Splitrock, a reduction in revenue associated with the
Prodigy contract starting in fiscal year 2001 and expiring at the end of
fiscal year 2004 and a 10% reduction in revenue growth associated with
other revenue sources as compared to the management case starting in
fiscal year 2000
. in the case of McLeodUSA, an accelerated decrease in long distance
revenue per minute from fiscal year 2001 to fiscal year 2009 and a 10%
reduction in revenue growth associated with data/internet service
provider businesses as compared with the management case starting in
fiscal year 2000
Credit Suisse First Boston calculated ranges of estimated terminal values by
multiplying estimated calendar year 2009 earnings before interest, taxes,
depreciation and amortization, commonly referred to as EBITDA, by terminal
EBITDA multiples of 9.0x to 10.0x. The estimated terminal values were then
discounted to present value using discount rates of 13% to 14%. The discount
rate range was selected based on a weighted average cost of capital analysis.
This analysis indicated an implied exchange ratio reference range of 0.54x to
0.77x for the management case and 0.43x to 0.62x for the adjusted management
case.
Comparable Companies Analysis. Credit Suisse First Boston compared
financial, operating and stock market data of Splitrock to corresponding data
of the following publicly traded companies in the businesses indicated:
Long Distance:
. MCI Worldcom, Inc.
Internet Service Providers:
. PSINet, Inc.
. Verio Inc.
37
<PAGE>
Competitive Local Exchange Carriers:
. CapRock Communications Corp.
. Focal Communications Corporation
. Allegiance Telecom, Inc.
. MGC Communications, Inc.
Fiber Builders:
. Qwest Communications International Inc.
. Williams Communications
In addition, Credit Suisse First Boston compared financial, operating and
stock market data of McLeodUSA to corresponding data of the following publicly
traded companies in the businesses indicated:
Traditional Competitive Local Exchange Carriers:
. Adelphia Business Solutions
. Electric Lightwave, Inc.
. e.spire Communications, Inc.
. GST Telecommunications, Inc.
. Intermedia Communications Inc.
. ICG Communications, Inc.
. ITC/\DeltaCom, Inc.
. NEXTLINK Communications, Inc.
. RCN Corporation
Smart Build Competitive Local Exchange Carriers:
. Allegiance Telecom, Inc.
. CTC Communications Corp.
. Focal Communications Corporation
. MGC Communications, Inc.
. Network Plus, Inc.
. US LEC Corp.
Credit Suisse First Boston reviewed enterprise values, calculated as equity
value, plus debt and minority interest, less cash and option proceeds, as
multiples of estimated calendar year 1999, 2000 and 2001 revenues and gross
property, plant and equipment for Splitrock and McLeodUSA. All multiples were
based on closing stock prices on January 5, 2000. Estimated financial data for
the comparable companies were based on publicly available research analysts'
estimates, and estimated financial data for Splitrock and McLeodUSA were based
on internal estimates of the management of Splitrock and of McLeodUSA,
respectively. Credit Suisse First Boston then applied a range of selected
multiples for the comparable companies of estimated calendar year 1999, 2000
and 2001 revenues and gross property, plant and equipment to the corresponding
financial data of Splitrock and McLeodUSA, utilizing the management case
estimates for Splitrock and McLeodUSA. This analysis indicated an implied
exchange ratio reference range of 0.22x to 0.78x.
38
<PAGE>
Comparable Acquisitions Analysis. Credit Suisse First Boston analyzed the
implied transaction multiples paid in the following comparable merger and
acquisition transactions in the industries indicated:
<TABLE>
<CAPTION>
Acquiror Acquired Company
-------- ----------------
<S> <C>
Long Distance:
Frontier Corporation ALC Communications Corporation
Century Telephone Enterprises, Inc. Pacific Telecom, Inc.
Internet Service Providers:
RCN Corporation Erol's Internet, Inc.
Intermedia Communications Inc. DIGEX, Incorporated
Teleport Communications Group Inc. CERFnet Services, Inc.
MFS Communications Company, Inc. UUNET Technologies, Inc.
Competitive Local Exchange Carriers:
AT&T Corp. Teleport Communications Group Inc.
WorldCom, Inc. Brooks Fiber Properties, Inc.
WorldCom, Inc. MFS Communications Company, Inc.
</TABLE>
Credit Suisse First Boston compared the enterprise value of each such
transaction as a multiple of, among other things, latest 12 months revenues and
gross property, plant and equipment. All multiples were based on publicly
available financial information. Credit Suisse First Boston then applied a
range of selected multiples for the comparable transactions of latest 12 months
revenues and gross property, plant and equipment to corresponding financial
data of Splitrock.
Aggregate Reference Range. Based on the valuation methodologies described
above, Credit Suisse First Boston derived an aggregate reference range of 0.35x
to 0.70x, as compared to the exchange ratio in the merger of 0.5347x.
Relative Analyses. Credit Suisse First Boston also conducted the following
relative analyses and compared the exchange ratio in the merger of 0.5347x with
the exchange ratios implied by these analyses, based on closing stock prices of
Splitrock common stock and McLeodUSA Class A common stock on January 5, 2000:
Relative Contribution Analysis. Credit Suisse First Boston performed an
exchange ratio analysis, based on management case and adjusted management
case estimates of Splitrock and McLeodUSA, comparing the relative
contributions of Splitrock and McLeodUSA to estimated revenues and EBITDA
of the combined company for calendar years 2000, 2001, 2002, 2003 and 2004.
This analysis yielded an implied exchange ratio reference range of 0.065x
to 0.758x and an implied percentage contribution reference range for
Splitrock of 1.7% to 17.0% in the management case, as indicated in the
following table:
<TABLE>
<CAPTION>
McLeodUSA Splitrock Implied
Percentage Contribution Percentage Contribution Exchange Ratio
----------------------- ----------------------- --------------
<S> <C> <C> <C>
Revenue:
2000..... 86.6% 13.4% 0.571
2001..... 84.4% 15.6% 0.686
2002..... 83.9% 16.1% 0.710
2003..... 83.1% 16.9% 0.751
2004..... 83.6% 16.4% 0.727
EBITDA:
2000..... NM NM NM
2001..... 98.3% 1.7% 0.065
2002..... 89.2% 10.8% 0.447
2003..... 84.9% 15.1% 0.659
2004..... 83.0% 17.0% 0.758
</TABLE>
39
<PAGE>
In addition, this analysis yielded an implied exchange ratio reference
range of 0.052x to 0.592x and an implied percentage contribution reference
range for Splitrock of 1.4% to 13.8% in the adjusted management case, as
indicated in the following table:
<TABLE>
<CAPTION>
McLeodUSA Splitrock Implied
Percentage Contribution Percentage Contribution Exchange Ratio
----------------------- ----------------------- --------------
<S> <C> <C> <C>
Revenue:
2000..... 87.2% 12.8% 0.543
2001..... 86.3% 13.7% 0.587
2002..... 86.5% 13.5% 0.578
2003..... 86.2% 13.8% 0.592
2004..... 86.8% 13.2% 0.564
EBITDA:
2000..... NM NM NM
2001..... 98.6% 1.4% 0.052
2002..... 91.1% 8.9% 0.362
2003..... 87.7% 12.3% 0.519
2004..... 86.3% 13.7% 0.588
</TABLE>
Historical Stock Trading Analysis. Credit Suisse First Boston performed
an exchange ratio analysis comparing the average daily closing stock
prices for Splitrock common stock and McLeodUSA Class A common stock on
January 5, 2000 and during the one-week, one-month and three-month
periods preceding January 5, 2000, and the premiums over those periods
implied by the exchange ratio in the merger. This comparison yielded an
implied exchange ratio reference range of 0.34x to 0.41x and an implied
premium reference range of 30.5% to 57.4%, as indicated in the
following table:
<TABLE>
<CAPTION>
Implied Premium At
Period Implied Exchange Ratio Merger Exchange Ratio
------ ---------------------- ---------------------
<S> <C> <C>
January 5, 2000.............. 0.38x 40.8%
One week preceding........... 0.34x 57.4%
One month preceding.......... 0.37x 44.6%
Three months preceding....... 0.41x 30.5%
</TABLE>
Pro Forma Company Analysis. Credit Suisse First Boston analyzed the
potential pro forma effect of the merger on the estimated revenues and EBITDA
per share of McLeodUSA for calendar years 2000 through 2002. Based on an
exchange ratio in the merger of 0.5347x and assuming no synergies, this
analysis indicated that the merger would be accretive to the McLeodUSA revenues
per share and dilutive to the McLeodUSA EBITDA per share during those periods.
The actual results achieved by the combined company may vary from projected
results and the variations may be material.
Other Factors. In the course of preparing its opinion, Credit Suisse First
Boston also reviewed and considered other information and data, including the
trading characteristics of Splitrock common stock and McLeodUSA Class A common
stock, market multiples for McLeodUSA and selected traditional competitive
local exchange carriers and the projected performance for McLeodUSA relative to
selected competitive local exchange carriers. Credit Suisse First Boston also
reviewed equity research coverage of McLeodUSA, as well as the pro forma
capitalization of McLeodUSA.
Miscellaneous. Splitrock has agreed to pay Credit Suisse First Boston an
advisory fee of $100,000, an announcement fee of $1,000,000 payable upon public
announcement of the merger, and a transaction fee equal to 0.60% of the total
consideration payable in the merger. The advisory fee and the announcement fee
will be creditable against the transaction fee. Splitrock also has agreed to
reimburse Credit Suisse First Boston for its reasonable out-of-pocket expenses,
including reasonable fees and expenses of legal counsel and any other
40
<PAGE>
advisor retained by Credit Suisse First Boston, and to indemnify Credit Suisse
First Boston and related parties against liabilities, including liabilities
under the federal securities laws, arising out of its engagement.
Credit Suisse First Boston and its affiliates have in the past provided
certain investment banking services to Splitrock and its affiliates and to
McLeodUSA and its affiliates unrelated to the proposed merger, for which
services Credit Suisse First Boston and its affiliates have received customary
compensation. In the ordinary course of business, Credit Suisse First Boston
and its affiliates may actively trade the debt and equity securities of both
Splitrock and McLeodUSA for their own accounts and for the accounts of
customers and, accordingly, may at any time hold long or short positions in
such securities.
Recommendation of the McLeodUSA Board of Directors and Reasons for the Merger
In recent months, experts in the communications industry have recognized a
significant growth in the demand for bandwidth to carry data. Furthermore, this
demand provides the opportunity for an even greater growth rate in the future.
Most players in the communications industry are developing a strategy to
capture a share of the data market and provide data services. In recent months
the McLeodUSA board of directors has focused on the data strategy of McLeodUSA.
As a result of this analysis, the McLeodUSA board of directors has decided to
accelerate the implementation of its data strategy.
The McLeodUSA board of directors believes the merger will create a stronger
company and competitor, will result in a greater presence in the data market
and will provide significant value for McLeodUSA stockholders, employees and
customers. The principal reasons for this belief are the following:
. We believe this transaction will provide a ubiquitous, advanced product
platform, including ATM-to-the-Edge design for IP, dial and dedicated
traffic. McLeodUSA will immediately have an advanced national backbone
network capable of carrying data, video and voice traffic. The Splitrock
network will include approximately 340 ATM points of presence in
approximately 800 cities which provide coverage of roughly 90% of the
United States.
. We believe the advanced Splitrock network will enable McLeodUSA to
pervasively provide a very broad range of data, products and services
and to serve customers of all sizes.
. We believe the transaction will allow the combined company to offer data
services which will enable McLeodUSA to obtain a share of the national
data market and to enhance the regional capabilities of McLeodUSA.
. We believe the transaction will complete our suite of software packages
by adding to the current software packages of McLeodUSA a sophisticated
Splitrock software which helps Internet service providers manage usage,
billing and other activities associated with the subscriber traffic of
their Internet service provider customers. McLeodUSA previously obtained
a recognized software to fully automate connections to national networks
and has internally developed a sophisticated and successful customer
support software.
. We anticipate a reduction in costs by utilizing the Splitrock advanced
network to terminate out of region voice and data traffic generated
within the 21-state market area of McLeodUSA and to lower the cost of
the in-region data transport of McLeodUSA.
. We believe the addition of Roy Wilkens to our management will maximize
the likelihood of successful execution of our data strategy. On January
7, 2000, Roy Wilkens became the Chief Technology Officer of McLeodUSA
and, after the merger, will become President and Chief Executive Officer
of the McLeodUSA Data Services operation. Mr. Wilkens brings a well-
known and well-respected reputation and background in national broadband
network operations and the communications industry.
. We anticipate savings by eliminating some capital expenditures which
would have been duplicated in the development of similar networks by the
two companies. Combining our fiber network with that of
41
<PAGE>
Splitrock will produce a combined total network of 26,000 miles. In
addition, by adding the 340 points of presence currently on the
Splitrock network, of which approximately one third are in our target
market area, the combined company will have approximately 400 ATM points
of presence in the year 2001.
The McLeodUSA board of directors believes that the merger agreement and the
merger are fair to, and in the best interests of, McLeodUSA and its
stockholders. Accordingly, the McLeodUSA board of directors has approved the
merger agreement and the merger, the proposed amendment to the McLeodUSA
certificate of incorporation to increase the number of authorized shares of
McLeodUSA Class A common stock and the issuance of the McLeodUSA Class A common
stock in the merger. The McLeodUSA board of directors recommends that McLeodUSA
stockholders vote "FOR" the amendment to the McLeodUSA certificate of
incorporation and "FOR" the issuance of shares of McLeodUSA Class A common
stock in the merger.
Before approving the transaction and making its recommendation that the
McLeodUSA stockholders increase the number of authorized shares of McLeodUSA
Class A common stock and approve the issuance of the McLeodUSA Class A common
stock in the merger, the McLeodUSA board of directors consulted with its
management, as well as its financial advisor and its outside legal counsel, and
considered the following material factors, among others:
. the reasons described above under "--Recommendation of the McLeodUSA
Board of Directors and Reasons for the Merger" and the risks described
under "Risk Factors"
. the merger consideration payable to stockholders of Splitrock is fixed
at 0.5347 of a share of McLeodUSA Class A common stock for each share of
Splitrock common stock, without cap or collar provisions
. the merger consideration consists of McLeodUSA Class A common stock and
does not require use of cash, except for cash paid for fractional shares
. the familiarity of the McLeodUSA board of directors and management with
the business, assets, management, operations, strengths and prospects of
McLeodUSA and Splitrock, including the alternatives available if the
merger were not consummated
. Salomon Smith Barney's financial presentations and opinion to the
McLeodUSA board of directors that, as of January 6, 2000 and based upon
and subject to the assumptions, limitations and qualifications stated in
the opinion, the exchange ratio to be paid by McLeodUSA was fair, from a
financial point of view, to McLeodUSA
. the qualification of the merger as a tax-free transaction for United
States federal income tax purposes, except to the extent any cash is
received by Splitrock stockholders for fractional shares
. the terms and conditions of the merger agreement, including the
conditions to closing, the termination fee payable under certain
circumstances, and the restrictions imposed on the conduct of the
business of Splitrock in the time period before closing
. the terms and conditions of the merger agreement which prohibit
Splitrock from soliciting competing offers to acquire outstanding shares
of Splitrock common stock
. the voting agreements of certain stockholders of Splitrock, ensuring
that approximately 52.3% of Splitrock shares are voted in favor of the
merger agreement
. the existence of stock option agreements with several stockholders of
Splitrock, who own approximately 50.5% of the outstanding shares of
Splitrock common stock, granting to McLeodUSA an option to acquire their
shares
. the decreased likelihood of a third party making a pre-closing
acquisition proposal with respect to Splitrock because of the voting and
option agreements
42
<PAGE>
. the fact that the merger agreement is subject to approval by
stockholders of Splitrock and by stockholders of McLeodUSA
. the dilutive effect on the ownership of existing stockholders of
McLeodUSA as a result of the issuance of additional shares of McLeodUSA
Class A common stock in connection with the closing of the merger
transaction
. the satisfactory completion of the due diligence investigation of
Splitrock by McLeodUSA
The foregoing discussion of the information and factors considered by the
McLeodUSA board of directors is not intended to be exhaustive. In view of the
wide variety of material factors considered in connection with this evaluation
of the merger and the complexity of these matters, the McLeodUSA board of
directors did not find it practical to, and did not, quantify or otherwise
attempt to assign a relative weight to the various factors considered. In
addition, the McLeodUSA board of directors did not undertake to make a specific
determination as to whether any particular factor, or any aspect of any
particular factor, was favorable or unfavorable to the ultimate determination
by the McLeodUSA board of directors, but rather the McLeodUSA board of
directors conducted an overall analysis of the factors described above,
including discussions with the McLeodUSA management and the McLeodUSA legal and
financial advisors. In considering the factors described above, individual
members of the McLeodUSA board of directors may have given different weight to
different factors.
We cannot assure you any of the potential savings, synergies or
opportunities considered by the McLeodUSA board of directors will be achieved
through consummation of the merger.
Opinion of the McLeodUSA Financial Advisor
Salomon Smith Barney has acted as the financial advisor to McLeodUSA in
connection with the merger. On January 6, 2000, Salomon Smith Barney stated in
a presentation to the McLeodUSA board of directors its oral opinion,
subsequently confirmed in writing, that, as of such date and based upon and
subject to the factors and assumptions set forth in the presentation, the
exchange ratio was fair to McLeodUSA from a financial point of view.
The full text of the written opinion which sets forth the assumptions made,
procedures followed and matters considered by Salomon Smith Barney is set forth
as Appendix E to this joint proxy statement/prospectus and McLeodUSA
stockholders are urged to read Salomon Smith Barney's opinion in its entirety.
The summary of the opinion as set forth in this joint proxy
statement/prospectus is qualified in its entirety by reference to the full text
of the opinion.
The opinion and presentation of Salomon Smith Barney to the McLeodUSA board
of directors, in connection with which Salomon Smith Barney was requested to
evaluate the fairness from a financial point of view of the exchange ratio to
McLeodUSA, was only one of many factors taken into consideration by the
McLeodUSA board of directors in making its determination to approve the merger.
No limitations were imposed by the McLeodUSA board of directors upon Salomon
Smith Barney with respect to the investigation made or the procedures followed
by Salomon Smith Barney in rendering its opinion.
Salomon Smith Barney's opinion should be read carefully and in its entirety.
It is directed only to the fairness, from a financial point of view, of the
exchange ratio to McLeodUSA, and does not address the underlying business
decision of McLeodUSA to effect the merger or constitute a recommendation to
any McLeodUSA stockholder as to how to vote with respect to the merger. It also
does not constitute an opinion or imply any conclusion of Salomon Smith Barney
as to what the value of the McLeodUSA Class A common stock actually will be
when issued pursuant to the merger or the price at which McLeodUSA Class A
common stock will trade following the announcement or completion of the merger,
which may vary.
In connection with rendering its opinion, Salomon Smith Barney reviewed
selected publicly available business and financial information concerning
McLeodUSA and Splitrock, as well as financial forecasts that
43
<PAGE>
were provided to Salomon Smith Barney by McLeodUSA and Splitrock, respectively.
Salomon Smith Barney discussed the business, operations and prospects of
McLeodUSA and Splitrock, as well as other matters it believed relevant to its
inquiry, with officers and employees of McLeodUSA and Splitrock. Salomon Smith
Barney also considered such other information, analyses, investigations and
financial, economic and market criteria that it deemed appropriate.
In its review and analysis and in arriving at its opinion, Salomon Smith
Barney assumed and relied upon, without assuming any responsibility for
independent verification, the accuracy and completeness of the financial and
other information reviewed by Salomon Smith Barney. With respect to the
financial forecasts of McLeodUSA and Splitrock, Salomon Smith Barney assumed
that they had been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the respective managements of McLeodUSA
and Splitrock as to the future financial performance of McLeodUSA and
Splitrock, respectively, and Salomon Smith Barney expressed no opinion with
respect to such forecasts or the assumptions on which such forecasts were
based. Salomon Smith Barney also assumed that the merger will be consummated in
accordance with the terms of the merger agreement and the other agreements
entered into in conjunction with the merger. Salomon Smith Barney did not make
or assume any responsibility for making or obtaining any independent
evaluations or appraisals of any of the assets or liabilities (contingent or
otherwise) of McLeodUSA or Splitrock. Salomon Smith Barney's opinion is
necessarily based upon conditions as they existed and could be evaluated on
January 6, 2000.
In connection with rendering its opinion to the McLeodUSA board of
directors, Salomon Smith Barney performed several financial analyses, the
material portions of which are summarized below. Salomon Smith Barney believes
that its analyses must be considered as a whole and that selecting portions of
such analyses and the factors it considered, without considering all such
analyses and factors, could create an incomplete view of the analyses and the
process underlying its opinion. While the conclusions reached in connection
with each analysis were considered carefully by Salomon Smith Barney in
arriving at its opinion, Salomon Smith Barney made various subjective judgments
in arriving at its opinion and did not consider it practicable to, nor did it
attempt to, assign relative weights to the individual analyses and specific
factors considered in reaching its opinion.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In
addition, the process of preparing a fairness opinion necessarily requires a
broad range of subjective judgments with respect to appropriate comparable
companies, appropriate multiples of various selected financial data,
appropriate discount rates and other financial and other factors. Analyses and
estimates of the values of companies do not purport to be appraisals or
necessarily reflect the prices at which companies or their securities actually
may be sold. No public company utilized for a comparison is identical to
McLeodUSA or Splitrock. Accordingly, any analysis of publicly traded comparable
companies is not mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies involved and other factors that could affect the public trading
value of the companies or company to which they are being compared. The range
of valuation for any particular analysis should not be taken to be the view of
Salomon Smith Barney of the actual value of McLeodUSA or Splitrock.
The following is a summary of the material financial analyses used by
Salomon Smith Barney in connection with providing its opinion to the McLeodUSA
board of directors. Several of the summaries below include information
presented in tabular format. In order to fully understand such financial
analyses used by Salomon Smith Barney, the tables must be read with the text of
each summary. The tables alone do not constitute a complete description of the
financial analyses.
(1) Historical Stock Price Performance
Salomon Smith Barney reviewed the relationship between movements of
Splitrock common stock, an index of Internet service providers' common stock,
an index of fiber providers' common stock and the Nasdaq composite index and
the trading volume and price history of Splitrock common stock for the period
from August 3, 1999, the date on which Splitrock common stock first traded
publicly, through December 31, 1999.
44
<PAGE>
Salomon Smith Barney noted that during the period analyzed, Splitrock common
stock had appreciated 120% compared to 25%, 40% and 55%, for the Internet
service providers index, the fiber providers index and the Nasdaq composite
index, respectively. Salomon Smith Barney also reviewed the relationship
between movements of McLeodUSA Class A common stock, an index of competitive
local exchange carriers (CLECs) and the Nasdaq composite index and the trading
volume and price history of McLeodUSA Class A common stock for the period from
January 1, 1999 through December 31, 1999. Salomon Smith Barney noted that
during the period analyzed, McLeodUSA Class A common stock had appreciated 273%
compared to 285% and 84%, for the CLEC index and the Nasdaq composite index,
respectively.
(2) Historical Exchange Ratio Analysis
Salomon Smith Barney reviewed the implied historical exchange ratio between
McLeodUSA Class A common stock and Splitrock common stock determined by
dividing the closing price per share of Splitrock common stock by the closing
price per share of McLeodUSA Class A common stock for the three and one month
intervals ending December 31, 1999 as well as for the period from August 3,
1999, the date on which Splitrock common stock first traded publicly, through
December 31, 1999. The review indicated that the closing prices of Splitrock
common stock and McLeodUSA Class A common stock on December 31, 1999 implied an
exchange ratio of 0.34 and indicated the following high, low and average
implied historical exchange ratios during these periods:
<TABLE>
<CAPTION>
High Implied Low Implied Average Implied
Exchange Ratio Exchange Ratio Exchange Ratio
-------------- -------------- ---------------
<S> <C> <C> <C>
1 month........................ 0.49 0.31 0.38
3 months....................... 0.55 0.31 0.42
8/3-12/31/1999................. 0.55 0.31 0.41
</TABLE>
(3) Splitrock Valuation Analysis
Salomon Smith Barney arrived at a range of values for Splitrock by utilizing
two principal methodologies in valuing Splitrock: a public market analysis and
a discounted cash flow analysis. Public market analysis analyzes a business's
operating performance and outlook relative to a group of publicly traded peer
companies to determine an implied unaffected market trading value. A discounted
cash flow analysis provides insight into the intrinsic value of a business
based on the projected earnings and capital requirements and the net present
value of the subsequent cash flows to be generated by the assets of such
business. No company used in the public market analysis described below is
identical to Splitrock. Accordingly, an analysis of the data described below
necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the businesses and
other facts that could affect the public trading value of the companies to
which they are being compared.
(a) Public Market Analysis. Salomon Smith Barney compared selected financial
information of Splitrock with corresponding data of the following companies
that Salomon Smith Barney believed to be appropriate.
Selected Business-Oriented Internet Service Providers
Concentric Network Corp.
PSINet, Inc. and
Verio, Inc.
Selected Fiber-Based Providers
Global Crossing Ltd.
ITC/\DeltaCom, Inc.
Level 3 Communications, Inc.
MetroMedia Fiber Network, Inc.
Qwest Communications International, Inc. and
Williams Communications, Inc.
45
<PAGE>
Salomon Smith Barney reviewed the multiples of firm value to each of the
following metrics of the foregoing companies, and using this information,
determined the corresponding range of multiples for Splitrock based on this
review:
<TABLE>
<CAPTION>
Splitrock Multiple
Range
-------------------
Operating Metric Low High
---------------- --------- ---------
<S> <C> <C>
Previous Quarter Revenues (annualized)................... 11.0x 13.0x
Estimated 1999 Revenue................................... 12.0x 14.0x
Estimated 2000 Revenue................................... 7.0x 9.0x
</TABLE>
Salomon Smith Barney also reviewed multiples, as adjusted based on
anticipated growth rates, of firm value to estimated revenue for each of the
following years, and using this information determined the corresponding
multiple range for Splitrock.
<TABLE>
<CAPTION>
Splitrock Growth-
Adjusted
Multiple Range
------------------
Estimated Revenue Year Low High
---------------------- -------- ---------
<S> <C> <C>
1999....................................................... 20.0x 28.0x
2000....................................................... 15.0x 20.0x
2001....................................................... 12.0x 15.0x
2002....................................................... 10.0x 12.0x
</TABLE>
Revenue estimates are based on research by securities analysts. Based on the
last quarter revenues, annualized, of Splitrock of $94.8 million and revenue
estimates of $86.8 million, $192.3 million, $317.1 million and $529.5 million
for 1999 through 2002, respectively, and other factors relevant in the
valuation of Splitrock, Salomon Smith Barney determined a valuation range for
Splitrock of $1.5 billion to $2.0 billion. After making adjustments for
outstanding net debt and proceeds from sales of stock issuable upon option
exercises, this analysis resulted in a valuation for the aggregate equity of
Splitrock of $1.4 billion to $1.9 billion, or $22.78 to $30.82 per share.
(b) Discounted Cash Flow Analysis. Salomon Smith Barney performed two
separate discounted cash flow analyses to provide insight into the intrinsic
value of Splitrock based on projected earnings and capital requirements and the
subsequent cash flows generated by the assets of Splitrock. Salomon Smith
Barney derived ranges of firm values for Splitrock based upon the present value
as of December 31, 1999 of its projected cash flows if Splitrock were to
continue on a stand-alone basis, without giving effect to the merger. In the
first analysis, referred to as the Wall Street Case, Salomon Smith Barney
employed cash flow projections through 2009 provided by Wall Street analysts.
In the second analysis, referred to as the Management Case, Salomon Smith
Barney employed cash flow projections through 2004 provided by Splitrock
management. The Wall Street Case uses different assumptions, including lower
EBITDA margins when considering the later years of the Management Case. Each
case described is only a portion of the overall analysis performed by Salomon
Smith Barney, and Salomon Smith Barney expresses no judgment on the
appropriateness or accuracy of the assumptions underlying either case. Salomon
Smith Barney applied discount rates reflecting the following:
<TABLE>
<CAPTION>
Weighted Average Terminal EBITDA
Cost of Capital Multiples
---------------- ---------------
<S> <C> <C>
Wall Street Case............................ 15.0%-17.0% 9.0x-11.0x
Management Case............................. 15.0%-17.0% 14.0x-16.0x
</TABLE>
Based on these rates, multiples and selected adjustments, these analyses
resulted in implied per share value ranges for Splitrock common stock as
follows:
<TABLE>
<CAPTION>
Range of Implied
Equity Value Per Share of
Splitrock Common Stock
-------------------------
<S> <C>
Wall Street Case................................... $28.08-40.40
Management Case.................................... $28.67-36.37
</TABLE>
46
<PAGE>
(4) McLeodUSA Valuation
Salomon Smith Barney also performed a public market analysis and a
discounted cash flow analysis of McLeodUSA.
(a) Public Market Analysis. Salomon Smith Barney compared selected financial
information of McLeodUSA with corresponding data of the following fiber-based
competitive local exchange carriers:
Adelphia Business Solutions, Inc.
e.spire Communications, Inc.
Electric Lightwave, Inc.
GST Telecommunications Inc.
ICG Communications, Inc.
Intermedia Communications, Inc.
NEXTLINK Communications, Inc.
Time Warner Telecom, Inc.
Salomon Smith Barney reviewed multiples of firm value to each of the
following operating metrics for the foregoing companies, and using this
information, determined the corresponding multiple range for McLeodUSA:
<TABLE>
<CAPTION>
McLeodUSA
Multiple Range
----------------
Operating Metric Low High
---------------- ------- -------
<S> <C> <C>
Previous Quarter Revenues (annualized).................. 20.0x 25.0x
Number of Access Lines.................................. $25,000 $30,000(1)
Net Property, Plant and Equipment....................... 6.5x 7.5x
</TABLE>
--------
(1) Range is of value per access line.
Salomon Smith Barney also reviewed multiples, as adjusted based on
anticipated growth rates, of firm value to estimated revenue for each of the
following years, and using this information determined the corresponding
multiple range for McLeodUSA:
<TABLE>
<CAPTION>
McLeodUSA
Growth-Adjusted
Multiple Range
-----------------
Estimated Revenue Year Low High
---------------------- ------- --------
<S> <C> <C>
1999....................................................... 33.0x 37.0x
2000....................................................... 23.0x 27.0x
2001....................................................... 18.0x 22.0x
2002....................................................... 16.0x 20.0x
</TABLE>
Revenue estimates are based on research by securities analysts. Based on
last quarter revenues (annualized) of McLeodUSA of $964.4 million, 616,400
access lines, net property, plant and equipment of $1.1 billion, and revenue
estimates of $906.9 million, $1.27 billion, $1.83 billion and $2.42 billion for
1999 through 2002, respectively, and other factors relevant to the valuation of
McLeodUSA, Salomon Smith Barney determined a valuation range for McLeodUSA of
$11.0 billion to $13.5 billion. After making adjustments for outstanding net
debt and proceeds from sales of common stock issuable upon option exercises,
this analysis yielded a valuation for the McLeodUSA aggregate equity of $11.2
billion to $13.7 billion, or $49.06 to $60.05 per share.
(b) Discounted Cash Flow Analysis. Salomon Smith Barney performed two
separate discounted cash flow analyses to provide insight into the intrinsic
value of McLeodUSA based on projected earnings and capital requirements and the
subsequent cash flows generated by the assets of McLeodUSA. Salomon Smith
Barney derived ranges of firm values for McLeodUSA based upon the present value
as of December 31, 1999 of its projected cash flows if McLeodUSA were to
continue on a stand-alone basis, without giving effect to the
47
<PAGE>
merger. In the first analysis, referred to as the Wall Street Case, Salomon
Smith Barney employed cash flow projections through 2009 provided by Wall
Street analysts. In the second analysis, referred to as the Management Case,
Salomon Smith Barney employed cash flow projections through 2009 provided by
McLeodUSA management. The Wall Street Case assumes a slower expansion of the
McLeodUSA business than the Management Case. Each case described is only a
portion of the overall analysis performed by Salomon Smith Barney, and Salomon
Smith Barney expresses no judgment on the appropriateness or accuracy of the
assumptions underlying either case. Salomon Smith Barney applied discount rates
reflecting the following:
<TABLE>
<CAPTION>
Weighted Average Terminal EBITDA
Cost of Capital Multiples
---------------- ---------------
<S> <C> <C>
Wall Street Case............................ 13.0%-14.0% 9.5x-10.5x
Management Case............................. 13.0%-14.0% 9.5x-10.5x
</TABLE>
Based on these rates, multiples and selected adjustments, these analyses
resulted in implied per share value ranges for McLeodUSA Class A common stock
as follows:
<TABLE>
<CAPTION>
Range of Implied Equity Value Per
Share of McLeodUSA Class A Common Stock
---------------------------------------
<S> <C>
Wall Street Case..................... $53.29-$64.36
Management Case...................... $64.50-$76.66
</TABLE>
Salomon Smith Barney is an internationally recognized investment banking
firm that regularly engages in the valuation of companies and their securities
in connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
and corporate, estate and other purposes. McLeodUSA retained Salomon Smith
Barney as a financial advisor because of its reputation, expertise in the
valuation of companies and substantial experience in transactions such as the
merger.
In the past, Salomon Smith Barney has rendered investment banking and
financial advisory services to McLeodUSA for which it has been paid fees.
Pursuant to an engagement letter dated January 5, 2000, McLeodUSA agreed to pay
Salomon Smith Barney a fee, before certain credits relating to a prior
transaction of (1) approximately $2.37 million upon execution of the merger
agreement, and (2) $4.75 million upon completion of the merger.
In addition, if McLeodUSA receives a termination fee under the terms of the
merger agreement or any profit resulting from any shares (or option to acquire
shares or assets) of Splitrock acquired in connection with the proposed merger
during the term of the Salomon Smith Barney engagement letter, Salomon Smith
Barney will receive a termination fee equal to the lesser of (1) 5% of all such
fees or profits, and (2) $5 million, in each case net of direct out-of-pocket
expenses incurred by McLeodUSA in connection with the proposed merger or in
obtaining such termination fees or profits, less any amounts previously paid to
Salomon Smith Barney and less any of the credits referenced above.
Additionally, McLeodUSA has agreed to reimburse Salomon Smith Barney for
reasonable out-of-pocket expenses, including, without limitation, reasonable
fees and expenses of Salomon Smith Barney's legal counsel, provided that this
reimbursement will not exceed $50,000 in the aggregate without the prior
written consent of McLeodUSA. McLeodUSA has also agreed to indemnify Salomon
Smith Barney and related persons against liabilities, including liabilities
under the federal securities laws, related to or arising out of its engagement.
In the ordinary course of its business, Salomon Smith Barney may actively trade
the securities of McLeodUSA and Splitrock for its own account and the accounts
of its customers and, accordingly, may at any time hold a long or short
position in these securities.
Independent Auditors
The partial presentation of prospective financial information included or
referred to in this document on pages 35 through 48 has been prepared by, and
is the responsibility of, the management of McLeodUSA and of
48
<PAGE>
Splitrock and their respective financial advisors. Arthur Andersen LLP and
PricewaterhouseCoopers LLP have neither examined nor compiled that prospective
financial information, and accordingly, Arthur Andersen LLP and
PricewaterhouseCoopers LLP do not express an opinion or any other form of
assurance with respect thereto and accept no responsibility for that
information. The Arthur Andersen LLP and PricewaterhouseCoopers LLP reports on
the financial statements of McLeodUSA and Splitrock, respectively, incorporated
by reference in this joint
proxy statement/prospectus relate to McLeodUSA's and Splitrock's historical
financial information. They do not extend to the prospective financial
information and should not be read to do so.
Interests of Splitrock Management in the Merger
Some directors and executive officers of Splitrock have interests in the
merger that are in addition to, or different from, their interests as
stockholders in Splitrock. The Splitrock board of directors knew about these
interests, and considered them, when it approved the merger agreement. These
interests are summarized below.
Options. Under the terms of the Splitrock 1997 and 1999 Stock Incentive
Plans, on the consummation of the merger, a total of 1,225,062 outstanding,
non-vested options to purchase Splitrock common stock held by Splitrock
directors and executive officers, as listed in the table below, will vest and
become immediately exercisable. McLeodUSA will issue substitute stock options
to purchase McLeodUSA Class A common stock in replacement of all unexercised
Splitrock stock options outstanding at the effective time of the merger as
described under "Terms of the Merger Agreement and Related Transactions--
Conversion of Splitrock Common Stock; Treatment of Options and Warrants."
The following table shows the number of unvested options held by Splitrock
executive officers and directors whose vesting will accelerate as a result of
the merger and the estimated value of such options, assuming the merger is
completed on March 30, 2000.
<TABLE>
<CAPTION>
Number of Unvested Splitrock Dollar Value of Unvested
Options that Options that Accelerate
Accelerate as a Result as a Result
Name of Officer or Director of the Merger(1) of the Merger(2)
- --------------------------- ---------------------------- ------------------------
<S> <C> <C>
James M. Nakfoor......... 45,040 $ 1,175,018
Marshall C. Turner....... 45,040 1,175,018
Roy A. Wilkens........... 33,780 1,145,423
David M. Boatner......... 268,700 6,986,977
J. Robert Fugate......... 200,737 5,224,699
Patrick J. McGettigan,
Jr. .................... 157,105 4,487,902
Jorge Rosado............. 250,000 5,177,080
Todd W. Wilkens.......... 224,660 7,477,627
</TABLE>
- --------
(1) This represents the number of Splitrock options estimated to be unvested as
of March 30, 2000.
(2) The estimated value of unvested options shown in this table is based upon
the February 9, 2000 closing price for McLeodUSA Class A common stock of
$67.0625 multiplied by the exchange ratio of 0.5347 less the exercise price
of these options.
New Employment Agreement. McLeodUSA entered into an agreement to employ Roy
A. Wilkens commencing on January 7, 2000. The agreement sets forth the terms
and conditions for his employment as Chief Technology Officer of McLeodUSA and,
upon consummation of the merger, as President and Chief Executive Officer of
the Data Services operations of McLeodUSA. In his role as CEO of Data Services
operations, Mr. Wilkens will be responsible for the operations and activities
currently undertaken by Splitrock, including development and installation of
asynchronous transmission mode, or ATM, switching capacity and colocations. The
agreement is for a three-year term ending on January 6, 2003 and provides for
an initial base annual salary of $400,000, with the potential for increases
each year based on competitive survey data, and bonus opportunities of not less
than 50% of the base annual salary. In addition, Mr. Wilkens was granted an
option to purchase 2 million shares of McLeodUSA Class A common stock at an
exercise price per share equal to the fair market value of a share of McLeodUSA
Class A common stock on the date of grant.
49
<PAGE>
Current Employment Agreements. Splitrock has employment agreements with
William R. Wilson, J. Robert Fugate and David M. Boatner, each of whom is an
executive officer of Splitrock. Under these agreements, if the executive's
employment with Splitrock is terminated by Splitrock without cause, as defined
in the agreements, the executive is entitled to receive severance compensation
and benefits consisting of the following:
. William R. Wilson--Mr. Wilson will not remain with Splitrock after the
effective time of the merger and will consequently receive a payment
equal to the balance of the base salary remaining to be paid under the
term of his employment agreement, which expires on March 15, 2002
. J. Robert Fugate--If Mr. Fugate's employment is terminated on or before
March 21, 2000, he will receive a payment equal to 12 months of his base
salary. If Mr. Fugate's employment is terminated after March 21, 2000
and before March 21, 2001, he will receive a payment equal to six months
of his base salary
. David M. Boatner--If Mr. Boatner's employment is terminated, he will
receive a payment equal to the balance of the base salary remaining to
be paid under the term of his employment agreement, which expires on
February 28, 2001
Excise Tax Agreements. Splitrock has entered into excise tax agreements with
Patrick J. McGettigan, Jr., David M. Boatner, J. Robert Fugate, Jorge Rosado
and Todd W. Wilkens, each of whom may be subject to excise tax under Section
280G of the Internal Revenue Code of 1986, as amended, as a result of the
merger. Under the excise tax agreements, if any amount payable to any of these
individuals is a "parachute payment" within the meaning of the Code and is
subject to the excise tax imposed upon such parachute payments, Splitrock will
make an additional payment to the individual. The additional payment will be
equal to the amount of the excise tax payable by the individual plus any income
and excise taxes payable by the individual with respect to this additional
payment.
Stockholders' Agreements. Kwok Li, Linsang Partners and William R. Wilson
each agreed to enter into a stockholders' agreement with McLeodUSA on or prior
to the closing of the merger. For a description of the terms of such
stockholders' agreements, see "Terms of the Merger Agreement and Related
Transactions--Terms of Stockholders' Agreements."
Confidentiality, Nonsolicitation and Noncompetition Agreements. Kwok Li,
Linsang Partners and William R. Wilson each agreed to enter into a
confidentiality, nonsolicitation and noncompetition agreement with McLeodUSA on
or prior to the closing of the merger. For a description of the terms of such
confidentiality, nonsolicitation and noncompetition agreements, see "Terms of
the Merger Agreement and Related Transactions--Confidentiality, Nonsolicitation
and Noncompetition Agreements."
Option Agreements. In connection with the merger agreement, McLeodUSA and
Kwok and Felice Li, William R. Wilson, Claudia Wilson, as trustee of the
William R. Wilson Grantor Retained Annuity Trust, and Linsang Partners entered
into stock option agreements under which these Splitrock stockholders granted
to McLeodUSA an option to purchase their Splitrock shares. The option is
exercisable for cash or stock under specified circumstances including those
when Splitrock is required to pay McLeodUSA the $68 million termination fee. In
addition, if McLeodUSA exercises the option and Splitrock within 12 months
thereafter consummates a Competing Transaction (as defined below), McLeodUSA
will pay an amount of additional consideration equal to 50% of the difference
between the aggregate price paid by McLeodUSA upon exercise of the option and
the aggregate amount received by McLeodUSA in the Competing Transaction. For a
description of the terms of the stock option agreements, see "Terms of the
Merger Agreement and Related Transactions--Stock Option Agreements."
Directors' and Officers' Insurance and Indemnification. The merger agreement
provides that, for six years after the merger, McLeodUSA will maintain
directors' and officers' liability insurance to cover present and former
directors and officers of Splitrock with respect to claims against them arising
from facts or events
50
<PAGE>
which occurred before the merger or for six years after the merger. Subject to
specified limitations, this insurance will have at least the same maximum
coverage and amounts as, and terms and conditions no less advantageous than,
the coverage currently provided by Splitrock.
The merger agreement requires the surviving corporation in the merger to
indemnify each present and former director and officer of Splitrock following
the merger against all expenses or liabilities incurred in connection with any
claim or investigation arising out of actions or omissions occurring before the
merger or for a period of six years after the merger to the fullest extent
permitted under the laws of the State of Delaware and the Splitrock certificate
of incorporation and bylaws. See "Terms of the Merger Agreement and Related
Transactions--Directors' and Officers' Insurance and Indemnification."
Interests of McLeodUSA Management in the Merger
Some directors and executive officers of McLeodUSA have interests in the
merger that are in addition to, or different from, their interests as
stockholders in McLeodUSA. The McLeodUSA board of directors knew about these
interests, and considered them, when it approved the merger agreement. These
interests are summarized below.
Splitrock common stock. The following table shows the number of shares of
Splitrock common stock held as of the record date by McLeodUSA executive
officers and directors and the number of shares of McLeodUSA Class A common
stock these executive officers and directors will receive in the merger.
<TABLE>
<CAPTION>
Shares of Shares of McLeodUSA
Splitrock Common Stock Class A Common Stock
Name of Officer or Director Owned Prior to the Merger to Be Received in the Merger
--------------------------- ------------------------- ----------------------------
<S> <C> <C>
Clark E. McLeod......... 574,260 307,056
Roy A. Wilkens.......... 365,950 195,673
</TABLE>
The shares of Splitrock common stock beneficially owned by Roy A. Wilkens
exclude 377,840 shares beneficially owned by his son Todd W. Wilkens, an
executive officer of Splitrock, 152,010 shares owned by other family members of
Roy A. Wilkens and shares Roy A. Wilkens has the right to acquire upon exercise
of options. See "Stock Ownership of Management, Directors and More than 5%
Stockholders of Splitrock."
New Employment Agreement. As described above, McLeodUSA entered into an
agreement to employ Roy A. Wilkens commencing on January 7, 2000. See "--
Interests of Splitrock Management in the Merger--New Employment Agreement."
Accounting Treatment
The merger is expected to be accounted for using the purchase method of
accounting. McLeodUSA will be deemed the acquiror for financial reporting
purposes. Under the purchase method of accounting, the purchase price in the
merger is allocated among the Splitrock assets acquired and the Splitrock
liabilities assumed to the extent of their fair market value, with any excess
purchase price being allocated to goodwill. Due to the expected significant
amount of goodwill to be acquired in the merger, the purchase method of
accounting and the related amortization of goodwill may have a material effect
on the McLeodUSA financial statements.
Listing on The Nasdaq Stock Market
McLeodUSA has agreed to cause the shares of McLeodUSA Class A common stock
issued in the merger to be approved for listing on The Nasdaq Stock Market.
Governmental and Regulatory Approvals
Under the HSR Antitrust Improvements Act of 1976, the merger may not be
consummated until certain information has been furnished to the Federal Trade
Commission and the Antitrust Division of the Department
51
<PAGE>
of Justice and specified waiting period requirements have been satisfied.
McLeodUSA and Splitrock filed premerger notification and report forms with the
FTC and the Antitrust Division on January 14, 2000, and were granted early
termination of the waiting period by the FTC on February 7, 2000.
Either before or after the effective time of the merger, however, the
Antitrust Division, the FTC or a private person or entity might seek under
antitrust laws, among other things, to enjoin the merger or to cause McLeodUSA
to divest itself, in whole or in part, of the surviving corporation of the
merger or of certain businesses conducted by the surviving corporation. We
cannot assure you that a challenge to the merger will not be made or that, if
such a challenge is made, McLeodUSA will prevail. The obligations of McLeodUSA
and Splitrock to consummate the merger are subject to the condition that the
applicable waiting period under the HSR Act will have expired or been
terminated without action by the Antitrust Division or the FTC to prevent
consummation of the merger. See "Terms of the Merger Agreement and Related
Transactions--Conditions to Consummation of the Merger" and "Terms of the
Merger Agreement and Related Transactions--Termination of the Merger
Agreement."
In connection with the merger, McLeodUSA may submit regulatory notices and
may take further actions before one or more federal or state regulatory
agencies. In addition, while not required, McLeodUSA may provide courtesy
notices prior to the effective time of the merger to a number of government
entities that have issued licenses, certifications and similar
telecommunications regulatory approvals to McLeodUSA and its subsidiaries.
Federal Income Tax Consequences
The following discussion is a summary of the material United States federal
income tax consequences of the reorganization and the merger to a stockholder
of Splitrock holding shares of Splitrock common stock as a capital asset at the
effective times of the reorganization and the merger.
This discussion does not address all aspects of federal taxation that may be
relevant to particular stockholders of Splitrock in light of their personal
circumstances or to stockholders of Splitrock subject to special treatment
under the Internal Revenue Code, including, without limitation, banks, tax-
exempt organizations, insurance companies, dealers in securities or foreign
currencies, stockholders who received their Splitrock stock through the
exercise of employee stock options or otherwise as compensation, stockholders
who are not U.S. persons and stockholders who hold Splitrock stock as part of a
hedge, straddle or conversion transaction. We have not described tax
consequences that arise from rules that apply generally to all taxpayers from
the ownership of McLeodUSA Class A common stock. We have also not described tax
consequences that we assume to be generally known by investors. In addition,
the discussion does not address any state, local or foreign tax consequences of
the reorganization and the merger. Finally, the tax consequences to holders of
stock options or restricted stock are not discussed.
The discussion is based on the Internal Revenue Code, the United States
Department of Treasury regulations and administrative rulings and court
decisions as of the date of this joint proxy statement/prospectus, all of which
are subject to change, possibly with retroactive effects, and which are subject
to differing interpretations. No ruling has been or will be sought from the IRS
concerning the tax consequences of the reorganization and the merger. Splitrock
stockholders are urged to consult their tax advisors regarding the tax
consequences of the reorganization and the merger to them, including the
effects of United States federal, state, local, foreign and other tax laws.
Tax Opinions. The obligation of McLeodUSA to consummate the merger is
subject to the condition, which may be waived, that McLeodUSA receive a legal
opinion from Hogan & Hartson L.L.P. to the effect that the merger will qualify
as a reorganization within the meaning of Section 368(a) of the Internal
Revenue Code or, if viewed as a single integrated transaction together with the
reorganization, the merger will qualify as a reorganization within the meaning
of Section 368(a) of Internal Revenue Code. The obligation of Splitrock to
consummate the merger is subject to the condition, which may be waived, that
Splitrock receive a legal opinion from Fried, Frank, Harris, Shriver & Jacobson
to the effect that the reorganization and the merger will each qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code or, if the
52
<PAGE>
reorganization and merger are viewed as a single integrated transaction, the
reorganization and merger together will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code. The opinions will be
based on customary assumptions and factual representations and will assume the
merger will be completed according to the terms of the merger agreement.
Tax Consequences of the Reorganization and the Merger. The following
discussion of United States federal income tax consequences of the
reorganization and the merger assumes that, if completed, the reorganization
and the merger will qualify as reorganizations within the meaning of Section
368(a) of the Internal Revenue Code, subject to the assumptions, limitations,
qualifications and other considerations described below under "--Considerations
with Respect to Opinions." Although it is uncertain whether the merger and the
reorganization will be viewed together as one intergated Section 368(a)
reorganization or viewed as two separate Section 368(a) reorganizations, the
results would be the same.
Accordingly, if the reorganization and the merger are completed:
. Splitrock, Splitrock Holdings and McLeodUSA will not recognize gain or
loss
. no gain or loss will be recognized by a Splitrock stockholder as a
result of the receipt solely of shares of Splitrock Holdings common
stock or McLeodUSA Class A common stock, except to the extent of any
cash received in lieu of fractional shares of McLeodUSA Class A common
stock
. a Splitrock stockholder who receives cash in lieu of a fractional share
of McLeodUSA Class A common stock will be treated as if the stockholder
received the fractional share and then sold the share back to McLeodUSA.
The stockholder will in general recognize gain or loss on the sale of
the fractional share equal to the difference between (a) the amount of
cash received for the fractional share and (b) the stockholder's tax
basis in the fractional share
. a Splitrock stockholder's aggregate tax basis in the McLeodUSA Class A
common stock received will initially be (a) equal to the stockholder's
aggregate tax basis in the Splitrock common stock immediately prior to
the reorganization and the merger (b) reduced by the amount of basis
allocable to the fractional share, as described above
. a Splitrock stockholder's holding period for McLeodUSA Class A common
stock received in accordance with the reorganization and the merger will
include the holding periods of the Splitrock and Splitrock Holdings
common stock, assuming the stockholder's Splitrock and Splitrock
Holdings common stock were held as capital assets, and
. Splitrock stockholders must retain records and file a statement setting
forth facts about the reorganization and the merger with their United
States federal income tax returns.
Considerations with Respect to Opinions. The tax opinions of Fried, Frank,
Harris, Shriver & Jacobson and Hogan & Hartson L.L.P. and the foregoing summary
of the U.S. federal income tax consequences of the reorganization and the
merger are and will be subject to assumptions, limitations and qualifications
and are based on current law and, among other things, representations of
Splitrock, Splitrock Holdings and McLeodUSA, including representations made by
the respective managements of Splitrock, Splitrock Holdings and McLeodUSA.
Opinions of counsel are not binding on the IRS and do not preclude the IRS from
adopting a contrary position. In addition, if any of the representations or
assumptions are inconsistent with the actual facts, the U.S. federal income tax
consequences of the reorganization and the merger could be adversely affected.
This discussion is only a general summary of the material federal income tax
consequences of the reorganization and the merger. The tax consequences of the
reorganization and the merger to you may be different from those summarized
above, based on your individual situation. Accordingly, Splitrock stockholders
are strongly urged to consult with their tax advisors with respect to the
particular United States federal, state, local or foreign income tax or other
tax consequences of the reorganization and the merger to them.
53
<PAGE>
Restrictions on Resales by Affiliates
The McLeodUSA Class A common stock to be issued to Splitrock stockholders in
the merger will be freely transferable under the Securities Act, except for
shares issued to any person who may be deemed to be an "affiliate" of Splitrock
within the meaning of Rule 145 under the Securities Act or who will become an
"affiliate" of McLeodUSA within the meaning of Rule 144 under the Securities
Act after the merger. Shares of McLeodUSA Class A common stock received by
persons who are deemed to be Splitrock affiliates or who become McLeodUSA
affiliates may be resold by these persons only in transactions permitted by the
limited resale provisions of Rule 145 or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Splitrock
generally include individuals or entities that, directly or indirectly through
one or more intermediaries, control, are controlled by or are under common
control with Splitrock and may include officers, directors and principal
stockholders of Splitrock. All Splitrock stockholders who may be deemed to be
affiliates of Splitrock will be so advised prior to the effective time of the
merger.
It is a condition to the consummation of the merger that Splitrock shall use
its reasonable best efforts to obtain an affiliate agreement from each
affiliate of Splitrock prior to the effective time of the merger by which each
Splitrock affiliate will agree not to sell in violation of the Securities Act
or the rules and regulations promulgated under the Securities Act any of the
McLeodUSA Class A common stock received upon consummation of the merger.
Generally, this will require that all sales be made in accordance with Rule 145
under the Securities Act, which in turn requires that, for specified periods,
sales be made in compliance with the volume limitations, manner of sale
provisions and current information requirements of Rule 144 under the
Securities Act.
The certificates evidencing McLeodUSA Class A common stock issued to
Splitrock affiliates in the merger will bear a legend summarizing the foregoing
restrictions until a sale, transfer or other disposition of the McLeodUSA Class
A common stock represented by these certificates has been registered under the
Securities Act or is made in compliance with Rule 145 under the Securities Act.
Persons who are not affiliates of Splitrock may generally sell their
McLeodUSA Class A common stock without restrictions and without delivering this
joint proxy statement/prospectus.
In addition, Kwok Li, Linsang Partners and William R. Wilson each agreed to
enter into a stockholders' agreement with McLeodUSA on or prior to the closing
of the merger. Those agreements may further restrict the ability of these
stockholders to sell the shares of McLeodUSA Class A common stock that they
will receive in the merger. For a description of the terms of these
stockholders' agreements, see "Terms of the Merger Agreement and Related
Transactions--Terms of Stockholders' Agreements."
Appraisal Rights of Dissenting Stockholders
Both McLeodUSA and Splitrock are organized under Delaware law. Under
Delaware law, neither the McLeodUSA nor the Splitrock stockholders have a right
to dissent and receive the appraised value of their shares in connection with,
or as a result of, the matters to be acted upon at the special meetings.
Splitrock 11 3/4% Senior Notes Due 2008
Consummation of the merger will trigger a change in control of Splitrock, as
defined in the indenture governing the Splitrock 11 3/4% senior notes due 2008.
As a result, each holder of one or more notes will be able to require the
surviving corporation in the merger to repurchase all or any part of the
holder's notes at a price equal to 101% of the aggregate principal amount of
the notes plus accrued and unpaid interest and liquidated damages, if any, to
the date of repurchase.
54
<PAGE>
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
The following summary of the material terms and provisions of the merger
agreement is qualified in its entirety by reference to the merger agreement.
The merger agreement is attached as Appendix A to this joint proxy
statement/prospectus and is considered a part of this document.
General
The merger agreement contemplates two distinct but related transactions:
. the holding company reorganization, in which Splitrock Services will
become a wholly owned subsidiary of Splitrock Holdings, and
. the merger, in which Splitrock Holdings will become a wholly owned
subsidiary of McLeodUSA.
McLeodUSA and Splitrock expect that the merger will be consummated as soon
as practicable following the holding company reorganization.
Both the McLeodUSA board of directors and the Splitrock board of directors
have approved the merger agreement and the transactions contemplated by the
merger agreement. At the effective time of the reorganization, each outstanding
share of Splitrock common stock will be converted into the right to receive a
share of common stock of Splitrock Holdings. At the effective time of the
merger, each right to receive a share of Splitrock Holdings common stock will
be converted into the right to receive 0.5347 of a share of McLeodUSA Class A
common stock and cash in lieu of fractional shares, all as more fully described
below.
Structure of the Reorganization
Subject to the terms and conditions of the merger agreement and in
accordance with the Delaware General Corporation Law, in the holding company
reorganization, Splitrock Merger Sub will be merged into Splitrock. Splitrock
will become a wholly owned subsidiary of Splitrock Holdings and will continue
its corporate existence under the laws of the State of Delaware. The separate
corporate existence of Splitrock Merger Sub will terminate. Each outstanding
share of common stock of Splitrock will be converted into the right to receive
a share of common stock of Splitrock Holdings. Splitrock stockholders will not
need to exchange their stock certificates because their shares of Splitrock
common stock will be treated as shares of Splitrock Holdings.
The diagram below illustrates the structure of Splitrock before and after
the holding company reorganization.
[Centered in the page is a diagram of Splitrock Services, Inc. and its
subsidiaries, Splitrock Holdings, Inc. and Splitrock Merger Sub, Inc., before
and after the reorganization.]
55
<PAGE>
After the reorganization, all references to Splitrock in the merger
agreement and in this joint proxy statement/prospectus should be generally
understood to refer to Splitrock Holdings, the new holding company.
Structure of the Merger
Subject to the terms and conditions of the merger agreement and in
accordance with the Delaware General Corporation Law, at the effective time of
the merger, Southside Acquisition Corporation will merge with and into
Splitrock Holdings. Splitrock Holdings will continue its corporate existence
under the laws of the State of Delaware under the name "Splitrock Holdings,
Inc." Splitrock will continue its corporate existence under the laws of the
State of Delaware under the name "Splitrock Services, Inc." as a wholly owned
subsidiary of Splitrock Holdings. At the effective time of the merger, the
separate corporate existence of Southside Acquisition Corporation will
terminate. The certificate of incorporation of Southside Acquisition
Corporation will become the certificate of incorporation of the surviving
corporation of the merger, except that Article 1 will be amended to change
Southside Acquisition Corporation's name to "Splitrock Holdings, Inc." The
bylaws of Southside Acquisition Corporation will become the bylaws of the
surviving corporation of the merger.
The diagram below illustrates the structure of Splitrock and McLeodUSA
before and after the merger.
[Centered in the page is a diagram of McLeodUSA Incorporated, Southside
Acquisition Corporation, Splitrock Holdings, Inc. and Splitrock Services, Inc.
depicting the merger of Southside Acquisition Corporation with and into
Splitrock Holdings, Inc.]
Conversion of Splitrock Common Stock; Treatment of Options and Warrants
At the effective time of the merger, each issued and outstanding share of
Splitrock common stock, other than shares held in the treasury of Splitrock,
held by McLeodUSA or held by any direct or indirect wholly owned subsidiary of
McLeodUSA or Splitrock, will be converted into the right to receive 0.5347 of a
share of McLeodUSA Class A common stock, which is the Exchange Ratio, as well
as cash, without interest, for fractional shares.
Each share of Splitrock common stock held in the treasury of Splitrock, held
by McLeodUSA or held by any direct or indirect wholly owned subsidiary of
McLeodUSA or of Splitrock will be canceled and extinguished at the effective
time of the merger without the payment of any consideration. Each share of
common stock of Southside Acquisition Corporation issued and outstanding
immediately prior to the effective time of the merger will be converted into
and exchanged for one newly and validly issued, fully paid and non-assessable
share of common stock of the surviving corporation of the merger.
If, prior to the effective time of the merger, the outstanding shares of
McLeodUSA Class A common stock or Splitrock common stock are changed into or
exchanged for a different number of shares or a different class as a result of
any stock dividend, subdivision, reclassification, recapitalization, split,
combination or exchange of shares, the nature of the consideration to be
received by the holders of Splitrock common stock and the Exchange Ratio will
be appropriately and correspondingly adjusted.
In addition, no fractional shares of McLeodUSA Class A common stock will be
issued in the merger. For each fractional share that would otherwise be issued,
a Splitrock stockholder will receive cash in an amount
56
<PAGE>
equal to the fractional share multiplied by the average closing price of
McLeodUSA Class A common stock on The Nasdaq Stock Market's National Market
System for the five trading days immediately preceding the day on which the
merger occurs. No interest will be paid or accrue on any cash in lieu of
fractional shares payable to the holders of Splitrock common stock.
At the effective time of the merger, each option to acquire Splitrock common
stock, referred to here as the Splitrock Stock Options, granted under the
Splitrock 1997 Incentive Share Plan or the Splitrock 1999 Stock Incentive Plan,
that is outstanding and unexercised immediately prior to the effective time of
the merger will be replaced by an option to purchase McLeodUSA Class A common
stock. The number of shares of McLeodUSA Class A common stock subject to the
new McLeodUSA option will be equal to the number of shares of Splitrock common
stock subject to the Splitrock Stock Option multiplied by the Exchange Ratio,
and rounding any fractional share down to the nearest whole share. The option
price per share of McLeodUSA Class A common stock will be equal to the
aggregate exercise price for the shares of Splitrock common stock subject to
the Splitrock Stock Option divided by the number of whole shares of McLeodUSA
Class A common stock subject to the new McLeodUSA option. Other than these
changes to the number of shares and the exercise price, the duration and all
other terms of each McLeodUSA option will be the same as those of the prior
Splitrock Stock Option. The conversion of the Splitrock Stock Options will not
affect the accelerated vesting with respect to those options, in accordance
with their terms, at the effective time of the merger. Within five business
days after the effective time, McLeodUSA will use its reasonable best efforts
to cause the McLeodUSA Class A common stock subject to the substituted
McLeodUSA options to be registered under the Securities Act pursuant to a
registration statement on Form S-3 or Form S-8. McLeodUSA will also use its
reasonable best efforts to cause the effectiveness of the registration
statement to be maintained for so long as the McLeodUSA options remain
outstanding.
Each warrant to purchase Splitrock common stock, referred to here as the
Splitrock Warrants, granted under the Warrant Agreement dated July 24, 1998
between Splitrock and Harris Trust Company of New York (formerly Bank of
Montreal Trust Company), as warrant agent, will be assumed by McLeodUSA and at
the effective time of the merger will become exercisable to purchase McLeodUSA
Class A common stock. In each case, the number of shares of McLeodUSA Class A
common stock subject to the Splitrock Warrants will be equal to the number of
shares of Splitrock common stock subject to the Splitrock Warrant multiplied by
the Exchange Ratio, and rounding any fractional share up to the nearest whole
share. The warrant price per share of McLeodUSA Class A common stock will be
equal to the aggregate exercise price for the shares of Splitrock common stock
subject to the Splitrock Warrant divided by the number of whole shares of
McLeodUSA Class A common stock subject to the warrant. McLeodUSA will use its
reasonable best efforts to (1) cause the McLeodUSA Class A common stock subject
to the Splitrock Warrants to be registered under the Securities Act in
accordance with the terms of the Splitrock Warrant Agreement and (2) cause the
effectiveness of the registration statement to be maintained in accordance with
the terms of the Splitrock Warrant Agreement for so long as Splitrock Warrants
remain outstanding.
Exchange of Certificates
For the benefit of the holders of Splitrock common stock outstanding
immediately prior to the effective time, McLeodUSA has agreed to deposit with
Norwest Bank Minnesota, N.A., or another bank or trust company acceptable to
McLeodUSA and Splitrock, as exchange agent in the merger: (1) certificates
representing the whole shares of McLeodUSA Class A common issuable to Splitrock
stockholders under the merger agreement and (2) cash in an amount sufficient to
permit payment of cash for fractional shares as provided in the merger
agreement.
Promptly after the effective time of the merger, McLeodUSA will cause the
exchange agent to mail a letter of transmittal to each holder of Splitrock
common stock. The letter of transmittal will contain instructions with respect
to the surrender to the exchange agent of Splitrock common stock certificates.
Splitrock stockholders should not return their stock certificates with the
enclosed proxy nor should they forward them to the exchange agent unless and
until they receive the letter of transmittal, at which time they should forward
them only in accordance with the accompanying instructions.
57
<PAGE>
Until the certificates representing Splitrock common stock to be converted
into McLeodUSA Class A common stock in the merger are surrendered for exchange
at or after the effective time of the merger, holders of these certificates
will accrue but will not be paid dividends or other distributions declared
after the effective time of the merger with respect to the McLeodUSA Class A
common stock into which their Splitrock common stock has been converted. When
these certificates are surrendered, any unpaid dividends or other distributions
will be paid, without interest. All stock certificates presented after the
effective time of the merger will be canceled and exchanged for certificates
representing the applicable number of shares of McLeodUSA Class A common stock,
together with cash in lieu of fractional shares and any dividends or
distributions to which the holder is entitled. All shares of McLeodUSA Class A
common stock issued upon conversion of the Splitrock common stock, including
cash for fractional shares and any dividends or distributions to which the
Splitrock stockholder is entitled, will be deemed to have been issued and paid
in full satisfaction of all rights pertaining to the Splitrock common stock.
Any shares of McLeodUSA Class A common stock and cash that remain
undistributed by the exchange agent one year after the effective time of the
merger will be delivered to McLeodUSA upon demand. After this period,
certificates representing Splitrock common stock must be surrendered for
exchange to McLeodUSA. None of McLeodUSA, Southside Acquisition Corporation,
Splitrock, the surviving corporation of the reorganization or the merger or the
exchange agent will be liable for any shares of McLeodUSA Class A common stock,
dividends or distributions on this stock, or cash delivered to a public
official under any abandoned property, escheat or similar laws.
If a certificate representing Splitrock common stock has been lost, stolen
or destroyed, the exchange agent will issue the consideration properly payable
in accordance with the merger agreement upon the making of an affidavit of such
loss, theft or destruction by the claimant, and, if required by McLeodUSA or
the exchange agent, the posting of a bond as indemnity against any claim that
may be made against McLeodUSA, the surviving corporation of the merger or the
exchange agent with respect to such certificate.
For a description of the McLeodUSA Class A common stock and a description of
the differences between the rights of the holders of Splitrock common stock, on
the one hand, and holders of McLeodUSA Class A common stock, on the other, see
"McLeodUSA Capital Stock and Comparison of Stockholder Rights."
Effective Time
The merger will occur as promptly as practicable, and in any event within
five business days, after the satisfaction or waiver of all of the conditions
to closing set forth in Article VII of the merger agreement. On the day the
merger occurs, McLeodUSA and Splitrock will file a certificate of merger with
the Secretary of State of the State of Delaware. The effective time of the
merger will be the date and time of such filing. If the merger is not
consummated by July 30, 2000, the merger agreement may be terminated by either
McLeodUSA or Splitrock, unless the failure to consummate the merger by this
date is due to the breach by the party seeking to terminate the merger
agreement of any of its obligations under the merger agreement. See "--
Conditions to Consummation of the Merger." Splitrock and McLeodUSA each
anticipate that, if the proposals are approved at the respective special
meetings, the merger will be consummated during the first quarter of 2000.
Representations and Warranties
The merger agreement contains various representations of Splitrock,
Splitrock Holdings, Splitrock Merger Sub, McLeodUSA and Southside Acquisition
Corporation.
Representations and Warranties of Splitrock, Splitrock Holdings and
Splitrock Merger Sub. The merger agreement contains representations and
warranties of Splitrock, Splitrock Holdings and Splitrock Merger Sub as to,
among other things:
. the corporate organization and existence of Splitrock and its
subsidiaries including Splitrock Holdings and Splitrock Merger Sub,
including that each is duly organized, validly existing and in good
standing with the corporate power and authority to own, operate and
lease its properties and to carry on its business as currently conducted
58
<PAGE>
. ownership by Splitrock of all outstanding shares of capital stock of its
subsidiaries
. the certificate or articles of incorporation or formation and bylaws or
other organizational documents of Splitrock and its subsidiaries
. the capitalization of Splitrock, including the number of shares of
capital stock authorized, the number of shares and rights to acquire
shares outstanding and the number of shares reserved for issuance
. due authorization of and execution by Splitrock, Splitrock Holdings and
Splitrock Merger Sub of the merger agreement and related documents
. the compliance of the merger agreement and related documents with (1)
the Splitrock certificate of incorporation and bylaws and the
certificate or articles of formation and bylaws of the subsidiaries of
Splitrock, (2) applicable laws and (3) certain material agreements of
Splitrock and its subsidiaries, including the absence of events of
default or acceleration of rights under these agreements
. the required governmental and third-party consents
. the possession and validity of all required licenses, timely filing of
required regulatory reports and compliance with applicable laws by
Splitrock and its subsidiaries
. the filings of Splitrock with the SEC, including the absence of material
misstatements or omissions in these filings and that the financial
statements included in these filings are in compliance with GAAP and
fairly present the financial position and results of operations and cash
flows of Splitrock and its subsidiaries
. the qualification of each of the merger and the reorganization as a
reorganization under Section 368(a) of the Internal Revenue Code
. the vote required to approve the merger agreement and the transactions
contemplated by the merger agreement
. the absence of brokers, other than Credit Suisse First Boston
Corporation
. the absence of material omissions and misstatements in the information
supplied by Splitrock for inclusion in this joint proxy
statement/prospectus or in connection with the merger agreement and the
transactions contemplated by the merger agreement
. the absence of material intellectual property infringement or contests
. the absence of material undisclosed liabilities
. the absence of material adverse changes in the business of Splitrock
since December 31, 1998
. the absence of material legal proceedings, injunctions and disputes
. the employee benefit plans of Splitrock and related matters, including
that the plans have been operated and administered in accordance with
applicable law
. the filing and accuracy of the tax returns of Splitrock and the payment
of all applicable taxes
. the receipt by Splitrock, from its financial advisor, of a written
opinion regarding the fairness to the Splitrock stockholders of the
consideration to be received by them in the merger
. the adoption by the Splitrock board of directors of a resolution
approving the merger agreement and the transactions contemplated by the
merger agreement and recommending approval and adoption of the merger
agreement by the stockholders of Splitrock
. true and complete copies of all documents
. the intention of the executive officers, directors and various
stockholders of Splitrock to enter into affiliate agreements
. the exemption of the merger from Section 203 of the Delaware General
Corporation Law
59
<PAGE>
. the absence of any appraisal or dissenters' rights on the part of
stockholders of Splitrock in connection with the merger or the
reorganization
. compliance with the Foreign Corrupt Practices Act of 1977, with other
laws related to gifts and contributions and with laws related to the
regulation of exports
. the Year 2000 risk management plans and condition of Splitrock
. maintenance of appropriate insurance against loss
. compliance with environmental laws and the absence of material
environmental liabilities
. the material contracts of Splitrock and the compliance with the terms of
these contracts
. the ownership of capital stock of McLeodUSA by Splitrock and its
associates and affiliates
. the capitalization and absence of prior business activities of Splitrock
Holdings and Splitrock Merger Sub
The foregoing representations and warranties will not survive the effective
time of the merger.
Representations and Warranties of McLeodUSA and Southside Acquisition
Corporation. The merger agreement contains representations and warranties of
McLeodUSA and Southside Acquisition Corporation as to, among other things:
. the corporate organization and existence of McLeodUSA, Southside
Acquisition Corporation and the significant subsidiaries of McLeodUSA,
including that each is duly organized, validly existing and in good
standing with the corporate power and authority to own, operate and
lease its properties and to carry on its business as currently conducted
. the McLeodUSA certificate of incorporation and bylaws and the
certificate of incorporation and bylaws of Southside Acquisition
Corporation
. the capitalization of McLeodUSA, including the number of shares of
capital stock authorized, the number of shares and rights to acquire
shares outstanding and the number of shares reserved for issuance
. due authorization of and execution by McLeodUSA and Southside
Acquisition Corporation of the merger agreement and related documents
. the compliance of the merger agreement and related documents with (1)
the McLeodUSA certificate of incorporation and bylaws and the
certificate of incorporation and bylaws of Southside Acquisition
Corporation and of the significant subsidiaries of McLeodUSA, (2)
applicable laws and (3) certain material agreements of McLeodUSA,
Southside Acquisition Corporation and the significant subsidiaries of
McLeodUSA, including the absence of events of default or acceleration of
rights under those agreements
. the required governmental and third-party consents
. the possession and validity of all required licenses and compliance with
applicable laws by McLeodUSA and its significant subsidiaries
. the filings of McLeodUSA with the SEC, including the absence of material
misstatements or omissions in these filings and that the financial
statements included in these filings are in compliance with GAAP and
fairly present the financial position and results of operations and cash
flows of McLeodUSA and its consolidated subsidiaries
. the qualification of the merger as a reorganization under Section 368(a)
of the Internal Revenue Code
. the vote of the stockholders of McLeodUSA required to approve (1) the
amendment to the McLeodUSA certificate of incorporation increasing the
number of authorized shares of McLeodUSA Class A common stock and (2)
the issuance of shares of McLeodUSA Class A common stock in the merger
. the absence of brokers, other than Salomon Smith Barney Inc.
60
<PAGE>
. the absence of material omissions and misstatements in the information
supplied by McLeodUSA and Southside Acquisition Corporation for
inclusion in this joint proxy statement/prospectus or in connection with
the merger agreement and the transactions contemplated by the merger
agreement
. the capitalization and absence of prior business activities of Southside
Acquisition Corporation
. the absence of material legal proceedings, injunctions and disputes
. the adoption by the board of directors of McLeodUSA and Southside
Acquisition Corporation of a resolution approving the merger agreement
and the adoption by the board of directors of McLeodUSA of a resolution
recommending the approval of the amendment to the McLeodUSA certificate
of incorporation and the issuance of shares of McLeodUSA Class A common
stock in the merger by the stockholders of McLeodUSA
. the Year 2000 risk management plans and condition of McLeodUSA
. the material contracts of McLeodUSA and the compliance with the terms of
those agreements
. the authorization and approval for listing on The Nasdaq Stock Market's
National Market System of the McLeodUSA Class A common stock to be
issued in the merger and upon the exercise of options and warrants by
reason of the merger
. the employee benefit plans and related matters of McLeodUSA, including
that the plans have been operated and administered in accordance with
applicable law
. the absence of material adverse changes in the business of McLeodUSA
since December 31, 1998
. the absence of material undisclosed liabilities
The foregoing representations and warranties will not survive the effective
time of the merger.
Business of Splitrock and its Subsidiaries Pending the Merger; Other Agreements
Under the merger agreement, Splitrock has agreed to, and to cause each of
its subsidiaries to, (1) conduct its business in the ordinary course consistent
with past practice in all material respects and (2) use reasonable best efforts
to maintain and preserve substantially intact its business organization, assets
and business relationships and retain the services of its officers and key
employees. In addition, Splitrock has agreed that, except as expressly
contemplated by the merger agreement or specified in a schedule to the merger
agreement, without the prior consent of McLeodUSA, it will not, and will cause
each of its subsidiaries not to, among other things:
. (1) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee, except for
increases or bonuses required by law or in the ordinary course of
business consistent with past practice and retention arrangements not to
exceed a specified dollar amount, (2) grant any severance or termination
pay (except for normal severance practices or existing agreements in
effect on the date of the merger agreement) to, or enter into any
severance agreement with, any director, officer or employee, or enter
into any employment agreement with any director, officer or employee,
(3) establish, adopt, enter into or amend any benefit plan or
arrangement, except as may be required to comply with applicable law,
(4) pay any material benefits not provided for under any benefit plan or
arrangement, (5) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or benefit plan or
arrangement (including the grant of stock options, stock appreciation
rights, stock-based or stock-related awards, performance units or
restricted stock, or the removal of existing restrictions in any benefit
plan or arrangement or agreement or awards made under the benefit plans,
arrangements or agreements), except for grants in the ordinary course of
business consistent with past practice or as required under existing
agreements or (6) take any action to fund or in any other way secure the
payment of compensation or benefits under any agreement, except as
required under existing agreements
61
<PAGE>
. declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock, other
than a dividend declared or paid by a wholly owned subsidiary to its
parent
. (1) redeem, purchase or otherwise acquire any shares of capital stock of
Splitrock or any of its subsidiaries or any securities or obligations
convertible into or exchangeable for any shares of capital stock of
Splitrock or any of its subsidiaries, or any options, warrants or
conversion or other rights to acquire any shares of capital stock of
Splitrock or any of its subsidiaries or any of these securities or
obligations, or any other securities of Splitrock or its subsidiaries
(other than any issuance of Splitrock common stock in connection with a
cashless exercise of Spitrock Stock Options or Splitrock Warrants or as
required under existing agreements), (2) effect any reorganization or
recapitalization other than the holding company merger provided for in
the merger agreement, or (3) split, combine or reclassify any of its
capital stock or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of, or in substitution for, shares of
its capital stock
. except (1) upon the exercise of Splitrock Stock Options or Splitrock
Warrants in accordance with their terms or (2) for grants of Splitrock
Stock Options in the ordinary course of business consistent with past
practice to new or existing employees who are not executive officers (to
the extent that the aggregate number of shares of Splitrock common stock
issuable under these grants, whether or not vested, does not exceed
500,000), issue, deliver, award, grant or sell, or authorize the
issuance, delivery, award, grant or sale (including the grant of any
limitations in voting rights or other encumbrances) of, any shares of
any class of its capital stock, including shares held in treasury, any
securities convertible into or exercisable or exchangeable for any
shares of its capital stock, or any rights, warrants or options to
acquire any shares of its capital stock, or amend or otherwise modify
the terms of any rights, warrants or options the effect of which will be
to make the terms more favorable to their holders
. except as contemplated by existing agreements, acquire or agree to
acquire, by merging or consolidating with, by purchasing an equity
interest in or a portion of the assets of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to
acquire any assets of any other person, other than the purchase of
assets from suppliers or vendors in the ordinary course of business
consistent with past practice
. sell, lease, exchange, mortgage, pledge, transfer or otherwise subject
to any encumbrance or dispose of, or agree to sell, lease, exchange,
mortgage, pledge, transfer or otherwise subject to any encumbrance or
dispose of, any of its assets, except for sales, dispositions or
transfers in the ordinary course of business consistent with past
practice
. adopt any amendments to its certificate of incorporation, bylaws or
other comparable charter or organizational documents, other than
amendments required by the Delaware General Corporation Law in
connection with the holding company reorganization
. make or rescind any express or deemed material election relating to
taxes, settle or compromise any material claim, action, suit,
litigation, proceeding, arbitration, investigation, audit or controversy
relating to taxes, or change any of its methods of reporting income or
deductions for federal income tax purposes from those employed in the
preparation of the federal income tax returns for the taxable year ended
December 31, 1998, except in either case as may be required by law, the
Internal Revenue Service or GAAP
. make or agree to make (1) any new capital expenditure or expenditures
which are not included in confidential forecasts provided to McLeodUSA
or (2) expenditures which are individually in excess of $1 million or in
excess of $10 million in the aggregate
62
<PAGE>
. (1) incur any indebtedness for borrowed money or guarantee any
indebtedness of another person, issue or sell any debt securities or
warrants or other rights to acquire any debt securities, guarantee any
debt securities of another person, enter into any "keep well" or other
agreement to maintain any financial statement condition of another
person, or enter into any agreement having the economic effect of any of
these actions, except for short-term borrowings incurred in the ordinary
course of business consistent with past practice, or (2) make any loans,
advances or capital contributions to, or investments in, any other
person other than intra-group loans, advances, capital contributions or
investments between or among Splitrock and any of its wholly owned
subsidiaries and other than the extension of credit to customers of
Splitrock or any of its subsidiaries in the ordinary course of business
consistent with past practice
. pay, discharge, settle or satisfy any material claims, liabilities or
obligations, other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in
accordance with their terms, of liabilities reflected or reserved
against in, or contemplated by, the most recent financial statement of
Splitrock or incurred in the ordinary course of business consistent with
past practice, or waive any material benefits of, or agree to modify in
any material respect, any confidentiality, standstill or similar
agreements to which Splitrock or any of its subsidiaries is a party
. except in the ordinary course of business consistent with past practice,
waive, release or assign any rights or claims, or modify, amend or
terminate any material agreement to which Splitrock or any of its
subsidiaries is a party
. make any change in any method of accounting or accounting practice or
policy other than those required by GAAP or a governmental entity
. authorize, or commit or agree to do any of the actions described above
Splitrock also has agreed:
. to, from the date of the merger agreement through the effective time,
prepare and timely file all tax returns, pay all taxes, promptly notify
McLeodUSA of any material action or claim involving taxes and cause its
subsidiaries to do all of the above
. to give, and to cause each of its subsidiaries to give, McLeodUSA access
to all of its properties, agreements, books, records and personnel,
except where disclosure or access would conflict with law or an existing
agreement
. to promptly take all action necessary in accordance with the Delaware
General Corporation Law and the Splitrock certificate of incorporation
and bylaws to hold a meeting of the stockholders of Splitrock to approve
the merger agreement and to use its reasonable best efforts to solicit
from those stockholders proxies or consents to approve the merger
agreement
. to furnish McLeodUSA with monthly unaudited consolidated balance sheets
and financial statements and other information concerning its business,
operations, prospects, conditions, assets, liabilities and personnel
Splitrock and McLeodUSA have further agreed:
. not to, and not to permit any of their respective affiliates to,
knowingly take any action that could reasonably be expected to result in
any of their respective representations and warranties becoming untrue,
any of the conditions to the merger not being satisfied, or prevent or
impede the merger and the reorganization from qualifying as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code
63
<PAGE>
. to comply with, and to cause their respective directors, officers,
employees and other representatives to comply with, all of their
respective obligations under the confidentiality agreement dated
December 22, 1999 between Splitrock and McLeodUSA
. to prepare and file with the SEC the registration statement on Form S-4
of which this joint proxy statement/prospectus is a part
. to use their reasonable best efforts promptly to make all filings under
applicable laws and to obtain all material authorizations, permits,
consents and approvals of all third parties and governmental entities
necessary or advisable to consummate the transactions contemplated by
the merger agreement
. during the period between the signing of the merger agreement and the
effective time, to update their respective disclosure schedules to
reflect any material changes to the representations and warranties
contained in the merger agreement or to either party's ability to
fulfill its obligations under the merger agreement
. that Splitrock, in consultation with McLeodUSA, may establish retention
and severance packages for its and its subsidiaries' officers and
employees, that after the effective time McLeodUSA will cause to be
honored existing severance agreements between Splitrock and its
subsidiaries and their respective current and former officers, directors
and employees, and that, for the period ending no sooner than December
31, 2000, McLeodUSA will cause the surviving corporation of the merger
to either maintain the total package of employee compensation, benefits
and options provided by Splitrock and its subsidiaries immediately
before the effective time or replace any of these programs with an
aggregate package of benefits comparable to that maintained for
similarly situated employees of McLeodUSA
No Solicitation by Splitrock
Splitrock has agreed to, and to cause its directors (other than Roy A.
Wilkens), officers, employees, representatives, agents and subsidiaries and
their respective directors, officers, employees, representatives and agents to,
immediately cease any discussions or negotiations with any person with respect
to a Competing Transaction (as defined below). Splitrock will not, and will
direct and cause its subsidiaries and the directors (other than Roy A.
Wilkens), officers, employees, representatives and agents of Splitrock and its
subsidiaries not to, directly or indirectly, (1) initiate, solicit or encourage
(including by way of furnishing information or assistance), or take any other
action to facilitate, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Competing
Transaction, (2) enter into discussions with, or furnish any information to, or
negotiate with any person regarding a Competing Transaction, or otherwise
cooperate in any way in furtherance of such inquiries or proposals, (3) grant
any waiver or release under any standstill or similar agreement with respect to
any class of its equity securities, or (4) agree to or endorse any Competing
Transaction.
For purposes of the merger agreement, "Competing Transaction" means any of
the following involving Splitrock or its subsidiaries, other than the
transactions contemplated by the merger agreement:
. any merger, consolidation, share exchange, business combination or other
similar transaction
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of 25% or more of the assets of Splitrock and its
subsidiaries, taken as a whole, or issuance of 25% or more of the
outstanding voting securities of Splitrock or any of its subsidiaries in
a single transaction or series of transactions
64
<PAGE>
. any tender offer or exchange offer for 25% or more of the outstanding
shares of capital stock of Splitrock or any of its subsidiaries or the
filing of a registration statement under the Securities Act in
connection with such a tender offer or exchange offer
. any solicitation of proxies in opposition to approval by the
stockholders of Splitrock of the merger agreement
. any person will have acquired beneficial ownership or the right to
acquire beneficial ownership of, or any group (as such term is defined
under Section 13(d) of the Exchange Act) will have been formed after the
date of the merger agreement which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding
shares of capital stock of Splitrock or any of its subsidiaries
. any agreement or public announcement by Splitrock or any other person of
a proposal, plan or intention to do any of the actions described above
The merger agreement does not preclude Splitrock from, prior to the time of
the meeting of its stockholders to consider and approve the merger agreement,
entering into negotiations with any person regarding an unsolicited bona fide
inquiry or proposal for a Competing Transaction which involves a merger,
consolidation, share exchange, business combination or the acquisition of more
than 51% of the aggregate voting power of Splitrock. Before entering into these
negotiations, however:
(1) Splitrock must enter into with the person making the inquiry or
proposal a confidentiality agreement not more favorable to that person
than the confidentiality agreement between Splitrock and McLeodUSA
(however, the Splitrock board of directors and/or financial advisors
may have limited discussions with this person to determine his or its
financial capability and intent to make a "Superior Proposal" (as
defined below))
(2) the Splitrock board of directors, after consultation with independent
financial advisors, must reasonably determine in good faith that the
Competing Transaction, if consummated, would result in a transaction
more favorable to the Splitrock stockholders than the merger, from a
financial point of view (any such more favorable Competing Transaction
is referred to in the merger agreement as a "Superior Proposal")
(3) the Splitrock board of directors must reasonably determine, in its good
faith judgment and after consultation with independent financial
advisors, that such person has the financial ability to consummate the
Superior Proposal
(4) the Splitrock board of directors, after consultation with independent
legal counsel, must determine in good faith that to enter into
negotiations regarding a Superior Proposal is appropriate in order for
the board to comply with its fiduciary duties to the Splitrock
stockholders under applicable law
(5) Splitrock must otherwise have complied with the nonsolicitation
provisions of the merger agreement
The merger agreement also provides that nothing in the merger agreement shall
prohibit the board of directors of Splitrock from complying with Rules 14d-9
and 14e-2 promulgated under the Exchange Act and from publicly disclosing the
existence of any Competing Transaction as required by law.
In the event that Splitrock has received a Superior Proposal, the board of
directors of Splitrock may withdraw its recommendation in favor of the merger
agreement and recommend the Superior Proposal to the stockholders of Splitrock.
Before doing so, however, the board must have (1) complied fully with the
nonsolicitation provisions of the merger agreement, (2) provided McLeodUSA at
least three business days' prior written notice of its intent to withdraw its
recommendation of the merger agreement and (3) in the event that McLeodUSA has
made a counterproposal during that three-day period, determined in good faith,
taking into account the advice of its outside financial advisors, that the
McLeodUSA counterproposal is not at least as favorable to the stockholders of
Splitrock as the Superior Proposal, from a financial point of view.
65
<PAGE>
Splitrock has further agreed:
. to promptly notify McLeodUSA if any inquiries or proposals regarding a
Competing Transaction are received by Splitrock or any of its
subsidiaries or any of their respective directors, officers, employees,
agents, investment bankers, financial advisors, attorneys, accountants
or other representatives
. to promptly inform McLeodUSA as to the material terms of the inquiry or
proposal (including the identity of the person making such proposal)
and, if in writing, to promptly deliver or cause to be delivered to
McLeodUSA a copy of such inquiry or proposal
. to keep McLeodUSA informed, on a current basis, of the nature of any
inquiries and the status and terms of any proposals and of the status
and terms of any negotiations regarding a Superior Proposal
. in the event that it has elected to engage in negotiations or to furnish
information to any person regarding a Superior Proposal, to give
McLeodUSA at least two business days' prior written notice of: (1) its
intent to do so, (2) the identity of the person and (3) the material
terms of the Superior Proposal
Additional Agreements of McLeodUSA
McLeodUSA has agreed:
. to promptly take all action necessary in accordance with the Delaware
General Corporation Law and the McLeodUSA certificate of incorporation
and bylaws to hold a meeting of the stockholders of McLeodUSA to approve
the amendment to the McLeodUSA certificate of incorporation and the
issuance of shares of McLeodUSA Class A common stock in the merger and
to use its reasonable best efforts to solicit from those stockholders
proxies or consents to approve these matters
. to use its reasonable best efforts to insure that the shares of
McLeodUSA Class A common stock issued upon exercise of the Splitrock
Stock Options or Splitrock Warrants assumed or converted in the merger
will be registered under the Securities Act on registration statements
on Forms S-8, S-3 or S-4 and approved for listing on The Nasdaq Stock
Market's National Market System, or an exchange if shares of McLeodUSA
Class A common stock are traded on an exchange
. to use its reasonable best efforts to maintain the effectiveness of
these registration statements for so long as these stock options and/or
warrants remain outstanding
. after the effective time, to cause Splitrock to comply with the
provisions of the Indenture, dated as of July 24, 1998 (the "Indenture")
between Splitrock and Harris Trust Company of New York (formerly Bank of
Montreal Trust Company) as trustee (the "Indenture Trustee"), relating
to a change of control offer with respect to the holders of the
outstanding Splitrock 11 3/4% Senior Notes due 2008
Directors' and Officers' Insurance and Indemnification
McLeodUSA has agreed that for the six-year period after the effective time
of the merger, (1) it will cause the surviving corporation of the merger to
maintain the current directors' and officers' insurance and indemnification
policy of Splitrock and related arrangements, or an equivalent policy and
related arrangements, for all present and former directors and officers of
Splitrock, covering claims made and insurable events occurring prior to or
within six years after the effective time of the merger, provided that the
surviving corporation of the merger will not be required to maintain this
policy except to the extent that the aggregate annual cost of maintaining this
policy is not in excess of 200% of the current annual cost, in which case the
surviving corporation of the merger will maintain this policy up to an annual
cost of 200% of the current annual cost; and (2) it will cause the surviving
corporation of the merger to honor indemnification provisions, including,
without limitation, provisions for expense advances, for present and former
officers and directors under the certificate of incorporation and bylaws of
Splitrock as in effect immediately prior to the effective time.
66
<PAGE>
McLeodUSA has also agreed to, or to cause the surviving corporation of the
merger to, indemnify and hold harmless, from and after the effective time of
the merger, to the full extent that the surviving corporation of the merger or
McLeodUSA would be permitted by applicable law, each present or former officer
or director of Splitrock against any losses, claims, damages, liabilities,
costs, expenses (including reasonable attorneys' fees), judgments, fines and
amounts paid in settlement in connection with any claim, action, suit,
proceeding or investigation to which each present or former director or officer
is, or is threatened to be made, a party by reason of the fact that he or she
is or was a director, officer, employee or agent of Splitrock, or is or was
serving at the request of Splitrock as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other entity,
except that neither McLeodUSA nor the surviving corporation of the merger will
be liable for any settlement effected without its prior written consent, which
consent may not be unreasonably withheld.
McLeodUSA has further agreed that, if it were to consolidate or merge with
another entity and not be the surviving entity of such consolidation or merger,
its successors will assume these obligations.
Conditions to Consummation of the Merger
Conditions to Each Party's Obligation to Effect the Merger. Each party's
obligation to effect the merger is subject to the satisfaction or waiver, where
permissible, of the following conditions at or prior to the effective time of
the merger:
. the registration statement of which this joint proxy
statement/prospectus forms a part will have become effective and no stop
order suspending its effectiveness will have been issued and no
proceedings for that purpose will have been initiated or threatened by
the SEC
. McLeodUSA will have received all federal or state securities permits and
other authorizations necessary to issue McLeodUSA Class A common stock
in the merger
. the stockholders of McLeodUSA will have approved the amendment to the
McLeodUSA certificate of incorporation and the issuance of shares of
McLeodUSA Class A common stock in connection with the merger
. the stockholders of Splitrock will have adopted and approved the merger
agreement
. no governmental entity or court will have enacted, issued, promulgated,
enforced or entered any statute, rule, regulation, executive order,
decree, judgment, injunction or other order which is in effect and
prevents or prohibits consummation of the reorganization or the merger
. the applicable waiting period under the HSR Act will have expired or
been terminated
. all material consents, waivers, approvals and authorizations required to
be obtained, and all filings or notices required to be made, by
McLeodUSA or by Splitrock or any of its subsidiaries prior to
consummation of the transactions contemplated by the merger agreement
will have been obtained from and made with all governmental entities
. the reorganization will have been completed
Conditions to the Obligation of McLeodUSA and Southside Acquisition
Corporation to Effect the Merger. The obligation of McLeodUSA and Southside
Acquisition Corporation to effect the merger is subject to the satisfaction or
waiver, where permissible, of the following additional conditions at or prior
to the effective time of the merger:
. the representations and warranties of Splitrock, Splitrock Holdings and
Splitrock Merger Sub will be true and correct as of the date of the
merger agreement and will be true and correct in all material respects
(except that where any statement in a representation or warranty
expressly includes a standard of materiality, the statement will be true
and correct in all respects giving effect to the materiality standard)
as of the effective time of the merger as though made as of the
effective time of the merger, except that those representations and
warranties which address matters only as of a
67
<PAGE>
particular date will remain true and correct in all material respects as
of that date, and except for (1) changes permitted by the merger
agreement or (2) in a representation or warranty that does not expressly
include a standard of materiality, any untrue or incorrect statements
therein that, considered in the aggregate, do not indicate that
Splitrock has suffered a material adverse effect, and McLeodUSA will
have received certificates of the chief executive officers and chief
financial officers of Splitrock and Splitrock Holdings to that effect
. Splitrock, Splitrock Holdings and Splitrock Merger Sub will have
performed or complied in all respects with all agreements required to be
performed or complied with by them under the merger agreement at or
prior to the effective time of the merger, and McLeodUSA will have
received certificates of the chief executive officers and chief
financial officers of Splitrock and Splitrock Holdings to that effect
. Splitrock or the appropriate subsidiary will have received all consents
or approvals required in connection with the merger under all agreements
to which Splitrock or any of its subsidiaries is a party, except where
the failure to do so, considered in the aggregate, would not have a
material adverse effect on either McLeodUSA or Splitrock
. there will not be pending any action, proceeding or investigation by any
governmental entity seeking to restrain the consummation of the merger
or the reorganization or challenging any of the merger, the
reorganization or the conversion of Splitrock common stock into
McLeodUSA Class A common stock in the merger
. the aggregate of the fractional share interests in McLeodUSA Class A
common stock to be paid in cash under the merger agreement shall not be
more than 5% of the maximum aggregate number of shares of McLeodUSA
Class A common stock which could be issued as a result of the merger
. McLeodUSA shall have received signed copies of confidentiality,
nonsolicitation and noncompetition agreements from each of Kwok Li,
Linsang Partners, LLC and William R. Wilson
. since the date of the merger agreement, Splitrock will not have suffered
a material adverse effect (provided, however, that no decrease in the
trading price in Splitrock common stock on The Nasdaq Stock Market's
National Market System will in and of itself constitute a material
adverse effect to Splitrock) and McLeodUSA will have received
certificates of the chief executive officers and chief financial
officers of Splitrock to that effect
. McLeodUSA will have received a signed affiliate agreement from each
affiliate of Splitrock
. McLeodUSA will have received the opinion of Hogan & Hartson L.L.P. to
the effect that the merger will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code or, if viewed as
a single integrated transaction together with the reorganization, the
merger will qualify as a reorganization within the meaning of Section
386(a) of the Internal Revenue Code
. McLeodUSA will have received a signed stockholders' agreement from each
of Kwok Li, Linsang Partners, LLC and William R. Wilson
. if Splitrock has elected to amend the Indenture as provided in the
merger agreement or if Splitrock is otherwise required to deliver or
otherwise delivers an opinion of its counsel to the Indenture Trustee in
connection with the transactions contemplated by the merger agreement,
McLeodUSA will have received a copy of such opinion or opinions
68
<PAGE>
Conditions to the Obligation of Splitrock, Splitrock Holdings and Splitrock
Merger Sub to Effect the Merger. The obligation of Splitrock, Splitrock
Holdings and Splitrock Merger Sub to effect the merger is subject to the
satisfaction or waiver, where permissible, of the following additional
conditions at or prior to the effective time of the merger:
. the representations and warranties of McLeodUSA and Southside
Acquisition Corporation will be true and correct as of the date of the
merger agreement and will be true and correct in all material respects
(except that where any statement in a representation or warranty
expressly includes a standard of materiality, the statement will be true
and correct in all respects giving effect to the materiality standard)
as of the effective time of the merger as though made as of the
effective time of the merger, except that those representations and
warranties which address matters only as of a particular date will
remain true and correct in all material respects as of that date, and
except for (1) changes permitted by the merger agreement or (2) in a
representation or warranty that does not expressly include a standard of
materiality, any untrue or incorrect statements therein that, considered
in the aggregate, do not indicate that McLeodUSA has suffered a material
adverse effect, and Splitrock will have received a certificate of the
chief executive officer and chief financial officer of McLeodUSA to that
effect
. McLeodUSA and Southside Acquisition Corporation will have performed or
complied in all respects with all agreements required to be performed or
complied with by them under the merger agreement at or prior to the
effective time of the merger, and Splitrock will have received a
certificate of the chief executive officer and chief financial officer
of McLeodUSA to that effect
. there will not be pending any action, proceeding or investigation by any
governmental entity seeking to restrain the consummation of the merger
or reorganization or challenging any of the merger, the reorganization
or the conversion of Splitrock common stock into McLeodUSA Class A
common stock in the merger
. Splitrock will have received the opinion of Fried, Frank, Harris,
Shriver & Jacobson to the effect that the merger and reorganization will
each qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code or, if the merger and reorganization are
viewed as a single integrated transaction, the merger and reorganization
together will qualify as a reorganization within the meaning of Section
386(a) of the Internal Revenue Code
. the McLeodUSA Class A common stock to be issued in the merger and upon
the exercise of the options and warrants by reason of the merger will be
approved for listing on The Nasdaq Stock Market's National Market System
. since the date of the merger agreement, McLeodUSA will not have suffered
a material adverse effect (provided, however, that no decrease in the
trading price in McLeodUSA Class A common stock on The Nasdaq Stock
Market's National Market System will in and of itself constitute a
material adverse effect to McLeodUSA) and Splitrock will have received a
certificate of the chief executive officer and chief financial officer
of McLeodUSA to that effect
Termination of the Merger Agreement
The merger agreement may be terminated at any time prior to the effective
time of the merger, even if the merger agreement has been approved by the
stockholders of Splitrock or if the stockholders of McLeodUSA have approved the
amendment to the McLeodUSA certificate of incorporation and the issuance of
shares of McLeodUSA Class A common stock in the merger:
. by mutual written consent of Splitrock and McLeodUSA
. by either McLeodUSA or Splitrock, if the merger has not been consummated
by July 30, 2000, except that this right to terminate the merger
agreement will not be available to any party whose breach of any
provision of the merger agreement has resulted in the failure of the
merger to occur on or before that date
69
<PAGE>
. by either McLeodUSA or Splitrock, if there is any law or regulation that
makes consummation of the merger illegal or prohibited or if any decree,
judgment, injunction, order or other action by any governmental entity
having competent jurisdiction prohibiting consummation of the merger
will have become final and non-appealable, after the parties have used
their reasonable best efforts to resolve or lift the applicable law,
regulation, decree, judgment, injunction or order
. by either McLeodUSA or Splitrock, if the stockholders of McLeodUSA do
not approve the amendment to the McLeodUSA certificate of incorporation
and the issuance of shares of McLeodUSA Class A common stock in the
merger
. by either McLeodUSA or Splitrock, if the stockholders of Splitrock do
not approve the merger agreement
. by McLeodUSA, if the Splitrock board of directors has amended, withdrawn
or qualified its recommendation in favor of approval of the merger
agreement in any manner adverse to McLeodUSA
. by McLeodUSA, if the Splitrock board of directors has recommended any
Superior Proposal to the stockholders of Splitrock
. by McLeodUSA, if Splitrock, any of its subsidiaries, or any of its or
their respective officers, directors, employees, representatives or
agents have willfully and materially breached the merger agreement's
nonsolicitation provisions
. by McLeodUSA if, following the announcement or receipt of a proposal for
a Competing Transaction, Splitrock has failed to hold the meeting of its
stockholders to approve the merger agreement
. by McLeodUSA, if a breach of any of the representations, warranties,
covenants or agreements of Splitrock has occurred that would cause
certain of the conditions precedent to the consummation of the merger
not to be satisfied and these conditions could not be satisfied by July
30, 2000
. by Splitrock, if the board of directors of McLeodUSA has amended,
withdrawn or qualified its recommendation in favor of the approval of
the amendment to the McLeodUSA certificate of incorporation and the
issuance of shares of McLeodUSA Class A common stock in the merger
. by Splitrock, if a breach of any of the representations, warranties,
covenants or agreements of McLeodUSA has occurred that would cause
certain of the conditions precedent to the consummation of the merger
not to be satisfied and these conditions could not be satisfied by July
30, 2000
. by Splitrock, if McLeodUSA materially breaches its obligations under the
Network Agreements (as described below) and this breach cannot be, or is
not, cured within ten days' written notice by Splitrock to McLeodUSA of
the breach
. by Splitrock, if, except in the event of the announcement or receipt of
a proposal for a Competing Transaction which has not been publicly
rejected by Splitrock, McLeodUSA has failed to hold the meeting of its
stockholders to approve the amendment to the McLeodUSA certificate of
incorporation and the issuance of shares of McLeodUSA Class A common
stock in the merger by July 30, 2000
. by Splitrock, in order to enter into an agreement with respect to a
Superior Proposal, if Splitrock has complied with the nonsolicitation
provisions of the merger agreement
Expenses; Termination Fee
The merger agreement provides that each party will pay its own costs and
expenses in connection with the merger agreement and the transactions
contemplated by the merger agreement, except that McLeodUSA and Splitrock will
share equally the expenses incurred in connection with the filing, printing and
mailing of this joint proxy statement/prospectus.
70
<PAGE>
Under the merger agreement, Splitrock will be required to pay McLeodUSA a
termination fee of $68 million if:
(a) the merger agreement is terminated as described above because:
(1) the merger has not been consummated by July 30, 2000
(2) the stockholders of Splitrock have not approved the merger
agreement
(3) the Splitrock board of directors has amended, withdrawn or
qualified its recommendation in favor of approval of the merger
agreement in any manner adverse to McLeodUSA
(4) the Splitrock board of directors has recommended any Superior
Proposal to the stockholders of Splitrock
(5) Splitrock, any of its subsidiaries, or any of its or their
respective officers, directors, employees, representatives or
agents has willfully and materially breached the merger agreement's
nonsolicitation provisions, or
(6) following the announcement or receipt of a proposal for a Competing
Transaction, Splitrock has failed to hold the meeting of its
stockholders to approve the merger agreement, and
(b) Splitrock or its stockholders has received in writing, or there has
been publicly disclosed, a Competing Transaction for Splitrock on or
before the date of such termination and an agreement or agreements to
effect a Competing Transaction are entered into within one year of such
termination.
Splitrock will also pay to McLeodUSA a termination fee equal to $68 million
if Splitrock terminates the merger agreement in order to enter into an
agreement with respect to a Superior Proposal.
The provisions regarding expenses and the payment of the termination fee by
Splitrock will not be exclusive of any rights at law or in equity that any
party may have in the event of a termination of the merger agreement or
otherwise release any party from liability for a breach of the merger
agreement.
Waiver and Amendment of the Merger Agreement
Waiver. At any time prior to the effective time of the merger, the parties
to the merger agreement may agree to:
. extend the time for the performance of any obligation or other act
required to be performed under the merger agreement
. waive any inaccuracies in the representations and warranties contained
in the merger agreement or in any document delivered in accordance with
the merger agreement
. waive compliance with any of the agreements or conditions contained in
the merger agreement
Amendment. The merger agreement may be amended by the parties to the merger
agreement at any time prior to the effective time of the merger. However, once
the stockholders of Splitrock have approved the merger agreement, they must
also approve any subsequent amendment if the amendment, by law, requires
further approval by the stockholders.
Voting Agreements
Voting Agreements of Certain Directors, Officers and Stockholders of
Splitrock. Several directors, executive officers and stockholders of Splitrock
have entered into voting agreements with McLeodUSA. Under the terms of these
voting agreements, until the date on which the merger is consummated or the
merger agreement is terminated in accordance with its terms, each such person
has agreed, among other things:
71
<PAGE>
. to cast all votes attributable to the Splitrock common stock
beneficially owned by such person at any annual or special meeting of
stockholders of Splitrock in favor of the approval and adoption of the
merger agreement and against any Competing Transaction
. to grant to the persons designated by the Splitrock board of directors
as attorneys-in-fact or proxies with respect to the meeting a specific
written proxy to vote all Splitrock common stock which such person is
entitled to vote in favor of the approval and adoption of the merger
agreement and against any Competing Transaction
. not to sell, transfer, pledge, encumber, assign or otherwise dispose of
any of the shares of Splitrock common stock owned by such person, unless
McLeodUSA approves the transfer and the transferee enters into a
comparable voting agreement with McLeodUSA
. not to grant any proxies, deposit any shares of Splitrock common stock
into a voting trust or enter into another voting agreement with respect
to any shares of Splitrock common stock
. not to take any action which would have the effect of preventing or
inhibiting such person from performing its obligations under the voting
agreement
In connection with the voting agreement entered into by Linsang Partners,
LLC, McLeodUSA agreed to exclude 2 million shares of Splitrock common stock
owned by Linsang Partners from the requirements of the voting agreement other
than those provisions requiring Linsang Partners to vote such shares for
approval and adoption of the merger agreement and against any Competing
Transaction.
By entering into these voting agreements, the holders of approximately 52.3%
of the outstanding shares of Splitrock common stock entitled to vote at the
special meeting have agreed to vote in favor of the approval and adoption of
the merger agreement and against any Competing Transaction.
Voting Agreements of Certain Directors, Officers and Stockholders of
McLeodUSA. Several directors, executive officers and stockholders of McLeodUSA
have entered into voting agreements with Splitrock. Under the terms of these
voting agreements, until the date on which the merger is consummated or the
merger agreement is terminated in accordance with its terms, each such person
has agreed, among other things:
. to cast all votes attributable to McLeodUSA Class A common stock
beneficially owned by such person at any annual or special meeting of
stockholders of McLeodUSA in favor of the approval of the amendment to
the McLeodUSA certificate of incorporation and the issuance of shares of
McLeodUSA Class A common stock in the merger
. to grant to the persons designated by the McLeodUSA board of directors
as attorneys-in-fact or proxies with respect to such meeting a specific
written proxy to vote all McLeodUSA Class A common stock which such
person is entitled to vote in favor of the approval of the amendment to
the McLeodUSA certificate of incorporation and the issuance of shares of
McLeodUSA Class A common stock in the merger
. not to grant any proxies, deposit any shares of McLeodUSA Class A common
stock into a voting trust or enter into a voting agreement with respect
to any shares of McLeodUSA Class A common stock, other than agreements
entered into prior to the date of the voting agreement by such person
. not to take any action which would have the effect of preventing or
inhibiting such person from performing its obligations under the voting
agreement
The voting agreement does not prevent the stockholder from selling,
transferring, pledging, encumbering, assigning or otherwise disposing of any of
the shares of McLeodUSA Class A common stock owned by the stockholder.
By entering into these voting agreements, the holders of approximately 29%
of the outstanding shares of McLeodUSA Class A common stock entitled to vote at
the special meeting have agreed to vote in favor of the approval of the
amendment to the McLeodUSA certificate of incorporation and the issuance of
shares of McLeodUSA Class A common stock in the merger.
72
<PAGE>
Stock Option Agreements
Several directors, executive officers and stockholders of Splitrock have
entered into stock option agreements with McLeodUSA representing approximately
50.5% of the outstanding Splitrock common stock as of the record date. The
agreements grant McLeodUSA an irrevocable option to purchase 28,908,037 shares
of Splitrock common stock that are owned beneficially or of record by the
stockholders. In connection with the option agreement entered into by Linsang
Partners, LLC, McLeodUSA agreed to exclude 2 million shares of Splitrock common
stock owned by Linsang Partners from the option agreement.
McLeodUSA may exercise the option if, on or after the date of the merger
agreement, any corporation, partnership, individual, trust or any person other
than McLeodUSA or any of its affiliates shall have:
. commenced or announced an intention to commence a bona fide tender offer
or exchange offer for any shares of Splitrock common stock, the
consummation of which would result in the beneficial ownership by such
person of 15% or more of the then-voting equity of Splitrock
. filed a form under the HSR Act reflecting an intent to acquire Splitrock
or any of its assets or securities
. solicited proxies in a solicitation subject to the proxy rules under the
Exchange Act, executed any written consent or become a participant in
any solicitation with respect to Splitrock common stock
McLeodUSA may also exercise the option if, on or after the date of the
merger agreement:
. the stockholders of Splitrock do not approve the merger agreement
. the Splitrock board of directors amends, withdraws or qualifies its
recommendation in favor of approval of the merger agreement in any
manner adverse to McLeodUSA or recommends any Superior Proposal to the
stockholders of Splitrock
. Splitrock, any of its subsidiaries, or any of its or their respective
officers, directors, employees, representatives or agents willfully and
materially breaches the merger agreement's nonsolicitation provisions
. following the announcement or receipt of a proposal for a Competing
Transaction, Splitrock fails to hold the meeting of its stockholders to
approve the merger agreement
. Splitrock terminates the merger agreement in order to enter into an
agreement with respect to a Superior Proposal
. any other event occurs that would require Splitrock to pay McLeodUSA the
termination fee provided for in the merger agreement (but without the
necessity of McLeodUSA having terminated the merger agreement)
. the person who has granted to McLeodUSA the option has committed a
material breach of the voting agreement, if any, entered into by such
person
The option granted in the stock option agreement is payable in cash or
stock, at the discretion of McLeodUSA, at an exercise price per share equal to:
(1) if in cash, 0.5347 (the exchange ratio set forth in the merger
agreement) multiplied by the average closing price of McLeodUSA Class A
common stock for the five trading days preceding the date on which the
option is exercised, or
(2) if in stock, 0.5347 of a share of McLeodUSA Class A common stock
The option agreement provides that the aggregate cash exercise price paid to a
stockholder when aggregated with all other cash purchases of Splitrock common
stock by McLeodUSA will be limited to that amount of cash that would permit any
subsequent acquisition of Splitrock by McLeodUSA that occurs to qualify as a
tax free reorganization under Section 368(a) of the Internal Revenue Code.
Furthermore, if McLeodUSA exercises
73
<PAGE>
the option and Splitrock within 12 months thereafter consummates a Competing
Transaction, McLeodUSA will pay to the Splitrock stockholder an amount of
additional consideration equal to 50% of the difference between the aggregate
price paid by McLeodUSA upon exercise of the option and the aggregate amount
received by McLeodUSA in the Competing Transaction.
McLeodUSA may exercise the option in whole or in part, at its discretion.
However, if it elects to exercise the option only in part, McLeodUSA must
purchase the total number of shares it is seeking pro rata from the holders of
Splitrock common stock who have entered into the option agreements.
If McLeodUSA exercises the option and pays in stock, within 90 days of the
exercise McLeodUSA must prepare and file a registration statement on Form S-3
under the Securities Act registering the resale of a maximum of 25% of the
McLeodUSA Class A common stock issued to the stockholder upon exercise of the
option. McLeodUSA must then use its reasonable best efforts to keep that
registration effective and current for one year after its original
effectiveness.
If the exercise of the option by McLeodUSA has the effect of triggering the
change of control offer provisions under the Indenture relating to the
Splitrock 11 3/4% Senior Notes due 2008, McLeodUSA must cooperate with
Splitrock to eliminate the need to make a change of control offer. If the
requirement to make a change of control offer cannot be eliminated, McLeodUSA
has agreed to purchase any senior notes that Splitrock would otherwise be
obligated to purchase as a result of the change of control offer provisions.
Prior to the termination of the option, the stockholder may not, without the
consent of McLeodUSA, sell, transfer, pledge, encumber, assign or otherwise
dispose of any of the shares of Splitrock common stock that are subject to the
option or take any other action that would prevent the stockholder from
fulfilling its obligations under the option agreement.
The option will terminate upon the earliest of:
. the effective time of the merger
. the termination of the merger agreement
(1) by mutual written agreement of McLeodUSA and Splitrock
(2) because the merger has not been consummated by July 30, 2000
(3) because a law or other regulation has made consummation of the
merger illegal or prohibited or if any decree, judgment,
injunction, order or other action by any governmental entity having
competent jurisdiction prohibiting consummation of the merger has
become final and nonappealable
(4) because the stockholders of McLeodUSA have not approved the
amendment to the McLeodUSA certificate of incorporation and the
issuance of shares of McLeodUSA Class A common stock in the merger
(5) because of a breach of the representations, warranties, covenants
or agreements of Splitrock that would cause certain conditions
precedent to the consummation of the merger not to be satisfied and
these conditions could not be satisfied by July 30, 2000
(6) because the McLeodUSA board of directors has amended, withdrawn or
qualified its recommendation in favor of approval of the amendment
to the McLeodUSA certificate of incorporation and the issuance of
shares of McLeodUSA Class A common stock in the merger
(7) because of a breach of the representations, warranties, covenants
and agreements of McLeodUSA that would cause certain conditions
precedent to the consummation of the merger not to be satisfied and
these conditions could not be satisfied by July 30, 2000
74
<PAGE>
(8) because McLeodUSA has materially breached its obligations under the
Network Agreements and the breach could not be, or is not, cured
within ten days' written notice by Splitrock to McLeodUSA of the
breach, or
(9) except in the event of the announcement or receipt of a proposal
for a Competing Transaction which has not been publicly rejected by
Splitrock, because McLeodUSA has failed to hold the meeting of its
stockholders to approve the amendment to the McLeodUSA certificate
of incorporation and the issuance of shares of McLeodUSA Class A
common stock in the merger, or
. nine months following the termination of the merger agreement:
(1) because the stockholders of Splitrock have not approved the merger
agreement
(2) because the Splitrock board of directors has amended, withdrawn or
modified its recommendation in favor of approval of the merger
agreement in a manner adverse to McLeodUSA or recommended a
Superior Proposal to the stockholders of Splitrock
(3) because Splitrock, any of its subsidiaries, or any of its or their
respective officers, directors, employees, representatives or
agents has willfully and materially breached the merger agreement's
nonsolicitation provisions
(4) because, following the receipt of a proposal for a Competing
Transaction, Splitrock has failed to hold the meeting of its
stockholders to approve the merger agreement, or
(5) because Splitrock has entered into an agreement with respect to a
Superior Proposal
Confidentiality, Nonsolicitation and Noncompetition Agreements
Kwok Li and Linsang Partners, LLC. Kwok Li and Linsang Partners, LLC have
agreed to enter into a confidentiality, nonsolicitation and noncompetition
agreement with McLeodUSA on or prior to the closing of the merger with the
following terms:
. all materials developed, invented or created by Splitrock, Mr. Li or
Linsang Partners in the course of Mr. Li's employment with Splitrock are
the sole and exclusive property of Splitrock, and Mr. Li and Linsang
Partners have no right, title or interest in or to that property
. Mr. Li and Linsang Partners will not use or disclose any confidential or
proprietary information belonging to Splitrock or to others with whom
Splitrock does business
. for a period of three years following the effective time of the merger,
Mr. Li and Linsang Partners will not solicit or take away any customer
of Splitrock or McLeodUSA
. Mr. Li and Linsang Partners will not in any way discourage customers or
potential customers from doing business with Splitrock or McLeodUSA
. for a period of three years following the effective time of the merger,
Mr. Li and Linsang Partners will not solicit the services or employment
of any employee of Splitrock or McLeodUSA or cause the employment of any
such employee by Mr. Li or Linsang Partners
. for a period of three years following the effective time of the merger,
Mr. Li and Linsang Partners will not compete with Splitrock in the data
communications services business in any geographic area where it
conducts this business as of the effective time of the merger or compete
with McLeodUSA in any geographic area where it conducts
telecommunications business as of the date of the merger agreement,
other than provision of service as a competitive local exchange carrier
in geographic areas in which Bell Atlantic or Bell South is the
incumbent local exchange carrier
75
<PAGE>
William R. Wilson. William R. Wilson has agreed to enter into a
confidentiality, nonsolicitation and noncompetition agreement with McLeodUSA on
or prior to the closing of the merger agreement with the following terms:
. all materials developed, invented or created by Splitrock or Mr. Wilson
in the course of his employment with Splitrock are the sole and
exclusive property of Splitrock and Mr. Wilson has no right, title or
interest in or to that property
. Mr. Wilson will not use or disclose any confidential or proprietary
information belonging to Splitrock or to others with whom Splitrock does
business
. for a period of two years following the effective time of the merger,
Mr. Wilson will not solicit or take away any customer of Splitrock,
except in connection with a business activity which does not violate Mr.
Wilson's agreement not to compete with Splitrock or McLeodUSA as
described below
. Mr. Wilson will not in any way discourage customers or potential
customers from doing business with Splitrock or McLeodUSA
. for a period of two years following the effective time of the merger,
Mr. Wilson will not solicit the services or employment of any employee
of Splitrock or McLeodUSA or cause the employment of any such employee
by Mr. Wilson
. for a period of two years following the effective time of the merger,
Mr. Wilson will not compete with Splitrock or McLeodUSA in the business
of wholesale Internet dialup access conducted by Splitrock as of the
effective time of the merger
Terms of Stockholders' Agreements
Kwok Li and Linsang Partners, LLC. Kwok Li and Linsang Partners, LLC have
agreed to enter into a stockholders' agreement with McLeodUSA on or prior to
the closing of the merger with the following terms:
. the stockholders' agreement will cover all equity securities of
McLeodUSA, or any other securities convertible into or exercisable for
McLeodUSA equity securities, received by Mr. Li and Linsang Partners in
the merger, other than (1) 320,820 shares of McLeodUSA Class A common
stock transferable by Linsang Partners to its members, (2) 213,880
shares of McLeodUSA Class A common stock transferable by Mr. Li to
charity, (3) the shares of McLeodUSA Class A common stock issued in the
merger in exchange for 2 million shares of Splitrock common stock owned
by Linsang Partners as of January 6, 2000 and (4) any shares of
McLeodUSA Class A common stock held of record by Mr. Li's wife, Felice
Li (the foregoing securities of McLeodUSA that are covered by the
stockholders' agreement are referred to as the "LL Covered Securities")
. until December 31, 2002, Mr. Li and Linsang Partners will not sell any
of the LL Covered Securities without receiving the prior written consent
of the McLeodUSA board of directors, except for transfers specifically
permitted by the stockholders' agreement
. for the period commencing for the quarter ending December 31, 2000 and
ending on the expiration date of the stockholders' agreement, the
McLeodUSA board of directors will determine on a quarterly basis the
aggregate number, if any, of shares of McLeodUSA Class A common stock,
not to exceed in the aggregate 100,000 shares per quarter, that Mr. Li
and Linsang Partners may sell during designated trading periods
following the release of McLeodUSA quarterly financial results
. the McLeodUSA board of directors will determine for each of 2001 and
2002 the aggregate number, if any, of shares of McLeodUSA Class A common
stock, not to exceed in the aggregate on a per year basis a number of
shares equal to 15% of the LL Covered Securities, to be registered by
McLeodUSA under the Securities Act for sale by Mr. Li and Linsang
Partners during 2001 and 2002
76
<PAGE>
. in any underwritten offering during 2001 and 2002 of shares of McLeodUSA
Class A common stock, 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 McLeodUSA Class A common stock owned by Mr. Li
and Linsang Partners, the McLeodUSA board of directors will determine
the aggregate number, if any, of shares of McLeodUSA Class A common
stock, not to exceed in the aggregate on a per year basis a number of
shares equal to 15% of the LL Covered Securities, to be registered by
McLeodUSA for sale by Mr. Li and Linsang Partners in the offering
. McLeodUSA may subsequently determine not to register any shares of Mr.
Li and Linsang Partners under the Securities Act and may either not file
a registration statement or otherwise withdraw or abandon a registration
statement previously filed
. at any time following the closing of the merger, Linsang Partners may
pledge to a nationally recognized financial institution certain shares
of McLeodUSA Class A common stock to permit certain financings by
Linsang Partners, provided the pledgee of such shares takes the shares
subject to the restrictions in the stockholders' agreement
. the stockholders' agreement will terminate on December 31, 2002,
provided that Mr. Li and Linsang Partners will be permitted to terminate
the stockholders' agreement on an earlier date if during each of 2001
and 2002, McLeodUSA has not provided Mr. Li and Linsang Partners a
reasonable opportunity to sell an aggregate number of shares of
McLeodUSA Class A common stock equal to not less than 15% of the LL
Covered Securities
William R. Wilson. William R. Wilson has agreed to enter into a stockholder
agreement with McLeodUSA on or prior to the closing of the merger with the
following terms:
. the agreement will cover all equity securities of McLeodUSA, or any
other securities convertible into or exercisable for McLeodUSA equity
securities, received by Mr. Wilson in the merger, other than 800,000
shares of McLeodUSA Class A common stock (the "Wilson Covered
Securities")
. until December 31, 2001, Mr. Wilson will not sell any of the Wilson
Covered Securities without receiving the prior written consent of the
McLeodUSA board of directors, except for transfers specifically
permitted by the stockholder agreement
. during each quarter during the calendar year ending December 31, 2001,
Mr. Wilson may sell up to an aggregate of 250,000 shares of McLeodUSA
Class A common stock, with any unused amounts being carried over to
subsequent quarters
. at any time following the closing of the merger, Mr. Wilson may pledge
to a nationally recognized financial institution shares of McLeodUSA
Class A common stock to permit certain financings by Mr. Wilson,
provided the pledgee of such shares takes the shares subject to the
restrictions in the stockholder agreement
. the stockholder agreement will terminate on December 31, 2001
Credit Agreement
Splitrock and Citicorp USA, Inc., as administrative agent, entered into a
credit agreement as of January 6, 2000 for a revolving credit facility of up to
$115 million. The principal terms of the facility are described below:
Availability. The availability under the facility is up to:
. $20 million from March 1, 2000 to March 31, 2000
. $55 million from April 1, 2000 to April 30, 2000
. $85 million from May 1, 2000 to May 31, 2000
77
<PAGE>
. $105 million from June 1, 2000 to June 30, 2000
. $115 million from July 1, 2000 to the maturity date of March 31, 2001
Rates and Fees. Loans under the facility bear interest at:
. prime plus 4% to July 6, 2000
. prime plus 4.5% from July 7, 2000 to October 6, 2000
. prime plus 5% from October 7, 2000
The commitment fee is 1.25% of undrawn amounts. Splitrock is required to pay
an arrangement fee of $100,000 and an administration fee of $10,000, in
addition to reimbursing Citicorp's out-of-pocket expenses.
Prepayment. Splitrock may at its option prepay any borrowings at par at any
time. Mandatory prepayments are required on a basis consistent with the terms
of the Indenture for the Splitrock 11 3/4% Senior Notes due 2008.
Security. Up to $75 million of the facility is secured by a guarantee by a
newly formed subsidiary of Splitrock, a pledge of the stock of this subsidiary
and a security agreement covering substantially all of the available assets of
Splitrock.
Covenants. The covenants in the credit agreement in large part mirror the
covenants contained in the Indenture for the Splitrock 11 3/4% Senior Notes due
2008. The covenants limit the ability of Splitrock, directly or through
subsidiaries, to:
. breach the merger agreement in a manner involving an intentional
misrepresentation, fraud, bad faith or willful misconduct
. use proceeds from the facility for any purpose other than working
capital purposes and capital expenditures materially consistent with
specified plans
. incur additional indebtedness or liens or enter into sale/leaseback
transactions
. pay dividends or make other distributions
. make investments
. repurchase equity interests or subordinated obligations
. consummate asset sales
. enter into transactions with affiliates
. engage in any business other than a telecommunications business
. merge or consolidate with any other person, other than McLeodUSA, or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its assets
The credit agreement permits the lenders to terminate and accelerate the
agreement upon a change of control of Splitrock. The credit agreement also
requires Splitrock to provide notices of material events and to furnish
financial and other information.
Master Services Agreement
Splitrock agreed to provide, and McLeodUSA agreed to purchase, dial-up
internet access and services under a master services agreement entered into as
of January 6, 2000. The term of the master services agreement is two years and
the standard features include a V.90-56K local dial access in more than 800
cities with a community subscriber usage average of 35 hours per month and
technical support for McLeodUSA
78
<PAGE>
problem resolution and access to the Splitrock customer care web site 24 hours
a day and seven days per week. The pricing schedule is based upon a commitment
for a minimum average number of McLeodUSA subscribers using the service over
the two-year term. A portion of the fees to be paid to Splitrock may be applied
to optional features such as filtration services to block access to specific
sites, additional dial domains including integrated services digital network
(ISDN) access where available and multi-link point-to-point protocol access
allowing for multiple bonded connections on a toll-free basis under a single
login and password for subscribers.
Letter of Intent Regarding Bandwidth Capacity
McLeodUSA and Splitrock entered into a letter of intent dated as of January
6, 2000 setting forth the principal terms of a proposed bandwidth capacity
agreement between the parties. The principal terms set forth in this letter of
intent include the following:
. Splitrock will provide a specified number of DS-3 capacity miles on the
nationwide multi-conduit fiber optic communications system provided on a
dark fiber basis to Splitrock by Level 3 Communications, and as further
converted to lit fiber by Splitrock, for a specified amount per route
mile
. twenty-year term subject to renewal consistent with any renewal term
offered by Level 3 Communications to Splitrock on the dark fiber lease
. access and rights to interconnect for McLeodUSA at the Splitrock
facilities and certain accommodations to additional access points
. optronics maintenance by Splitrock at least equal to maintenance
Splitrock provides to itself and within industry standards
. liquidated damages for certain delays
The total amount McLeodUSA will pay to Splitrock under the terms of the
Master Services Agreement and the Letter of Intent Regarding Bandwidth Capacity
is $105 million, all of which is payable prior toMarch 31, 2001. The terms,
including the pricing terms, of the Master Services Agreement and the Letter of
Intent Regarding Bandwidth Capacity were negotiated to be consistent with those
found in other agreements of this type in the industry. In addition, McLeodUSA
has an option to terminate either of these agreements upon a change of control
of Splitrock.
79
<PAGE>
INFORMATION ABOUT McLEODUSA AND SOUTHSIDE ACQUISITION CORPORATION
General
McLeodUSA. McLeodUSA provides communications services to business and
residential customers in the Midwestern and Rocky Mountain regions of the
United States. The McLeodUSA communications services include local, long
distance, Internet access, data, voice mail and paging, all from a single
company on a single bill. McLeodUSA believes it is the first communications
provider in most of its markets to offer one-stop shopping for communications
services tailored to customers' specific needs.
The McLeodUSA approach makes it easier for both its business and its
residential customers to satisfy their communications needs. It also allows
businesses to receive customized services, including competitive long distance
pricing and enhanced calling features, that might not otherwise be directly
available on a cost-effective basis. As of December 31, 1999, McLeodUSA served
over 678,000 local lines in 592 cities and towns.
In addition to its core business of providing competitive local, long
distance and related communications services, McLeodUSA also derives revenue
from:
. the 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 and paging services
In most of its markets, McLeodUSA competes with the incumbent local phone
company by leasing its lines and switches. In other markets, primarily in east
central Illinois and southeast South Dakota, McLeodUSA operates its own lines
and switches. McLeodUSA provides long distance services by using its own
communications network facilities and leasing capacity from long distance and
local communications providers. McLeodUSA is actively developing fiber optic
communications networks in Iowa, Illinois, Wisconsin, Indiana, Missouri,
Minnesota, South Dakota, North Dakota, Arizona, Michigan, Nebraska, Ohio, Utah,
Colorado and Wyoming to carry additional communications traffic on its own
network.
McLeodUSA wants to be the leading and most admired provider of integrated
communications services in its markets. To achieve this goal, McLeodUSA is:
. aggressively capturing customer share and generating revenue using
leased communications network capacity
. concurrently building its own communications network
. migrating customers to its own communications network to provide
enhanced services and reduce operating costs
80
<PAGE>
The principal elements of the McLeodUSA business strategy are to:
Provide integrated communications services. McLeodUSA believes it can
rapidly penetrate its target markets and build customer loyalty by providing an
integrated product offering to business and residential customers.
Build customer share through branding. McLeodUSA believes it will create and
strengthen brand awareness in its target markets by branding its communications
services with the trade name McLeodUSA in combination with the distinctive
black-and-yellow motif of its telephone directories.
Provide outstanding customer service. McLeodUSA customer service
representatives are available 24 hours a day, seven days a week, to answer
customer calls. The customer-focused software and systems of McLeodUSA allow
its representatives immediate access to its customer and network data, enabling
a rapid and effective response to customer requests.
Emphasize small and medium sized businesses. McLeodUSA primarily targets
small and medium sized businesses because it believes it can rapidly capture
customer share by providing face-to-face business sales and strong service
support to these customers.
Expand its fiber optic communications network. McLeodUSA is building a
state-of-the-art fiber optic communications network to deliver multiple
services and reduce operating costs.
Expand intra-city fiber optic communications network. Within selected
cities, McLeodUSA plans to extend its network directly to its customers'
locations. This will allow McLeodUSA to provide expanded services and reduce
the expense of leasing communications facilities from the local exchange
carrier.
Explore acquisitions and strategic alliances. McLeodUSA plans to pursue
acquisitions, joint ventures and strategic alliances to expand or complement
its business.
Leverage proven management team. The McLeodUSA executive management team
consists of veteran telecommunications managers who successfully implemented
similar customer-focused telecommunications strategies in the past.
----------------
As of January 7, 2000, McLeodUSA estimated, based on the combined McLeodUSA
and Splitrock business plan, capital requirements and growth projections as of
that date, that it would require $2.5 billion through 2002. The estimated
aggregate capital requirements of McLeodUSA include the projected cost of:
. building its fiber optic communications network, including intra-city
fiber optic communications networks
. adding voice and ATM switches
. expanding operations in existing and new markets
. developing wireless services
. funding general corporate purposes
. completing recent acquisitions, including the merger
. constructing, acquiring, developing or improving telecommunications
assets
The projected additional funding need of McLeodUSA is approximately $900
million through 2002 based on the difference between existing cash balances and
the combined McLeodUSA and Splitrock business plan, capital requirements and
growth projections. This projected additional funding need assumes that the
Splitrock 11 3/4% senior notes due 2008, which are redeemable by the holders
upon a change of control, will remain outstanding at the completion of this
merger. McLeodUSA may meet any additional capital needs by issuing additional
debt or equity securities or borrowing funds from one or more lenders.
81
<PAGE>
The actual amount and timing of the future capital requirements of McLeodUSA
are subject to risks and uncertainties and may differ materially from its
estimates. Accordingly, McLeodUSA may need additional capital to continue to
expand its markets, operations, facilities, network and services. See "Risk
Factors--Failure to Raise Necessary Capital Could Restrict the Ability of
McLeodUSA to Develop its Network and Services and Engage in Strategic
Acquisitions."
----------------
The principal executive offices of McLeodUSA are located at McLeodUSA
Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-
3177, and its phone number is (319) 364-0000.
Southside Acquisition Corporation. Southside Acquisition Corporation is a
Delaware corporation and a wholly owned subsidiary of McLeodUSA. McLeodUSA
formed Southside Acquisition Corporation in December 1999 to facilitate the
merger. Southside Acquisition Corporation has not transacted any business other
than that incident to its formation and to completion of the merger.
Additional Information
A detailed description of the McLeodUSA business, executive compensation,
various benefit plans, including stock option plans, voting securities and the
principal holders of its voting securities, relationships and transactions with
its directors, executive officers and principal stockholders, financial
statements and other matters related to McLeodUSA is incorporated by reference
or set forth in the McLeodUSA Annual Report on Form 10-K for the year ended
December 31, 1998 or on Form 10-Q for the quarter ended September 30, 1999,
incorporated by reference into this joint proxy statement/prospectus.
Stockholders desiring copies of these documents may contact McLeodUSA at its
address or telephone number indicated under "Where You Can Find More
Information."
82
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
The information in the following unaudited table is based on historical
financial information included in the prior SEC filings of McLeodUSA, including
the McLeodUSA annual report on Form 10-K for the fiscal year ended December 31,
1998 and the report on Form 10-Q for the quarter ended September 30, 1999. 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." The audited
historical financial statements of McLeodUSA as of December 31, 1998 and 1997,
and for each of the three years in the period ended December 31, 1998 were
audited by Arthur Andersen LLP, independent public accountants.
The information in the following table reflects financial information for
the following companies McLeodUSA has 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. These acquisitions affect the
comparability of the financial data for the periods presented.
The pro forma information presented in the operations statement data and
other financial data in the table includes the operations of Ovation and
Splitrock as if they had been acquired at the beginning of the periods
presented and the as adjusted information in the balance sheet data in the
table includes the Ovation and Splitrock financial position as of the date
presented. The 1998 pro forma amounts include adjustments to the Splitrock 1998
historical financial statements to give effect to the July 1998 issuance by
Splitrock of $261 million of 11 3/4% senior notes as if the notes were issued
at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has issued:
<TABLE>
<CAPTION>
Description of Securities Principal Amount Date Issued
------------------------- ---------------- -----------
<S> <C> <C>
10 1/2% senior discount notes due March
1, 2007................................ $500 million March 4, 1997
9 1/4% senior notes due July 15, 2007... $225 million July 21, 1997
8 3/8% senior notes due March 15, 2008.. $300 million March 10, 1998
9 1/2% senior notes due November 1,
2008................................... $300 million October 30, 1998
8 1/8% senior notes due February 15,
2009................................... $500 million February 22, 1999
Series A preferred stock................ $287 million August 23, 1999
Series B preferred stock................ $687 million September 15, 1999
Series C preferred stock................ $313 million September 15, 1999
</TABLE>
The operations statement data and other financial data in the table include
the effects of the issuances beginning on the dates the securities were issued.
The balance sheet data in the table include the effects of these issuances at
the end of the periods presented. The pro forma information presented in the
operations statement data and other financial data in the table includes the
effects of the issuance of the 8 3/8% senior notes, the 9 1/2% senior notes and
the 8 1/8% senior notes and the Series A, B and C preferred stock as if they
had occurred at the beginning of 1998.
83
<PAGE>
On June 30, 1999, McLeodUSA announced that its 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
McLeodUSA Class A common stock for each share held. Distribution of the
additional shares took place on July 26, 1999. All information in the selected
consolidated financial data has been adjusted to reflect the two-for-one stock
split.
(table begins on the next page)
84
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Da-
ta:
Revenue................. $ 8,014 $ 28,998 $ 81,323 $267,886 $ 604,146 $ 688,792
-------- -------- -------- -------- --------- ---------
Operating expenses:
Cost of service....... 6,212 19,667 52,624 151,190 323,208 420,731
Selling, general and
administrative....... 12,373 18,054 46,044 148,158 260,931 280,810
Depreciation and amor-
tization............. 772 1,835 8,485 33,275 89,107 229,549
Other................. -- -- 2,380 4,632 5,575 5,575
-------- -------- -------- -------- --------- ---------
Total operating ex-
penses............... 19,357 39,556 109,533 337,255 678,821 936,665
Operating loss.......... (11,343) (10,558) (28,210) (69,369) (74,675) (247,873)
Interest Income (ex-
pense), net............ (73) (771) 5,369 (11,967) (52,234) (152,294)
Other income............ -- -- 495 1,426 1,997 1,997
Income taxes............ -- -- -- -- -- --
-------- -------- -------- -------- --------- ---------
Net loss................ (11,416) (11,329) (22,346) (79,910) (124,912) (398,170)
Preferred stock divi-
dends.................. -- -- -- -- -- (54,406)
-------- -------- -------- -------- --------- ---------
Loss applicable to com-
mon stock.............. $(11,416) $(11,329) $(22,346) $(79,910) $(124,912) $(452,576)
======== ======== ======== ======== ========= =========
Loss per common share... $ (.27) $ (.20) $ (.28) $ (.73) $ (.99) $ (2.71)
======== ======== ======== ======== ========= =========
Weighted average common
shares outstanding..... 42,928 56,008 81,012 109,948 125,614 167,302
======== ======== ======== ======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1998 1999 1999
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operations Statement Data:
Revenue................................... $438,642 $ 644,875 $ 722,515
-------- --------- ---------
Operating expenses:
Cost of service......................... 239,195 327,438 420,281
Selling, general and administrative..... 189,579 282,385 305,673
Depreciation and amortization........... 63,663 130,583 235,506
Other................................... 5,575 -- --
-------- --------- ---------
Total operating expenses.............. 498,012 740,406 961,460
Operating loss............................ (59,370) (95,531) (238,945)
Interest Income (expense), net............ (35,519) (79,326) (105,806)
Other income.............................. 1,789 7,555 7,555
Income taxes.............................. -- -- --
-------- --------- ---------
Net loss.................................. (93,100) (167,302) (337,196)
Preferred stock dividends................. -- (4,125) (40,773)
-------- --------- ---------
Loss applicable to common stock........... $(93,100) $(171,427) $(377,969)
======== ========= =========
Loss per common share..................... $ (.74) $ (1.18) $ (2.11)
======== ========= =========
Weighted average common shares outstand-
ing...................................... 125,240 144,982 179,207
======== ========= =========
</TABLE>
85
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30, 1999
----------------------------------------------- -----------------------
1994 1995 1996 1997 1998 Actual Pro Forma
------- ------- -------- ---------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current assets.......... $ 4,862 $ 8,507 $224,401 $ 517,869 $ 793,192 $1,751,588 $1,893,699
Working capital
(deficit).............. $ 1,659 $(1,208) $185,968 $ 378,617 $ 613,236 $1,479,782 $1,564,836
Property and equipment,
net.................... $ 4,716 $16,119 $ 92,123 $ 373,804 $ 629,746 $1,094,965 $1,183,701
Total assets............ $10,687 $28,986 $452,994 $1,345,652 $1,925,197 $4,173,118 $6,404,026
Long-term debt.......... $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,801,185 $2,059,525
Redeemable convertible
preferred stock........ $ -- $ -- $ -- $ -- $ -- $1,000,000 $1,000,000
Stockholders' equity.... $ 3,291 $14,958 $403,429 $ 559,379 $ 462,806 $1,065,438 $2,978,655
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
Pro Forma
1994 1995 1996 1997 1998 1998
-------- ------- -------- -------- -------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures
Property, plant and
equipment............ $ 3,393 $ 5,272 $ 70,290 $151,280 $289,923 $ 379,778
Business
acquisitions......... $ -- $ 9,425 $103,492 $449,857 $ 49,737 $2,700,983
EBITDA(1).............. $(10,571) $(8,723) $(17,345) $(31,462) $ 20,007 $ (12,749)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1998 1999 1999
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures
Property, plant and equipment............ $204,700 $394,100 $ 448,780
Business acquisitions.................... $ 64,400 $677,400 $2,884,617
EBITDA(1)................................. $ 9,868 $ 35,052 $ (3,439)
</TABLE>
- --------
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
86
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared to
give effect to:
. the issuance of the 8 3/8% senior notes in March 1998
. the issuance of the 9 1/2% senior notes in October 1998
. the issuance of the 8 1/8% senior notes in February 1999
. the acquisition of Ovation Communications, Inc. in March 1999
. the issuance of the 6.75% Series A preferred stock in August 1999
. the issuance of the Series B preferred stock and Series C preferred
stock in September 1999
. the reorganization and merger
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, Series B and Series C preferred stock are collectively referred to as
the "Preferred Stock Issuances." The Unaudited Pro Forma Condensed Consolidated
Balance Sheet assumes that the merger was consummated on September 30, 1999.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
include the operations of Ovation Communications, Inc. and the operations of
Splitrock as if the acquisition of Ovation and the merger with Splitrock were
consummated on January 1, 1998 and the related weighted average share amounts
have been adjusted to give effect to the shares issued in the transactions as
if they had been issued on January 1, 1998. The Splitrock results have been
adjusted to give effect to the issuance in July 1998 by Splitrock of $261
million of its 11 3/4% senior notes due 2008 as if the issuance was consummated
on January 1, 1998. It also assumes that interest related to the Notes
Offerings, dividends related to the Preferred Stock Issuances and the
additional depreciation and amortization due to the increased value of tangible
and intangible assets acquired through the acquisition of Ovation and the
merger with Splitrock, using the purchase method of accounting, began January
1, 1998. The unaudited pro forma financial information is derived from and
should be read in conjunction with the Consolidated Financial Statements of
McLeodUSA and the related notes thereto included in the McLeodUSA Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.
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 to be
acquired in the merger. The acquired intangibles will be amortized over periods
ranging from three to 20 years. The adjustments for the merger reflect the
preliminary allocation of the net purchase price of Splitrock to the net assets
of Splitrock that are to be acquired, including intangible assets, and record
the issuance of 30,494,256 shares of McLeodUSA Class A common stock valued at
$58.88 per share. The value of $58.88 per share represents the average closing
price of McLeodUSA Class A common stock on The Nasdaq Stock Market for the 10
trading days beginning five days prior to the date the merger agreement was
announced, January 7, 2000, and ending four days after such announcement. The
net purchase price of approximately $1.9 billion is equal to (1) the product of
(A) the total number of shares of Splitrock common stock attributable to
outstanding Splitrock common stock, warrants and options (totaling 62,231,443)
as of December 31, 1999, multiplied by (B) the conversion ratio of 0.5347,
multiplied by (C) $58.88, the value of a share of McLeodUSA Class A common
stock (calculated as described above), minus (2) the aggregate option and
warrant proceeds to be received and the net assets to be acquired (a net
deficit of $19,415). The Unaudited Pro Forma Condensed Consolidated Balance
Sheet also includes a reduction in cash to reflect payment of investment
banking fees, an increase in current liabilities related to employee
compensation, severance and other matters directly attributable to the merger
under EITF 95-3, and a related increase in the purchase price as purchased
intangibles. The pro forma adjustments include the elimination of the Splitrock
historical equity components, including common stock, treasury stock, other
capital and retained deficit.
87
<PAGE>
For purposes of allocating the net purchase price among the various assets
to be acquired, McLeodUSA has preliminarily considered the carrying value of
the acquired assets to approximate their fair value, with all of the excess of
the net purchase price being attributed to intangible assets, primarily
goodwill. McLeodUSA intends to more fully evaluate the acquired assets
following consummation of the merger and, as a result, the allocation of the
net purchase price among the acquired tangible and intangible assets may
change. The following pro forma schedules assume that the Splitrock 11 3/4%
senior notes due 2008, which are redeemable by the holders upon a change of
control, will remain outstanding at the completion of the merger since the
current market value of the senior notes exceeds the redemption price. Should
the notes be redeemed at the request of the holders, an extraordinary loss of
approximately $14 million would be recognized.
The unaudited pro forma financial information is provided for informational
purposes only and is not necessarily indicative of the operating results that
would have occurred had the merger been consummated at the beginning of 1998,
nor is it necessarily indicative of future operating results or financial
position.
(table begins on the next page)
88
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheets
(In thousands)
As of September 30, 1999
<TABLE>
<CAPTION>
Adjustments for Pro Forma for
Splitrock Splitrock
McLeodUSA Splitrock Transaction Transaction
---------- --------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equiva-
lents................... $ 885,170 $ 91,544 $ (18,000) $ 958,714
Other current assets..... 866,418 68,567 -- 934,985
---------- -------- ---------- ----------
Total Current Assets... 1,751,588 160,111 (18,000) 1,893,699
Property and Equipment,
net..................... 1,094,965 88,736 -- 1,183,701
Intangible assets........ 1,215,403 18,477 1,965,632 3,199,512
Other assets............. 111,162 15,952 -- 127,114
---------- -------- ---------- ----------
Total Assets........... $4,173,118 $283,276 $1,947,632 $6,404,026
========== ======== ========== ==========
LIABILITIES AND STOCKHOLD-
ERS' EQUITY
Current Liabilities........ $ 271,806 $ 42,057 $ 15,000 $ 328,863
Long-term debt, less cur-
rent maturities......... 1,801,185 258,340 -- 2,059,525
Other long-term liabili-
ties.................... 34,689 2,294 -- 36,983
---------- -------- ---------- ----------
Total Liabilities...... 2,107,680 302,691 15,000 2,425,371
---------- -------- ---------- ----------
Redeemable convertible pre-
ferred stock.............. 1,000,000 -- -- 1,000,000
---------- -------- ---------- ----------
Stockholders' Equity:
Preferred stock.......... 12 -- -- 12
Common stock............. 1,550 57 248 1,855
Additional paid-in capi-
tal..................... 1,472,590 123,958 1,788,954 3,385,502
Common stock warrants.... -- 2,247 (2,247) --
Retained earnings (defi-
cit).................... (424,826) (145,331) 145,331 (424,826)
Accumulated other compre-
hensive income.......... 16,112 (346) 346 16,112
---------- -------- ---------- ----------
Total Stockholders' Eq-
uity.................. 1,065,438 (19,415) 1,932,632 2,978,655
---------- -------- ---------- ----------
Total Liabilities and
Stockholders' Equity.. $4,173,118 $283,276 $1,947,632 $6,404,026
========== ======== ========== ==========
</TABLE>
89
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Twelve months Ended December 31, 1998
-------------------------------------------------------------------------------------------------------
Pro Forma for
Adjustments Pro Forma Adjustments Pro Forma for Adjustments Preferred
for the Notes for the Notes for Ovation Ovation for Preferred Stock
McLeodUSA Offerings Offerings Ovation Acquisition Acquisition Stock Issuances Issuances
--------- ------------- ------------- ------- ----------- ------------- --------------- -------------
<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 16,177 110,667 -- 110,667
Other............ 5,575 -- 5,575 -- -- 5,575 -- 5,575
--------- -------- --------- ------- -------- --------- -------- ---------
Total operating
expenses........ 678,821 -- 678,821 25,191 16,177 720,189 -- 720,189
--------- -------- --------- ------- -------- --------- -------- ---------
Operating income
(loss)........... (74,675) -- (74,675) (4,156) (16,177) (95,008) (95,008)
Interest income
(expense), net... (52,234) (71,606) (123,840) (1,608) -- (125,448) -- (125,448)
Other non-
operating income
(expense)........ 1,997 -- 1,997 -- -- 1,997 -- 1,997
Income taxes..... -- -- -- -- -- -- -- --
--------- -------- --------- ------- -------- --------- -------- ---------
Net income
(loss)........... (124,912) (71,606) (196,518) (5,764) (16,177) (218,459) -- (218,459)
Preferred stock
dividends........ -- -- -- -- -- -- (54,406) (54,406)
--------- -------- --------- ------- -------- --------- -------- ---------
Earnings
applicable to
common stock..... $(124,912) $(71,606) $(196,518) $(5,764) $(16,177) $(218,459) $(54,406) $(272,865)
========= ======== ========= ======= ======== ========= ======== =========
Loss per common
equivalent
share............ $ (0.99) $ (1.56) $ (1.60) $ (1.99)
========= ========= ========= =========
Weighted average
common and
common
equivalent
shares
outstanding...... 125,614 125,614 11,194 136,808 136,808
========= ========= ======== ========= =========
Other Financial
Data:
EBITDA(1)......... $ 20,007 $ -- $ 20,007 $ 1,227 $ -- $ 21,234 $ -- $ 21,234
<CAPTION>
Pro Forma
for
Splitrock Adjustments Splitrock
as Adjusted for Splitrock Acquisition
------------ ------------- -----------
<S> <C> <C> <C>
Operations
Statement Data:
Revenue........... $ 63,611 $ -- $ 688,792
------------ ------------- -----------
Operating
expenses:
Cost of
service.......... 91,204 -- 420,731
Selling, general
and
administrative... 6,390 280,810
Depreciation and
amortization..... 13,850 105,032 229,549
Other............ -- 5,575
------------ ------------- -----------
Total operating
expenses........ 111,444 105,032 936,665
------------ ------------- -----------
Operating income
(loss)........... (47,833) (105,032) (247,873)
Interest income
(expense), net... (26,846) (152,294)
Other non-
operating income
(expense)........ -- -- 1,997
Income taxes..... -- -- --
------------ ------------- -----------
Net income
(loss)........... (74,679) (105,032) (398,170)
Preferred stock
dividends........ -- (54,406)
------------ ------------- -----------
Earnings
applicable to
common stock..... $(74,679) $(105,032) $(452,576)
============ ============= ===========
Loss per common
equivalent
share............ $ (2.71)
===========
Weighted average
common and
common
equivalent
shares
outstanding...... 30,494 167,302
============= ===========
Other Financial
Data:
EBITDA(1)......... $(33,983) $ -- $ (12,749)
</TABLE>
- ----
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
90
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1999
-----------------------------------------------------------------------------------------------
Adjustments for Pro Forma Adjustments Pro Forma for Adjustments for
the Notes for the Notes Ovation for Ovation Ovation Preferred
McLeodUSA Offerings Offerings (Jan-Mar 99) Acquisition Acquisition Stock Issuances
--------- --------------- ------------- ------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue........ $ 644,875 $ -- $ 644,875 $19,696 $ -- $ 664,571 $ --
--------- ------- --------- ------- ------- --------- --------
Operating
expenses:
Cost of
service........ 327,438 -- 327,438 7,338 -- 334,776 --
Selling,
general and
administrative.. 282,385 -- 282,385 10,880 -- 293,265 --
Depreciation
and
amortization... 130,583 -- 130,583 2,829 4,044 137,456 --
Other.......... -- -- -- -- -- -- --
--------- ------- --------- ------- ------- --------- --------
Total
operating
expenses...... 740,406 -- 740,406 21,047 4,044 765,497 --
--------- ------- --------- ------- ------- --------- --------
Operating
income (loss).. (95,531) -- (95,531) (1,351) (4,044) (100,926) --
Interest income
(expense),
net............ (79,326) (5,962) (85,288) (2,383) -- (87,671) --
Other non-
operating
income
(expense)...... 7,555 -- 7,555 -- 7,555 --
Income taxes... -- -- -- -- -- --
--------- ------- --------- ------- ------- --------- --------
Net income
(loss)......... (167,302) (5,962) (173,264) (3,734) (4,044) (181,042) --
Preferred stock
dividends...... (4,125) -- (4,125) -- -- (4,125) (36,648)
--------- ------- --------- ------- ------- --------- --------
Earnings
applicable to
common stock... $(171,427) $(5,962) $(177,389) $(3,734) $(4,044) $(185,167) $(36,648)
========= ======= ========= ======= ======= ========= ========
Loss per common
equivalent
share.......... $ (1.18) $ (1.22) $ (1.25)
========= ========= =========
Weighted
average common
and common
equivalent
shares
outstanding.... 144,982 144,982 3,731 148,713
========= ========= ======= =========
Other Financial
Data:
EBITDA(1)...... $ 35,052 $ -- $ 35,052 $ 1,478 $ -- $ 36,530 $ --
<CAPTION>
Pro Forma for Pro Forma
Preferred Adjustments for Splitrock
Stock Issuances Splitrock for Splitrock Acquisition
--------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Operations Statement Data:
Revenue........ $ 664,571 $ 57,944 $ -- $722,515
--------------- ---------- ------------- -------------
Operating
expenses:
Cost of
service........ 334,776 85,505 -- 420,281
Selling,
general and
administrative.. 293,265 12,408 -- 305,673
Depreciation
and
amortization... 137,456 19,276 78,774 235,506
Other.......... -- -- -- --
--------------- ---------- ------------- -------------
Total
operating
expenses...... 765,497 117,189 78,774 961,460
--------------- ---------- ------------- -------------
Operating
income (loss).. (100,926) (59,245) (78,774) (238,945)
Interest income
(expense),
net............ (87,671) (18,135) -- (105,806)
Other non-
operating
income
(expense)...... 7,555 -- -- 7,555
Income taxes... -- -- -- --
--------------- ---------- ------------- -------------
Net income
(loss)......... (181,042) (77,380) (78,774) (337,196)
Preferred stock
dividends...... (40,773) -- (40,773)
--------------- ---------- ------------- -------------
Earnings
applicable to
common stock... $(221,815) $(77,380) $(78,774) $(377,969)
=============== ========== ============= =============
Loss per common
equivalent
share.......... $ (1.49) $ (2.11)
=============== =============
Weighted
average common
and common
equivalent
shares
outstanding.... 148,713 30,494 179,207
=============== ============= =============
Other Financial
Data:
EBITDA(1)...... $ 36,530 $(39,969) $ -- $ (3,439)
</TABLE>
- ----
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. McLeodUSA has included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
91
<PAGE>
Splitrock Services, Inc.
Unaudited Pro Forma Condensed Statements of Operations
(In thousands, except per share information)
The following unaudited pro forma financial information has been prepared to
give effect to the issuance by Splitrock of $261 million 11 3/4% senior notes
in July 1998 as if the issuance was consummated on January 1, 1998.
<TABLE>
<CAPTION>
Twelve Months Ended December 31, 1998
--------------------------------------
Adjustments for Splitrock
Splitrock the Notes as adjusted
--------- --------------- -----------
<S> <C> <C> <C>
Operations Statement Data:
Revenue................................. $ 63,611 $ -- $ 63,611
-------- -------- --------
Operating expenses:
Cost of service........................ 91,204 91,204
Selling, general and administrative.... 6,390 -- 6,390
Depreciation and amortization.......... 13,850 -- 13,850
Other.................................. -- -- --
-------- -------- --------
Total operating expenses............. 111,444 -- 111,444
-------- -------- --------
Operating income (loss)................ (47,833) -- (47,833)
Interest income (expense), net......... (9,997) (16,849) (26,846)
Income taxes........................... -- -- --
-------- -------- --------
Net income (loss)...................... $(57,830) $(16,849) $(74,679)
======== ======== ========
Loss per common shares................. $ (1.30) $ -- $ (1.68)
======== ======== ========
Weighted average shares--basic and di-
luted................................. 44,389 44,389
======== ========
</TABLE>
92
<PAGE>
INFORMATION ABOUT SPLITROCK
Overview
Splitrock is a facilities-based provider of advanced data communications
services. Splitrock markets its services to Internet service providers,
telecommunications carriers and other businesses throughout the United States.
The services provided by Splitrock include an array of Internet access and data
communications services delivered over its high capacity, facilities-based
network. The combination of the existing Splitrock network with its pending
acquisition of significant fiber optic facilities positions Splitrock to
deliver a broad range of end-to-end data communications services on its
network, including:
. dial and dedicated Internet access
. Internet access for higher bandwidth services, such as digital
subscriber line and cable modem
. value-added services such as virtual private networks and web hosting
. bandwidth leasing and colocation services
Splitrock was founded in March 1997. In July 1997, Splitrock acquired the
existing legacy network infrastructure of Prodigy Communications Corporation,
and agreed to build and operate a nationwide communications network and to
provide network services for Prodigy's customers. Splitrock initially provided
service to Prodigy's subscribers using Prodigy's legacy network. For locations
outside the coverage area of the legacy network, Splitrock has used the AT&T
Global Services Network, formerly IBM's Global Services Network. Since
September 1997, Splitrock has deployed its broadband access network in
metropolitan areas across the country. Over time, as more coverage became
available on the Splitrock access network, Splitrock decommissioned the Prodigy
legacy network points of presence (POPS) and has substantially discontinued the
use of the AT&T network.
Currently, Splitrock provides Internet dial access and related services to
Prodigy, which is the primary customer of Splitrock and one of the largest
Internet service providers in the United States. Splitrock is currently
Prodigy's primary provider of dial access services. Historically, Prodigy has
accounted for substantially all of the revenues of Splitrock since its
inception. For the year ended December 31, 1998, and the nine months ended
September 30, 1999, Prodigy accounted for 99% and 88% of the Splitrock
revenues, respectively. While Splitrock expects revenues from Prodigy to
decrease as a percentage of its total revenues in future periods, Splitrock
believes that Prodigy will continue to account for a significant portion of its
revenues.
In addition to providing Internet dial access and related services to
Prodigy, Splitrock provides Internet dial access, Internet dedicated services,
and virtual private network services to other customers. Given the nature of
the network costs of Splitrock and the fact that current network utilization
peaks in the evening hours to support Prodigy's residential Internet
subscribers, Splitrock is targeting providers of daytime intensive traffic as
well as providers of evening intensive traffic to maximize network utilization
throughout a 24-hour period.
Splitrock launched its virtual Internet service (VIS) to Internet service
provider customers in the third quarter of 1999. VIS is marketed to Internet
service providers which desire to outsource certain back office and support
functions, such as billing and customer service, in addition to Internet dial
access services.
Splitrock is currently building its first data center in Houston, Texas to
offer web hosting services, and plans to build three more over the next year.
Revenues from these facilities are expected to commence in the first half of
2000, but there can be no assurance that Splitrock will generate revenues from
this new product line.
As segments of the Splitrock fiber backbone are constructed, Splitrock plans
to use the additional network capacity to offer bandwidth leasing services.
Network
As of September 30, 1999, the Splitrock broadband access network included
329 installed POPS, 320 of which were operational. When its network is
completed, Splitrock expects to have approximately 340 active
93
<PAGE>
broadband access POPS. Splitrock has realized efficiencies in its network and
has made economic decisions regarding coverage of certain markets that have
allowed Splitrock to decrease its expected number of POPs necessary to give
Splitrock a physical presence in all 50 states, and target 90% of U.S.
businesses and 87% of U.S. households with a local call. The expanding
Splitrock network is managed and supported by its state-of-the-art network
operations center in Houston, Texas. Splitrock has deployed asynchronous
transfer mode (ATM) switches at every core, hub and remote POP of its network.
This network architecture, called "ATM-to-the-EdgeTM," enables Splitrock to
serve as a broad-based provider of data communications services through the
creation of a platform that efficiently delivers multiple services, such as
Internet access, virtual private networks and web hosting, across multiple
protocols, including Internet Protocol, frame relay and ATM. The flexibility
inherent in the Splitrock network design allows it to expand its service
offerings to provide fully integrated data, video and voice services. This
flexibility also allows Splitrock to incorporate future technological
innovations into its network architecture with a lower incremental investment
than that required by other communications service providers with legacy
systems that have separate networks for voice and data.
As part of the ongoing efforts of Splitrock to further expand and enhance
its network and service offerings, Splitrock has agreed to acquire the
indefeasible rights to use four dark fiber strands in a state-of-the-art fiber
optic network currently under construction by Level 3 Communications, LLC, with
an option to acquire indefeasible rights to use an additional 12 fibers. This
nationwide fiber network will cover approximately 15,000 route miles and will
be delivered in segments that are expected to become available from the first
quarter of 2000 through the first quarter of 2001. Combining this fiber optic
backbone with the Splitrock broadband access network positions Splitrock to:
. deliver, on its own facilities, a broad array of end-to-end data
communications services at the high level of quality and reliability
increasingly demanded by customers
. reduce significantly its network costs as a percentage of revenues as it
substitutes the acquired bandwidth for existing leased circuit
arrangements with various telecommunications carriers
. expand its service offerings by providing bandwidth leasing services on
a stand-alone basis or bundled with the other services of Splitrock
. increase the reliability and redundancy of its network
. increase the variety of service options and speeds available to
customers
Sales Organization
In 1999 Splitrock began to implement its distribution strategy by developing
an in-house direct sales force. Splitrock's direct sales force markets our
services directly to Internet service providers, carriers, value added service
providers, and medium and larger businesses. Splitrock also utilizes alternate
distribution channels, such as agents, resellers and wholesalers, to market our
services. As of December 31, 1999, Splitrock's sales and marketing staff
totaled 75 professionals, the majority of which comprised the direct sales
force.
General
Splitrock was incorporated in Texas on March 5, 1997 and reincorporated in
Delaware on May 8, 1998. The headquarters of Splitrock are located at 9012 New
Trails Drive, The Woodlands, Texas 77381, and its phone number is (281) 465-
1200.
Additional Information
A detailed description of the Splitrock business, executive compensation,
various benefit plans, including stock option plans, voting securities and the
principal holders of these securities, relationships and transactions between
Splitrock and its executive officers, directors and principal stockholders,
financial statements and other matters related to Splitrock is incorporated by
reference or set forth in the Splitrock registration statement on Form S-1 or
in the Splitrock Form 10-K for the year ended December 31, 1998 or on the Form
10-Q for the quarter ended September 30, 1999, incorporated into this joint
proxy statement/prospectus by reference. Stockholders desiring copies of such
documents may contact Splitrock at its address or telephone number indicated
under "Where You Can Find More Information."
94
<PAGE>
Selected Financial Data of Splitrock
(In thousands, except per share data)
The information in the following table is based on historical financial
information included in the prior SEC filings of Splitrock, including the
Splitrock registration statement on Form S-1 filed on June 3, 1999, as amended,
and the Splitrock quarterly report on Form 10-Q for the quarter ended September
30, 1999. The following 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." The audited
historical financial statements of Splitrock for the period from inception
(March 5, 1997) to December 31, 1997 and for the year ended December 31, 1998
were audited by PricewaterhouseCoopers LLP. The unaudited historical financial
statements of Splitrock for the nine months ended September 30, 1998 and 1999
include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
such unaudited interim periods.
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997) Nine Months Ended
through Year Ended September 30,
December 31, December 31, ------------------
1997 1998 1998 1999
--------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues.................... $ 22,708 $ 63,611 $ 47,592 $ 57,944
Operating expenses:
Cost of service........... 28,166 91,204 63,535 85,505
Selling, general and
administrative........... 1,276 6,390 4,169 12,408
Depreciation and
amortization............. 3,500 13,850 7,711 19,276
-------- -------- -------- --------
Total operating
expenses............... 32,942 111,444 75,415 117,189
-------- -------- -------- --------
Operating loss.............. (10,234) (47,833) (27,823) (59,245)
Interest income (expense),
net........................ 113 (9,997) (4,289) (18,135)
Income taxes................ -- -- -- --
-------- -------- -------- --------
Net loss.................... $(10,121) $(57,830) $(32,112) $(77,380)
======== ======== ======== ========
Loss per common share....... $ (0.42) $ (1.30) $ (0.74) $ (1.59)
======== ======== ======== ========
Weighted average common
shares outstanding......... 24,110 44,389 43,636 48,805
</TABLE>
<TABLE>
<CAPTION>
December 31, September 30,
---------------- -------------
1997 1998 1999
------- -------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..................... $ 7,710 $ 28,330 $ 91,544
Unrestricted investments- short term.......... -- 120,475 33,745
Restricted investments--short term(1)......... 3,472 39,476 25,870
Property and equipment, net................... 38,504 73,899 88,736
Restricted investments--long-term(1).......... -- 19,001 4,038
Total assets.................................. 54,388 296,141 283,276
Long-term debt................................ -- 258,217 258,340
Total liabilities............................. 33,981 326,432 302,691
Stockholders' equity (deficit)................ 20,407 (30,291) (19,415)
</TABLE>
95
<PAGE>
<TABLE>
<CAPTION>
Period from Inception Nine Months Ended
(March 5, 1997) Year Ended September 30,
through December 31, ------------------
December 31, 1997 1998 1998 1999
--------------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Other Financial Data:
Capital expenditures.... $16,969 $ 45,261 $ 17,120 $ 32,683
EBITDA(2)............... (6,734) (33,983) (20,112) (39,969)
Cash provided by (used
in):
Operating activities.. (2,233) (735) 2,183 (79,110)
Investing activities.. (17,198) (169,512) (20,795) 60,966
Financing activities.. 27,141 190,867 193,224 81,358
</TABLE>
- --------
(1) Restricted investments as of December 31, 1998 and September 30, 1999
represent escrowed funds that, together with interest received on those
funds, will be sufficient to pay, when due, the semi-annual interest
payments through July 15, 2000 on the outstanding Splitrock 11 3/4% senior
notes due 2008.
(2) EBITDA is defined as net loss plus net interest expense, provision for
income taxes, depreciation and amortization. Splitrock has included EBITDA
data because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity. EBITDA
is not necessarily comparable with similarly titled measures reported by
other companies.
96
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND MORE THAN 5%
STOCKHOLDERS OF McLEODUSA
The following beneficial ownership table sets forth information regarding
beneficial ownership of McLeodUSA Class A common stock as of the record date
by:
. each person or entity who is known to McLeodUSA to own beneficially more
than 5% of the McLeodUSA Class A common stock
. each director of McLeodUSA
. the chief executive officer and four other most highly compensated
officers of McLeodUSA
. all of the executive officers and directors of McLeodUSA as a group
Under the Exchange Act, a person is deemed to be a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting of
the security or the power to dispose or direct the disposition of the security.
A person is also deemed to be a beneficial owner of any securities of which
that person has the right to acquire beneficial ownership within 60 days. More
than one person may be deemed to be a beneficial owner of the same securities.
The percentage ownership of each stockholder is calculated based on the total
number of outstanding shares of McLeodUSA Class A common stock as of the record
date plus those shares of McLeodUSA Class A common stock that the stockholder
has the right to acquire within 60 days. Consequently, the denominator for
calculating the percentage ownership may be different for each stockholder.
The table is based upon information supplied by the directors and executive
officers. Unless otherwise indicated in the footnotes to the table, each of the
stockholders listed has sole voting and dispositive power with respect to the
shares shown as beneficially owned. The table does not include any shares of
McLeodUSA Class A common stock that the stockholders may receive in the merger.
The number of option shares includes shares of McLeodUSA Class A common
stock that the individuals named in the table have the right to acquire within
60 days from the record date upon exercise of options.
<TABLE>
<CAPTION>
Beneficial Ownership
----------------------------
Number of
Number of Shares and
Option Option
Name of Beneficial Owner Shares Shares Percent
------------------------ --------- ---------- -------
<S> <C> <C> <C>
Clark E. McLeod(1)(2)............................. 415,000 17,839,360 11.1%
Alliant Energy Corporation(1)(3).................. 2,601,376 19,067,192 11.7%
Fidelity Management & Research Company(4)......... 0 10,186,920 6.4%
Putnam Investments, Inc.(5)....................... 0 20,832,034 13.0%
Janus Capital Corporation(9)...................... 0 8,765,995 5.5%
Richard A. Lumpkin(1)(6).......................... 65,000 3,882,456 2.4%
Mary E. McLeod(1)(7).............................. 0 8,780,460 5.5%
Stephen C. Gray(8)................................ 502,004 1,237,513 *
Blake O. Fisher, Jr............................... 311,514 488,243 *
Arthur Christoffersen............................. 91,068 91,068 *
Thomas M. Collins................................. 29,395 313,943 *
Paul D. Rhines.................................... 19,655 156,743 *
Lee Liu........................................... 36,250 60,650 *
Robert J. Currey.................................. 60,000 60,000 *
Peter H. O. Claudy................................ 0 0 *
Roy A. Wilkens.................................... 0 204,000 *
Anne Bingaman..................................... 0 0 *
Erskine Bowles.................................... 0 0 *
Theodore Forstmann................................ 0 0 *
Directors and executive officers as a group (19
persons)......................................... 1,860,380 24,811,741 15.4%
</TABLE>
97
<PAGE>
- --------
* Less than one percent.
(1) Richard A. Lumpkin, Gail G. Lumpkin, Margaret L. Keon, Mary Lee Sparks and
all of their children, along with Steven L. Grissom, David R. Hodgman and
U.S. Trust Company of New York, individually, or as trustees or settlors
for trusts for the benefit of members of the family of Richard Adamson
Lumpkin, Alliant Energy Corporation and certain of its subsidiaries, M/C
Investors L.L.C., Media/Communications Partners III Limited Partnership,
Clark E. McLeod and Mary E. McLeod are parties to one or more stockholders'
agreements and, accordingly, may constitute a group within the meaning of
Section 13(d)(3) of the Exchange Act. As of the record date, these
stockholders beneficially owned an aggregate of 52,230,632 shares of
McLeodUSA Class A common stock, including 2,601,376 shares that Alliant
Energy Corporation has the right to acquire upon exercise of options, and
415,000 and 65,000 shares that Messrs. McLeod and Lumpkin, respectively,
have the right to purchase upon exercise of options, within 60 days from
the record date, representing an ownership interest of 32.4%. See
"McLeodUSA Capital Stock and Comparison of Stockholder Rights--
Stockholders' Agreements."
(2) Includes 7,820,460 shares of McLeodUSA Class A common stock held of record
by Mary E. McLeod, Mr. McLeod's wife, over which Mr. McLeod has shared
voting power and 460,000 shares of McLeodUSA Class A common stock held by
the McLeod Charitable Foundation for which both Mr. McLeod and Mrs. McLeod
are directors and over which both have shared voting and dispositive power.
Also includes 250,000 shares of McLeodUSA Class A common stock held by the
Clark E. McLeod Unitary Trust and 250,000 shares of McLeodUSA Class A
common stock held by the Mary E. McLeod Unitary Trust for which Mr. McLeod
is a trustee and over which Mr. McLeod has shared voting and investment
power. Mr. McLeod's address is c/o McLeodUSA Incorporated, McLeodUSA
Technology Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, IA 52406-
3177.
(3) Includes 2,601,376 shares of McLeodUSA Class A common stock that Alliant
Energy Investments, Inc., a wholly owned subsidiary of Alliant Energy
Corporation, has the right to acquire upon exercise of options and
10,401,726 shares of McLeodUSA Class A common stock of which Alliant Energy
Investments, Inc. is the holder of record. Heartland Properties, Inc., a
wholly owned subsidiary of Alliant Energy Investments, Inc., is the holder
of record of 134,902 shares of McLeodUSA Class A common stock. LNT
Communications LLC, a limited liability company wholly owned by Alliant
Energy Resources, Inc., a wholly owned subsidiary of Alliant Energy
Corporation, is the record holder of 5,839,188 shares. Alliant Energy
Foundation, Inc., an independently chartered foundation which is affiliated
with Alliant Energy Corporation, is the record holder of 90,000 shares of
McLeodUSA Class A common stock. The address of Alliant Energy Corporation
is 222 West Washington Avenue, P.O. Box 192, Madison, WI 53701.
(4) Fidelity Management & Research Company is a wholly owned subsidiary of FMR
Corp. The address of FMR Corp. is 82 Devonshire Street, Boston, MA 02109.
The amount of the beneficial ownership was disclosed on a Schedule 13G
filed by FMR Corp. on September 30, 1999.
(5) The address of Putnam Investment, Inc. is One Post Office Square, Boston,
MA 02109. The amount of the beneficial ownership was disclosed on a
Schedule 13G filed by Putnam Investment Inc. on December 31, 1999.
(6) Includes 622,254 shares of McLeodUSA Class A common stock held of record by
Gail G. Lumpkin, Mr. Lumpkin's wife, over which Mr. Lumpkin has shared
voting power. Includes 1,457,456 shares of McLeodUSA Class A common stock
held by various trusts for the benefit of the family of Richard A. Lumpkin
over which Mr. Lumpkin has shared voting and investment power. Includes
1,737,746 shares of McLeodUSA Class A common stock held by various trusts
for the benefit of the family of Richard A. Lumpkin over which Mr. Lumpkin
has shared investment power. Includes 65,000 shares of McLeodUSA Class A
common stock that Mr. Lumpkin has the right of purchase within 60 days from
the record date pursuant to options. Mr. Lumpkin's address is c/o McLeodUSA
Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O. Box 3177,
Cedar Rapids, IA 52406-3177.
(7) Includes 460,000 shares of McLeodUSA Class A common stock held by the
McLeod Charitable Foundation for which Mrs. McLeod is a director and over
which she has shared voting and dispositive power. Also includes 250,000
shares of McLeodUSA Class A common stock held by the Mary E. McLeod Unitary
Trust and 250,000 shares of McLeodUSA Class A common stock held by the
Clark E. McLeod
98
<PAGE>
Unitary Trust for which Mrs. McLeod is a trustee and over which Mrs. McLeod
has shared voting and investment power. Mrs. McLeod's address is c/o
McLeodUSA Incorporated, McLeodUSA Technology Park, 6400 C Street SW, P.O.
Box 3177, Cedar Rapids, IA 52406-3177.
(8) Includes 7,500 shares of McLeodUSA Class A common stock held of record by
the Stephen Samuel Gray Irrevocable Trust and 7,500 shares of McLeodUSA
Class A common stock held of record by the Elizabeth Mary Fletcher Gray
Education Trust, of which Mr. Gray is the trustee. Includes 52,500 shares
of McLeodUSA Class A common stock held of record by Morgan Stanley Dean
Witter & Co. for the benefit of Mr. Gray.
(9) The address of Janus Capital Corporation is 100 Fillmore Street, Suite
400, Denver, CO 80206-4923.
The amount of beneficial ownership was disclosed on a Schedule 13G filed by
Janus Capital Corporation on September 30, 1999.
99
<PAGE>
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND MORE THAN 5%
STOCKHOLDERS OF SPLITROCK
The following beneficial ownership table sets forth information regarding
beneficial ownership of Splitrock common stock as of the record date by:
. each person or entity who is known to Splitrock to own beneficially more
than 5% of the Splitrock common stock
. each director of Splitrock
. the chief executive officer and four other most highly compensated officers
of Splitrock
. all of the executive officers and directors of Splitrock as a group
Under the Exchange Act, a person is deemed to be a "beneficial owner" of a
security if he or she has or shares the power to vote or direct the voting of
the security or the power to dispose or direct the disposition of the security.
A person is also deemed to be a beneficial owner of any securities of which
that person has the right to acquire beneficial ownership within 60 days. More
than one person may be deemed to be a beneficial owner of the same securities.
The percentage ownership of each stockholder is calculated based on the total
number of outstanding shares of common stock as of the record date plus those
shares of common stock that the stockholder has the right to acquire within 60
days. Consequently, the denominator for calculating the percentage ownership
may be different for each stockholder.
The table is based upon information supplied by the directors and executive
officers. Unless otherwise indicated in the footnotes to the table, each of the
stockholders listed has sole voting and dispositive power with respect to the
shares shown as beneficially owned.
The number of shares includes shares of common stock that the individuals
named in the table have the right to acquire within 60 days from the record
date upon exercise of options and warrants. The number of shares of McLeodUSA
Class A common stock after the merger includes shares of McLeodUSA Class A
common stock subject to options held by the beneficial owner. In the merger all
options to purchase shares of Splitrock common stock will become the right to
purchase shares of McLeodUSA Class A common stock and will be exercisable upon
the merger.
<TABLE>
<CAPTION>
Number of Shares
of
Number of Shares McLeodUSA
of Splitrock Class A
Common Stock Common Stock
Name of Beneficial Owner Before the Merger Percent After the Merger Percent
------------------------ ----------------- ------- ---------------- -------
<S> <C> <C> <C> <C>
Kwok Li(1)................. 6,135,695 10.7% 3,280,756 1.7%
Linsang Partners, LLC(1)... 15,425,848 27.0% 8,248,200 4.3%
Carso Global Telecom S.A.
de C.V.(2)................ 14,075,000 24.6% 7,525,902 4.0%
William R. Wilson.......... 9,439,600 16.5% 5,047,354 2.7%
Roy A. Wilkens(3).......... 365,950 * 213,735 *
Marshall C. Turner(4)...... 28,150 * 39,134 *
James M. Nakfoor(2)........ 0 * 24,082 *
J. Robert Fugate........... 50,263 * 134,209 *
Patrick J. McGettigan...... 68,895 * 120,842 *
David M. Boatner........... 56,300 * 173,777 *
Todd W. Wilkens............ 377,840 * 322,156 *
Jorge Rosado............... 1,000 * 134,209 *
Directors and executive
officers as a group (10
persons).................. 16,523,693 28.9% 9,490,259 5.0%
</TABLE>
- --------
* Less than one percent.
100
<PAGE>
(1) The shares beneficially owned by Mr. Li include 1,144,700 shares owned by
his spouse and 30,402 shares owned by his minor children, but exclude the
15,425,848 shares owned beneficially and of record by Linsang Partners,
LLC, a limited liability company controlled by Mr. Li, and members of his
family. The shares beneficially owned by Linsang Partners, LLC include
62,704 shares issuable upon exercise of warrants included as part of the
units purchased by Linsang Partners, LLC in the senior notes offering.
(2) The shares beneficially owned by Mr. Nakfoor exclude stock owned by Carso
Global Telecom, S.A. de C.V. Carso Global is an affiliate of Grupo
Financiero Inbursa, S.A. de C.V. and Mr. Nakfoor is a Vice President of
Inbursa. Mr. Carlos Slim Helu, a Mexican citizen, and members of his
immediate family, directly and through their ownership of a majority of the
voting and economic interests in two trusts, own a majority of the
outstanding voting equity securities of Carso Global.
(3) The shares beneficially owned by Roy A. Wilkens are held by Roy A. Wilkens
and Sandra L. Wilkens jointly. These shares exclude 377,840 shares
beneficially owned by Roy A. Wilkens' son Todd W. Wilkens, an executive
officer of Splitrock, and 152,010 shares owned by other family members of
Roy A. Wilkens. The number of shares of McLeodUSA Class A common stock
after the merger excludes 204,000 shares of McLeodUSA Class A common stock
owned by Roy A. Wilkens.
(4) The shares beneficially owned by Mr. Turner do not include shares
beneficially owned by Linsang Partners, LLC, of which Mr. Turner is a
director and a member.
101
<PAGE>
McLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS
If the merger is completed, shares of Splitrock common stock will be
converted into shares of McLeodUSA Class A common stock. As a result, Splitrock
stockholders, whose rights are currently governed by the Delaware General
Corporation Law, the Splitrock certificate of incorporation and bylaws, will
become McLeodUSA stockholders, whose rights are governed by the Delaware
General Corporation Law, the McLeodUSA certificate of incorporation and bylaws.
The following is a description of the capital stock of McLeodUSA, including
the McLeodUSA Class A common stock to be issued in the merger, and a summary of
the material differences between the rights of Splitrock stockholders and
McLeodUSA stockholders. These differences arise from the differences between
the McLeodUSA certificate of incorporation and bylaws and the Splitrock
certificate of incorporation and bylaws. Although it is impractical to compare
all of the aspects in which the companies' governing instruments differ with
respect to stockholders' rights, the following discussion summarizes the
significant differences between them.
DESCRIPTION OF McLEODUSA CAPITAL STOCK
The following summary description of the capital stock of McLeodUSA is based
on the provisions of the McLeodUSA certificate of incorporation and bylaws and
the applicable provisions of the Delaware General Corporation Law. The summary
description does not reflect the proposed amendment to the McLeodUSA
certificate of incorporation. For information on how to obtain copies of the
McLeodUSA certificate of incorporation and bylaws, see "Where You Can Find More
Information."
Authorized and Outstanding Capital Stock of McLeodUSA
Under the McLeodUSA certificate of incorporation, McLeodUSA has authority to
issue 274,000,000 shares of capital stock, consisting of 250,000,000 shares of
McLeodUSA Class A common stock, 22,000,000 shares of Class B common stock, par
value $.01 per share, and 2,000,000 shares of preferred stock, par value $.01
per share. As of the record date, 159,718,852 shares of McLeodUSA Class A
common stock, no shares of McLeodUSA Class B common stock, 1,150,000 shares of
6.75% Series A cumulative convertible preferred stock, par value $.01 per
share, 275,000 shares of Series B cumulative convertible preferred stock, par
value $.01 per share and 125,000 shares of Series C convertible preferred
stock, par value $.01 per share, were issued and outstanding.
The rights of the holders of McLeodUSA Class A common stock, Class B common
stock, Series A preferred stock, Series B preferred stock and Series C
preferred stock discussed below are subject to any rights that the McLeodUSA
board of directors may confer on holders of McLeodUSA preferred stock that may
be issued in the future. These rights may adversely affect the rights of the
holders of any or all of these classes and series of McLeodUSA securities.
McLeodUSA Class A Common Stock
Voting Rights. Each holder of McLeodUSA Class A common stock is entitled to
attend all special and annual meetings of the stockholders of McLeodUSA and,
together with the holders of shares of McLeodUSA Class B common stock and the
holders of all other classes of stock entitled to attend and vote at such
meetings, to vote upon any matter, including, without limitation, the election
of directors, properly considered and acted upon by the stockholders of
McLeodUSA. Holders of McLeodUSA 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 McLeodUSA
Class A common stock, the holders of McLeodUSA Class B common stock and holders
of any class or series of stock entitled to participate with the McLeodUSA
102
<PAGE>
Class A and Class B common stock, will become entitled to participate in the
distribution of any assets of McLeodUSA remaining after McLeodUSA has paid, or
provided for payment of, all debts and liabilities of McLeodUSA and after
McLeodUSA has paid, or set aside for payment, to the holders of any class of
stock having preference over the McLeodUSA 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. Subject to the rights of the holders of McLeodUSA preferred
stock, dividends may be paid on the McLeodUSA Class A common stock, the
McLeodUSA Class B common stock and on any class or series of stock entitled to
participate with the McLeodUSA Class A and Class B common stock when and as
declared by the McLeodUSA board of directors.
No Preemptive or Conversion Rights. The holders of McLeodUSA Class A common
stock have no preemptive or subscription rights to purchase additional
securities issued by McLeodUSA nor any rights to convert their McLeodUSA Class
A common stock into other securities of McLeodUSA or to have their shares
redeemed by McLeodUSA.
McLeodUSA Class B Common Stock
Voting Rights. Each holder of McLeodUSA Class B common stock is entitled to
attend all special and annual meetings of the stockholders of McLeodUSA and,
together with the holders of shares of McLeodUSA Class A common stock and the
holders of all other classes of stock entitled to attend and vote at such
meetings, to vote upon any matter or thing, including, without limitation, the
election of directors, properly considered and acted upon by the stockholders
of McLeodUSA. Holders of McLeodUSA 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 McLeodUSA
Class B common stock, the holders of McLeodUSA Class A common stock and the
holders of any class or series of stock entitled to participate with the
McLeodUSA Class B and Class A common stock, will become entitled to participate
in the distribution of any assets of McLeodUSA remaining after McLeodUSA has
paid, or provided for payment of, all debts and liabilities of McLeodUSA and
after McLeodUSA has paid, or set aside for payment, to the holders of any class
of stock having preference over the McLeodUSA 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. Subject to the rights of the holders of McLeodUSA preferred
stock, dividends may be paid on the McLeodUSA Class B common stock, the
McLeodUSA Class A common stock and on any class or series of stock entitled to
participate with the McLeodUSA Class B and Class A common stock when and as
declared by the McLeodUSA board of directors.
Conversion into McLeodUSA Class A Common Stock; No Other Preemptive or
Conversion Rights. The shares of McLeodUSA Class B common stock may be
converted at any time at the option of the holder into fully paid and
nonassessable shares of McLeodUSA Class A common stock at the rate of one share
of McLeodUSA Class A common stock for each share of McLeodUSA Class B common
stock, as adjusted for any stock split. Except for this conversion right, the
holders of McLeodUSA Class B common stock have no preemptive or subscription
rights to purchase additional securities issued by McLeodUSA nor any rights to
convert their McLeodUSA Class B common stock into other securities of McLeodUSA
or to have their shares redeemed by McLeodUSA.
McLeodUSA Preferred Stock
The McLeodUSA certificate of incorporation authorizes the McLeodUSA 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 McLeodUSA preferred stock, in one
or more series, and to fix the relative rights and preferences of the shares,
103
<PAGE>
including voting powers, dividend rights, liquidation preferences, redemption
rights and conversion privileges. As of the date of this joint proxy
statement/prospectus, 1,150,000 shares of Series A preferred stock, 275,000
shares of Series B preferred stock, and 125,000 shares of Series C preferred
stock, are issued and outstanding. Because of its broad discretion to create
and issue McLeodUSA preferred stock without stockholder approval, the McLeodUSA
board of directors could adversely affect the voting power of the holders of
McLeodUSA Class A common stock and, by issuing shares of McLeodUSA preferred
stock with preferential voting, conversion or redemption rights, could
discourage any attempt to obtain control of McLeodUSA.
McLeodUSA Series A Preferred Stock
Ranking. The Series A preferred stock, with respect to dividend rights and
rights on liquidation, dissolution or winding-up, ranks:
. junior to all McLeodUSA debt obligations
. junior to "Senior Stock," which is each class of McLeodUSA capital stock
or series of preferred stock established after the Series A preferred
stock by the McLeodUSA 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 the McLeodUSA 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 (and which includes the Series B preferred stock and
Series C preferred stock as described below)
. senior to "Junior Stock," which is all classes of McLeodUSA common
stock, including McLeodUSA Class A common stock and Class B common
stock, and any other class of McLeodUSA capital stock established after
the Series A preferred stock by the McLeodUSA board of directors whose
terms do not expressly provide that such class or series ranks senior
to, or on a parity with, the Series A preferred stock
While any shares of Series A preferred stock are outstanding, McLeodUSA 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. McLeodUSA
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.
Voting Rights. The holders of Series A preferred stock, except as otherwise
required under Delaware law or as provided in the Series A preferred stock
certificate of designations, are not entitled to vote on any matter required or
permitted to be voted upon by the McLeodUSA stockholders. If the Series A
preferred stock does vote, each outstanding share of Series A preferred stock
has one vote, excluding shares of Series A preferred stock held by McLeodUSA or
any entity controlled by McLeodUSA, which shares have no votes. The Series A
preferred stock certificate of designations provides 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 will be entitled to elect to serve on the McLeodUSA
board of directors the lesser of (1) two additional members to the McLeodUSA
board of directors or (2) that number of directors constituting at least 25% of
the members of the McLeodUSA board of directors, and the number of members of
the McLeodUSA board of directors will be immediately and automatically
increased by that number. These voting rights will continue until all dividends
in arrears on the Series A preferred stock are paid in full, at which time the
term of any directors elected according to the provisions of this paragraph
(subject to the right of holders of any other preferred stock to elect these
directors) shall terminate and the number of directors constituting the
McLeodUSA board of directors will be immediately and automatically decreased by
104
<PAGE>
that number (until the occurrence of any such subsequent event). The Series A
preferred stock certificate of designations also provides 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 of Junior Stock or Parity Stock 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.
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 the holder, plus accumulated and unpaid dividends on the Series A
preferred stock to the date fixed for liquidation, dissolution or winding-up
(including an amount equal to a prorated dividend for the period from the last
dividend payment date to the date fixed for liquidation, dissolution or
winding-up) before any distribution is made on any Junior Stock, including
McLeodUSA Class A common stock.
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 McLeodUSA 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 of $250 per share
of Series A preferred stock (equivalent to $16.875 per share annually).
Dividends on the Series A preferred stock are payable quarterly and accrue from
the most recent date as to which dividends have been paid. 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 McLeodUSA Class A common stock.
Conversion into McLeodUSA Class A Common Stock; No Other Preemptive or
Conversion Rights. Shares of Series A preferred stock are convertible, in whole
or in part, at any time, at the option of the holders of the Series A preferred
stock, into shares of McLeodUSA Class A common stock at the conversion price of
$29.06 per share, subject to adjustment upon the happening of various events.
This amount is referred to herein as the Conversion Price. McLeodUSA has the
option to convert all of the shares of Series A preferred stock into shares of
McLeodUSA Class A common stock at the Conversion Price if, on or after August
15, 2002, the closing price of McLeodUSA 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. Except for this conversion right, the holders of the Series A
preferred stock have no preemptive or preferential right to purchase or
subscribe to stock, obligations, warrants or any other securities of any class
of McLeodUSA.
Provisional Redemption. McLeodUSA may redeem Series A preferred stock at a
redemption price of 104.5% of the liquidation preference, plus accumulated and
unpaid dividends, if any, to the redemption date, on or after August 15, 2001,
but prior to August 15, 2002, if the closing price of McLeodUSA 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 called a
Provisional Redemption. If McLeodUSA undertakes 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 date of the
Provisional Redemption to August 15, 2002. McLeodUSA may effect any Provisional
Redemption, in whole or in part, at its option, by payment of the redemption
price, including any additional payment, in cash, through delivery of shares of
McLeodUSA Class A common stock or a combination thereof, subject to applicable
law.
105
<PAGE>
Optional Redemption. Except under the foregoing circumstances for a
Provisional Redemption, and except under certain circumstances set forth in the
McLeodUSA certificate of incorporation (as set forth below), McLeodUSA 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 the option of
McLeodUSA, in whole or in part, at any time or from time to time at the
following redemption prices, plus accumulated and unpaid dividends, if any, to
the date fixed for redemption, payable in cash. This type of redemption is
referred to herein as 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
Year Price
---- ----------
<S> <C>
2002............................................................... 103.3750%
2003............................................................... 102.2500%
2004............................................................... 101.1250%
2005 and thereafter................................................ 100.0000%
</TABLE>
Notwithstanding any of the foregoing provisions relating to a Provisional
Redemption or an Optional Redemption, the McLeodUSA certificate of
incorporation provides that McLeodUSA may redeem shares of any class of its
capital stock (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 of shares
of Series A preferred stock under such circumstances will be at the price, and
on the other terms and conditions, specified in the McLeodUSA certificate of
incorporation. These provisions are described below under "--Certain Charter
and Statutory Provisions--Certain Statutory Provisions."
McLeodUSA Series B and Series C Preferred Stock
Ranking. The Series B preferred stock and Series C preferred stock, with
respect to dividend rights and rights on liquidation, dissolution or winding-
up, ranks:
. junior to all McLeodUSA debt obligations
. junior to "Senior Stock," which is each class of McLeodUSA capital stock
or series of preferred stock established after the Series B preferred
stock and Series C preferred stock by the McLeodUSA board of directors
that has terms which expressly provide that the class or series will
rank senior to the Series B preferred stock and Series C preferred stock
. on a parity with "Parity Stock," which is the Series A preferred stock
and each class of capital stock or series of preferred stock established
after the Series B preferred stock and Series C preferred stock by the
McLeodUSA board of directors that has terms which expressly provide that
the class or series will rank on a parity with the Series B preferred
stock and Series C preferred stock
. senior to "Junior Stock," which is all classes of McLeodUSA common
stock, including McLeodUSA Class A common stock and Class B common
stock, and any other class of McLeodUSA capital stock established after
the Series B preferred stock and Series C preferred stock by the
McLeodUSA board of directors whose terms do not expressly provide that
such class or series ranks senior to, or on a parity with, the Series B
preferred stock and Series C preferred stock
While any shares of Series B preferred stock or Series C preferred stock are
outstanding, McLeodUSA 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 a majority of the outstanding shares of Series B
preferred stock and Series C preferred stock. McLeodUSA may, however, without
the consent of any holder of Series B preferred stock and Series C
106
<PAGE>
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.
Voting Rights. The holders of Series B preferred stock, except as otherwise
required under Delaware law or as provided in the Series B preferred stock
certificate of designations, are not entitled to vote on any matter required or
permitted to be voted upon by the McLeodUSA stockholders other than, voting
separately as a series, to designate and elect two directors to the McLeodUSA
board of directors. However:
(1) the entitlement of the holders of Series B preferred stock to
designate two directors for election to the McLeodUSA board of directors,
and the exclusive right of the holders of Series B preferred stock to vote,
separately as a series, for the election of such designees to the McLeodUSA
board of directors, shall cease immediately upon less than 110,000 shares
of Series B preferred stock being outstanding, and the holders of the
outstanding shares of the Series B preferred stock shall be entitled to
designate one director for election to the McLeodUSA board of directors
and, voting separately as a series, shall have the exclusive right to vote
for the election of such designee to the McLeodUSA board of directors, and
to designate one non-voting board observer, for as long as, and only for so
long as, less than 110,000 shares of Series B preferred stock but more than
55,000 shares of Series B preferred stock remain outstanding;
(2) the entitlement of the holders of outstanding shares of Series B
preferred stock to designate one director for election to the McLeodUSA
board of directors, and the exclusive right of the holders of outstanding
shares of Series B preferred stock to vote separately as a series for the
election of such designee to the McLeodUSA board of directors, and the
exclusive right of the holders of outstanding shares of Series B preferred
stock to designate one non-voting board observer, and the rights of such
non-voting board observer, shall cease immediately upon 55,000 or fewer
shares of Series B preferred stock being outstanding, and the holders of
the outstanding shares of Series B preferred stock shall be entitled to
designate two non-voting board observers for as long as, and only for as
long as, 55,000 or fewer (but at least one) shares of Series B Preferred
Stock remain outstanding; and
(3) immediately upon no shares of Series B preferred stock being
outstanding, the entitlement of the holders of Series B preferred stock to
designate two non-voting board observers, and the rights of such board
observers, shall cease.
In exercising any such votes, each outstanding share of Series B preferred
stock has one vote.
The holders of Series C preferred stock, except as otherwise required under
Delaware law or as provided in the Series C preferred stock certificate of
designations, are not entitled to vote on any matter required or permitted to
be voted upon by the McLeodUSA stockholders other than, voting separately as a
series, to designate and elect one non-voting board observer to the McLeodUSA
board of directors for so long as any shares of Series C preferred stock remain
issued and outstanding.
In addition, the Series B preferred stock certificate of designations
provides that if dividends on the Series B preferred stock are in arrears and
unpaid for six or more dividend periods (whether or not consecutive) or
McLeodUSA has failed to discharge a redemption obligation as required under the
Series B preferred stock certificate of designation, then the holders of the
outstanding shares of Series B preferred stock will be entitled to elect one
additional director to serve on the McLeodUSA board of directors, and the
number of members of the McLeodUSA board of directors will be immediately and
automatically increased by this number. These voting rights will continue until
either all dividends in arrears on the Series B preferred stock are paid in
full or the redemption obligation is fulfilled, as the case may be, at which
time the term of the director elected according to the provisions of this
paragraph shall terminate and the number of directors constituting the
McLeodUSA board of directors will be immediately and automatically decreased by
one (until the occurrence of any such subsequent event).
Similarly, the Series C preferred stock certificate of designations provides
that if McLeodUSA has failed to discharge a redemption obligation as required
under the Series C preferred stock certificate of designations
107
<PAGE>
then the holders of the outstanding shares of Series C preferred stock will be
entitled to elect one additional director to serve on the McLeodUSA board of
directors, and the number of members of the McLeodUSA board of directors will
be immediately and automatically increased by this number. These voting rights
of the Series C preferred stock will continue until such time as such
redemption obligation is fulfilled at which time the term of the director
elected according to the provisions of this paragraph shall terminate and the
number of directors constituting the McLeodUSA board of directors will be
immediately and automatically decreased by one (until the occurrence of any
such subsequent event).
The Series B preferred stock certificate of designations and the Series C
preferred stock certificate of designations 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 of Junior Stock or Parity Stock within the existing
class of Series B preferred stock and Series C 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 B preferred stock or Series C preferred stock and shall not be deemed to
affect adversely the rights, preferences, privileges or voting rights of shares
of Series B preferred stock or Series C preferred stock.
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, the
holders of the Series B preferred stock and Series C preferred stock taken
together will be entitled to be paid, out of the assets of McLeodUSA available
for distribution to stockholders, an amount equal to the greater of (1) the
liquidation preference of $2,500 per share of Series B preferred stock and
Series C preferred stock, 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 dividend payment date
to the date fixed for liquidation, dissolution or winding-up) or (2) the
aggregate amount that would have been received with respect to the shares of
Series B preferred stock and Series C preferred stock if these shares had been
converted to McLeodUSA Class A common stock immediately prior to the
liquidation, dissolution or winding-up, before any distribution is made on any
Junior Stock, including McLeodUSA Class A common stock. If, upon any
liquidation, dissolution or winding-up, the assets or proceeds of McLeodUSA,
shall be insufficient to pay in full the amounts under clause (1) of the
preceding sentence and liquidating payments on all Parity Securities, then the
assets or proceeds, shall (A) be distributed among the shares of Series B
preferred stock and Series C preferred stock taken together and all other
Parity Securities ratably in accordance with the respective amounts that would
be payable on such shares and any other Parity Securities if all amounts
payable thereon were paid in full and (B) the amount distributable under clause
(A) to the Series B preferred stock and Series C preferred stock taken
together, shall be distributed to the holders of the Series B preferred stock
and Series C preferred stock according to the formulas specified in the Series
B preferred stock certificate of designations and Series C preferred stock
certificate of designations.
Dividends. Subject to the rights of any holders of Senior Stock and Parity
Stock, holders of shares of Series B preferred stock will be entitled to
receive, when, as and if declared by the McLeodUSA board of directors out of
funds of McLeodUSA legally available for payment, cumulative dividends at the
annual rate of $127.273 per share. Dividends on the Series B preferred stock
are payable quarterly and accrue from the most recent date as to which
dividends have been paid. Holders of shares of Series C preferred stock are not
entitled to receive any dividends on their shares of Series C preferred stock.
Notwithstanding the above, if at any time prior to September 15, 2004,
McLeodUSA pays a dividend in cash or property other than in shares of capital
stock on its Class A common stock then McLeodUSA must also declare and pay a
dividend on the Series B preferred stock and Series C preferred stock in an
amount equal to that which would have been paid if the Series B preferred stock
and Series C preferred stock taken together had been converted into McLeodUSA
Class A common stock on the date established as the record date with respect to
such dividend on the McLeodUSA Class A common stock. The dividend shall be
distributed to the holders of the Series B preferred stock and Series C
preferred stock according to the formulas specified in the Series B preferred
stock certificate of designations and Series C preferred stock certificate of
designations.
108
<PAGE>
Conversion into McLeodUSA Class A Common Stock; No Other Preemptive or
Conversion Rights. Shares of Series B preferred stock and Series C preferred
stock are convertible, in whole or in part, at any time, at the option of the
holders of the shares, into shares of McLeodUSA Class A common stock at the
conversion price of $36.50 per share, subject to adjustment upon the happening
of various events; provided that upon the exercise by any holder of Series B
preferred stock of this conversion option, a proportional amount, based on the
percentage of each series of shares outstanding, of the Series C preferred
stock shall automatically convert in accordance with the terms of the Series C
preferred stock certificate of designations. Except for this conversion right,
the holders of the Series B preferred stock and Series C preferred stock have
no preemptive or preferential right to purchase or subscribe to stock,
obligations, warrants or any other of our securities of any class.
Optional Redemption. Except under certain circumstances set forth in the
McLeodUSA certificate of incorporation (as set forth below), McLeodUSA may not
redeem the Series B preferred stock and Series C preferred stock prior to
September 15, 2006. Thereafter, each share of the Series B preferred stock and
Series C preferred stock may be redeemed, at the option of McLeodUSA, in whole
or in part, at any time or from time to time at a redemption price per share
equal to the liquidation preference of that share, plus accumulated and unpaid
dividends, if any, to the date fixed for redemption, payable in cash; provided
that McLeodUSA shall only be entitled to redeem shares of the Series B
Preferred Stock if shares of the Series C Preferred Stock are also redeemed on
a proportional basis based on the percentage of each series of shares then
outstanding. This type of redemption is referred to herein as an Optional
Redemption.
Notwithstanding any of the foregoing provisions relating to an Optional
Redemption, the McLeodUSA certificate of incorporation provides that McLeodUSA
may redeem shares of any class of its capital stock (including the Series B
preferred stock and Series C 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 of shares
of Series B preferred stock and Series C preferred stock under such
circumstances will be at the price, and on the other terms and conditions,
specified in the McLeodUSA certificate of incorporation. These provisions are
described below under "--Certain Charter and Statutory Provisions--Certain
Statutory Provisions."
Mandatory Redemption. To the extent McLeodUSA shall have funds legally
available therefor, during the 180-day period commencing on September 15, 2009,
the holders of the Series B preferred stock and Series C preferred stock shall
have the right to cause McLeodUSA to redeem at any time in whole or from time
to time in part outstanding shares of Series B preferred stock and Series C
preferred stock, if any, at a redemption price per share in cash equal to the
liquidation preference, plus accumulated and unpaid dividends, if any, without
interest; provided that upon any election by holders of the Series B preferred
stock to exercise this redemption right McLeodUSA shall be required to redeem a
proportional amount of the Series C preferred stock.
STOCKHOLDERS' AGREEMENTS
On December 17, 1999, McLeodUSA entered into a further amendment and
restatement of a stockholders' agreement originally entered into on November
18, 1998 with several of its significant stockholders consisting of Alliant
Energy Corporation and several of its subsidiaries, Alliant Energy Foundation,
Inc., Clark and Mary McLeod, and Richard and Gail Lumpkin and various trusts
for the benefit of their family.
Such further amended and restated November 1998 stockholders' agreement
provides, among other things, that:
. until December 31, 2001, the parties will not sell any equity securities
of McLeodUSA, or any other securities convertible into or exchangeable
for McLeodUSA equity securities, without receiving the prior written
consent of the McLeodUSA board of directors, except for transfers
specifically permitted by the agreement
109
<PAGE>
. to the extent the McLeodUSA board of directors approves a transfer of
McLeodUSA equity securities by a party, the other parties are
automatically granted transfer rights
. the McLeodUSA board of directors will determine on a quarterly basis the
aggregate number, if any, of shares of McLeodUSA Class A common stock,
not to exceed in the aggregate 300,000 shares per quarter, that the
parties may sell during designated trading periods following the release
of the quarterly financial results of McLeodUSA
. to the extent the McLeodUSA board of directors grants registration
rights to a party in connection with a sale of McLeodUSA securities by
that party, it will grant similar registration rights to the other
parties
. the McLeodUSA board of directors will determine for each of 2000 and
2001 the aggregate number, if any, of shares of McLeodUSA Class A common
stock, not to exceed in the aggregate on a per year basis a number of
shares equal to 15% of the total number of shares of McLeodUSA Class A
common stock beneficially owned by the parties as of December 31, 1998,
to be registered by McLeodUSA under the Securities Act for sale by the
parties
. in any underwritten offering of shares of McLeodUSA Class A common
stock, 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 McLeodUSA Class A common stock owned by the parties, the
McLeodUSA board of directors will determine the aggregate number, if
any, of shares of McLeodUSA Class A common stock, not to exceed on a per
year basis a number of shares equal to 15% of the total number of shares
of McLeodUSA Class A common stock beneficially owned by the parties as
of December 31, 1998, to be registered by McLeodUSA for sale by the
parties in connection with the offering
. McLeodUSA 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
Under the further amended and restated November 1998 stockholders'
agreement, each party also agreed, until it owns less than 5,000,000 shares of
McLeodUSA Class A common stock, to vote its shares and take all action within
its power to:
. establish the size of the McLeodUSA board of directors at up to 13
directors
. cause to be elected to the McLeodUSA board of directors one director
designated by Alliant Energy Corporation and its subsidiaries for so
long as they collectively own at least 5,000,000 shares of McLeodUSA
Class A common stock
. cause to be elected to the McLeodUSA 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 5,000,000
shares of McLeodUSA Class A common stock
. cause Richard Lumpkin to be elected to the McLeodUSA board of directors
for so long as Richard and Gail Lumpkin and various other parties
related to the Lumpkins collectively own at least 5,000,000 shares of
McLeodUSA Class A common stock
. cause to be elected to the McLeodUSA board of directors up to eight non-
employee directors nominated by the board
The further amended and restated November 1998 stockholders' agreement
terminates on December 31, 2001. In addition, if during each of 2000 and 2001
McLeodUSA has not provided a party a reasonable opportunity to sell an
aggregate number of shares of McLeodUSA Class A common stock equal to not less
than 15% of the total number of shares of McLeodUSA Class A common stock
beneficially owned by a party as of December 31, 1998, then that party may
terminate the agreement as it applies to that party.
110
<PAGE>
On December 17, 1999, McLeodUSA also entered into a further amendment and
restatement of a stockholders' agreement originally entered into on January 7,
1999 with the parties to the further amended and restated November 1998
stockholders' agreement described above and M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership in connection with the
acquisition by McLeodUSA of Ovation Communications, Inc.
The further amended and restated January 1999 stockholders' agreement
provides that, until December 31, 2001, the M/C entities will not sell any
equity securities of McLeodUSA, or any other securities convertible into or
exchangeable for McLeodUSA equity securities, without receiving the prior
written consent of the McLeodUSA board of directors, except for transfers
specifically permitted by the agreement. The further amended and restated
January 1999 stockholders' agreement also contains various provisions intended
to insure that the M/C entities and the parties to the further amended and
restated November 1998 stockholders' agreement are treated on a basis generally
similar to one another in connection with permitted sales and registration of
McLeodUSA securities under such agreements. In addition, for so long as the M/C
entities own at least 5,000,000 shares of McLeodUSA Class A common stock, the
M/C entities have agreed to vote their shares in accordance with the voting
agreement contained in the further amended and restated November 1998
stockholders' agreement and the other parties have agreed to vote their shares
to cause to be elected to the McLeodUSA board of directors one director
designated by the M/C entities.
The further amended and restated January 1999 stockholders' agreement
terminates on December 31, 2001. In addition, if (1) during each of 2000 and
2001, McLeodUSA has not provided the M/C entities an opportunity to register
under the Securities Act for sale an aggregate number of shares of McLeodUSA
Class A common stock equal to not less than 15% of the total number of shares
of McLeodUSA Class A common stock beneficially owned by the M/C entities as a
result of the acquisition of Ovation Communications, Inc., or (2) the further
amended and restated November 1998 stockholders' agreement has been terminated
by all parties to such agreement, then the M/C entities may terminate the
further amended and restated January 1999 stockholders' agreement. The further
amended and restated January 1999 stockholders' agreement will be terminated
with respect to parties other than the M/C entities and McLeodUSA at the time
as the further amended and restated November 1998 stockholders' agreement is
terminated with respect to such other parties.
For a description of the stockholders' agreements to be entered into in
connection with the merger agreement and the merger, see "Terms of the Merger
Agreement and Related Transactions--Terms of Stockholders' Agreements."
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.
The McLeodUSA certificate of incorporation limits the liability of directors to
McLeodUSA or its stockholders to the full extent permitted by Section
102(b)(7). Specifically, directors of McLeodUSA are not personally liable for
monetary damages to McLeodUSA or its 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 McLeodUSA or its
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
111
<PAGE>
Indemnification. To the maximum extent permitted by law, the McLeodUSA
bylaws provide for mandatory indemnification of directors and officers of
McLeodUSA 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, McLeodUSA must advance or reimburse
directors and officers for expenses incurred by them in connection with
indemnifiable claims. McLeodUSA also maintains directors' and officers'
liability insurance.
CERTAIN CHARTER AND STATUTORY PROVISIONS
Classified Board. The McLeodUSA certificate of incorporation provides for
the division of the McLeodUSA board of directors into three classes of
directors, serving staggered three-year terms. The McLeodUSA certificate of
incorporation further provides that the approval of the holders of at least
two-thirds of the shares entitled to vote on the certificate of incorporation
and the approval of a majority of the entire McLeodUSA board of directors are
necessary for the alteration, amendment or repeal of specific sections of the
McLeodUSA certificate of incorporation relating to the election and
classification of the McLeodUSA board of directors, limitation of director
liability, indemnification and the vote requirements for these amendments to
the McLeodUSA certificate of incorporation. These provisions may have the
effect of deterring hostile takeovers or delaying changes in control or
management of McLeodUSA.
Section 203 of the Delaware General Corporation Law. McLeodUSA is subject to
the provisions of Section 203 of the Delaware General Corporation Law. In
general, this statute prohibits a publicly held Delaware corporation such as
McLeodUSA from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless
. prior to that 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 that 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 specified directors or
specified 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, the original
McLeodUSA certificate of incorporation provided that it would not be governed
by Section 203. Several stockholders, including Clark and Mary McLeod and
Alliant Energy Corporation, became interested stockholders within the meaning
of Section 203 while that certificate of incorporation was in effect.
Accordingly, future transactions between McLeodUSA and any of these
stockholders will not be subject to the requirements of Section 203.
Mandatory Redemption. The McLeodUSA certificate of incorporation empowers
the McLeodUSA board of directors to redeem any of the McLeodUSA outstanding
capital stock at a price determined by the McLeodUSA board of directors, which
price will be at least equal to the lesser of
112
<PAGE>
. fair market value, as determined in accordance with the McLeodUSA
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 stock of McLeodUSA whose
holding of McLeodUSA stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
McLeodUSA or any of its subsidiaries to conduct any portion of the business of
McLeodUSA or any of its subsidiaries. Under the Telecommunications Act of 1996,
non-U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the FCC determines
that the public interest would be served by prohibiting this ownership.
Additionally, the FCC's rules may under some conditions limit the size of
investments by foreign telecommunications carriers in U.S. international
carriers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the McLeodUSA Class A common stock is
Norwest Bank Minnesota, N.A.
COMPARISON OF MCLEODUSA CLASS A COMMON STOCK AND SPLITROCK COMMON STOCK
The rights of Splitrock stockholders are currently governed by the Delaware
General Corporation Law, the Splitrock certificate of incorporation and the
Splitrock bylaws. In accordance with the merger agreement, at the effective
time of the merger each issued and outstanding share of Splitrock common stock
will be converted into the right to receive 0.5347 of a share of McLeodUSA
Class A common stock. Accordingly, upon consummation of the merger, the rights
of Splitrock stockholders who become stockholders of McLeodUSA will be governed
by the Delaware General Corporation Law and the McLeodUSA certificate of
incorporation and bylaws. The following are summaries of the material
differences between the rights of Splitrock stockholders and the rights of
McLeodUSA stockholders. For additional information, see "Where You Can Find
More Information."
Authorized Capital
Splitrock. As of the record date, the authorized capital stock of Splitrock
consisted of (1) 150,000,000 shares of Splitrock common stock, of which (a)
57,202,170 shares were issued and outstanding, (b) no shares were held in the
treasury of Splitrock, (c) 4,286,855 shares were reserved for issuance upon the
exercise of outstanding options to purchase shares of Splitrock common stock
and (d) 913,998 shares were reserved for issuance upon the exercise of
outstanding warrants to purchase shares of Splitrock common stock; and
(2) 25,000,000 shares of preferred stock, $.001 par value per share, of which
(a) no shares were issued and outstanding, (b) no shares were held in the
treasury of Splitrock, and (c) no shares were reserved for issuance.
McLeodUSA. As of the record date, the authorized capital stock of McLeodUSA
consisted of (1) 250,000,000 shares of McLeodUSA Class A common stock, of which
159,718,852 shares were issued and outstanding, (2) 22,000,000 shares of
McLeodUSA Class B common stock, of which no shares were issued and outstanding,
and (3) 2,000,000 shares of McLeodUSA serial preferred stock, of which (a)
1,150,000 shares of 6.75% Series A cumulative convertible preferred stock, par
value $.01 per share, (b) 275,000 shares of Series B cumulative convertible
preferred stock, par value $.01 per share, and (c) 125,000 shares of Series C
convertible preferred stock, par value $.01 per share, were issued and
outstanding.
113
<PAGE>
Board of Directors
Splitrock. Under the Splitrock bylaws, the number of directors of Splitrock
will be not less than three and will be determined from time to time by
resolution adopted by the Splitrock board of directors. The current number of
Splitrock directors is five. The Splitrock board of directors is divided into
three classes as nearly equal in number as possible, and the Splitrock
directors are elected for three-year terms by a plurality vote at the annual
stockholders meeting by the holders of shares present at the meeting or
represented by proxy and entitled to vote in the election. A quorum at any
meeting of the Splitrock board of directors consists of a majority of the total
number of directors, and a majority of the directors present, at any meeting at
which a quorum is present is required to approve any Splitrock board of
directors action.
McLeodUSA. Under the McLeodUSA certificate of incorporation and bylaws, the
number of McLeodUSA directors will be between three and 15. The current number
of McLeodUSA directors is 13. The McLeodUSA bylaws provide that the election
and term of the McLeodUSA directors is determined by the McLeodUSA certificate
of incorporation. The McLeodUSA board of directors is divided into three
classes as nearly equal in number as possible, and the McLeodUSA directors are
elected for three-year terms by a plurality of the voting rights represented by
the shares present in person or represented by proxy at the annual stockholders
meeting and entitled to vote in the election. A quorum at any meeting of the
McLeodUSA board of directors consists of a majority of the total number of
directors, and a majority of the directors present, at any meeting at which a
quorum is present is required to approve any McLeodUSA board of directors
action.
Committees of the Board of Directors
Splitrock. Under the Splitrock bylaws, the Splitrock board of directors may
appoint one or more committees, other than an executive committee, from among
its members. The Splitrock bylaws provide that these committees may be
designated by a resolution adopted by a majority of the Splitrock board of
directors. The Splitrock board of directors currently has a compensation
committee and an audit committee.
McLeodUSA. Under the McLeodUSA certificate of incorporation, the McLeodUSA
board of directors may designate one or more committees, which must consist of
McLeodUSA directors. The McLeodUSA board of directors currently has a
compensation committee and an audit committee.
Newly Created Directorships and Vacancies
Splitrock. Under the Splitrock bylaws, newly created directorships resulting
from an increase in the number of directors will be filled by the vote of a
majority of directors, election at an annual meeting of the stockholders or at
a special meeting of stockholders called for that purpose. No decrease in the
number of directors may have the effect of shortening the term of any incumbent
director. Any vacancy occurring in the board of directors may be filled by the
vote of a majority of the remaining directors, even if the remaining directors
comprise less than a quorum of the board of directors. A director elected to
fill a vacancy will be elected for the unexpired term of his predecessor in
office.
McLeodUSA. Under the McLeodUSA certificate of incorporation, vacancies and
newly created directorships resulting from an increase in the authorized number
of McLeodUSA directors elected by all of the holders of McLeodUSA Class A
common stock and McLeodUSA Class B common stock may be filled by a majority of
the McLeodUSA directors then in office, even if less than a quorum, or by a
sole remaining director. When the number of directors is changed, any newly
created or eliminated directorship will be apportioned among the classes of
directors so as to make all classes as nearly equal in number as possible. A
decrease in the number of directors may not shorten the term of the incumbent
director.
Removal of Directors
Splitrock. Under the Splitrock bylaws, a director may be removed with or
without cause at any annual or special meeting of stockholders by the vote of a
majority of the shares of common stock outstanding and
114
<PAGE>
entitled to vote on the election of that director, as long as notice of the
intention to act on the matter was given in the notice calling the meeting.
McLeodUSA. Neither the McLeodUSA certificate of incorporation nor the bylaws
includes a provision setting forth the procedure for the removal of directors.
Under the Delaware General Corporation Law, any director or the entire board of
directors of a corporation with a classified board, such as McLeodUSA, may be
removed by the holders of a majority of shares then entitled to vote at an
election of directors, but only for cause.
Officers
Splitrock. Under the Splitrock bylaws, the Splitrock principal officers
consist of a President and a Secretary. The Splitrock board of directors
appoints all principal officers at its first meeting after the annual meeting
of stockholders. The Splitrock board of directors may also appoint a Chairman
of the Board, one or more Vice Presidents, a Treasurer and one or more
Assistant Secretaries and Assistant Treasurers. The Splitrock board of
directors may remove any officer with or without cause, by the vote of a
majority of the board of directors present at a meeting of the board at which a
quorum is present.
McLeodUSA. Under the McLeodUSA bylaws, the McLeodUSA officers consist of a
President, a Secretary and a Treasurer, and other officers and assistant
officers as may be elected or appointed by the McLeodUSA board of directors.
The McLeodUSA board of directors may remove any officer, with or without cause,
by the affirmative vote of a majority of the McLeodUSA board of directors.
Special Meetings of Stockholders
Splitrock. Under the Splitrock bylaws, a special meeting of the Splitrock
stockholders may be called at any time by the board of directors.
McLeodUSA. Under the McLeodUSA bylaws, a special meeting of the McLeodUSA
stockholders may be called by the board of directors, the Chairperson, the
Chief Executive Officer or the President.
Quorum at Stockholder Meetings
Splitrock. Under the Splitrock bylaws, the holders of record of a majority
of the shares issued and outstanding and entitled to vote at a stockholder
meeting, present in person or represented by proxy, constitute a quorum at each
stockholder meeting. In the absence of a quorum, the stockholders present in
person or represented by proxy at a meeting may adjourn the meeting until a
quorum is present or represented.
McLeodUSA. Under the McLeodUSA bylaws, the holders of a majority of the
voting rights represented by the shares issued and outstanding and entitled to
vote at the meeting, and who are present in person or represented by proxy,
will constitute a quorum at all meetings of the stockholders for the
transaction of business. Where a separate vote by a class or classes is
required, a majority of the outstanding shares of the class or classes, present
in person or represented by proxy, will constitute a quorum entitled to take
action with respect to that vote on that matter. The holders of a majority of
the voting rights represented by the shares represented at a meeting, whether
or not a quorum is present, may adjourn the meeting from time to time.
Stockholder Action by Written Consent
Splitrock. Under the Splitrock bylaws, any action required or permitted to
be taken at any annual or special meeting of stockholders may be taken without
a meeting, without prior notice and without a vote, if written consents are
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to take the action at a meeting at
which all shares entitled to vote were present and voted. The bylaws further
provide that the minimum number of written consents necessary to approve the
115
<PAGE>
action at issue must be delivered to Splitrock within 60 days of the date of
the written consent bearing the earliest signature. Prompt notice of the taking
of an action by the stockholders without a meeting and by less than unanimous
consent must be given to those stockholders who did not consent in writing to
the action.
McLeodUSA. Under the Delaware General Corporation Law, unless a
corporation's certificate of incorporation provides otherwise, any action
required or permitted to be taken at any annual or special meeting of
stockholders may be taken without a meeting, without prior notice and without a
vote, if written consents are signed by the holders of outstanding stock having
not less than the minimum number of votes that would be necessary to take the
action at a meeting at which all shares entitled to vote were present and
voted. The McLeodUSA certificate of incorporation does not address this matter.
Advance Notice of Stockholder-Proposed Business at Annual Meetings
Splitrock. The Splitrock bylaws require stockholders seeking to bring
business before an annual meeting to provide timely notice in writing.
Generally, to be timely, a stockholder's notice must be delivered to Splitrock
not less than 90 days before the anniversary of the previous year's annual
meeting of stockholders.
McLeodUSA. Neither the McLeodUSA certificate of incorporation nor the bylaws
include a provision which requires that advance notice be given to McLeodUSA of
stockholder-proposed business to be conducted at annual meetings.
Amendment of Governing Documents
Splitrock. Under the Delaware General Corporation Law, an amendment to a
corporation's certificate of incorporation requires the recommendation of a
corporation's board of directors, the approval of a majority of all shares
entitled to vote on the amendment, voting together as a single class, and the
approval of a majority of the outstanding stock of each class entitled to vote
separately on the amendment unless a higher vote is required in the
corporation's certificate of incorporation. The Splitrock certificate of
incorporation does not address this matter.
Under the Splitrock certificate of incorporation and bylaws, the Splitrock
bylaws may be amended or repealed or new bylaws may be adopted by the
stockholders or by the board of directors. Notice of the intent to amend or
repeal the bylaws must be contained in the notice of the meeting at which the
action is taken.
McLeodUSA. McLeodUSA may amend or repeal any provision of its certificate of
incorporation as permitted by the Delaware General Corporation Law and the
McLeodUSA certificate of incorporation, except as noted below. Under the
Delaware General Corporation Law, an amendment to a corporation's certificate
of incorporation requires the recommendation of a corporation's board of
directors, the approval of a majority of all shares entitled to vote on the
amendment, voting together as a single class, and the approval of a majority of
the outstanding stock of each class entitled to vote separately on the
amendment unless a higher vote is required in the corporation's certificate of
incorporation. Under the McLeodUSA certificate of incorporation, the
affirmative vote of at least two-thirds of the voting rights represented by the
shares entitled to vote on the amendment and the affirmative vote of a majority
of the entire McLeodUSA board of directors is required to amend, alter or
repeal Sections 5.1 (election of directors) and 5.3 (limitation of liability),
Article 6 (indemnification), and Article 8 (amendment of certificate of
incorporation) of the McLeodUSA certificate of incorporation.
Under the McLeodUSA certificate of incorporation, the McLeodUSA board of
directors has the power to adopt, alter, amend and repeal the McLeodUSA bylaws
in accordance with the Delaware General Corporation Law. Under the Delaware
General Corporation Law, the stockholders also have the power to amend or
repeal the McLeodUSA bylaws or to adopt new bylaws.
116
<PAGE>
Business Combination with an Interested Stockholder
Splitrock and McLeodUSA are subject to the provisions of Section 203 of the
Delaware General Corporation Law as generally described above under "--
Description of McLeodUSA Capital Stock--Certain Charter and Statutory
Provisions."
117
<PAGE>
PROPOSALS TO McLEODUSA STOCKHOLDERS TO BE VOTED ON AT THE McLEODUSA SPECIAL
MEETING
Proposal 1.
Approval of an Amendment to the McLeodUSA Certificate of Incorporation to
Increase the Number of Authorized Shares of McLeodUSA Class A Common Stock to
1,000,000,000 from 250,000,000
The McLeodUSA board of directors adopted on December 17, 1999 an amendment
to Section 4.1 of the McLeodUSA certificate of incorporation, subject to
stockholder approval at the McLeodUSA special meeting, to increase the number
of authorized shares of McLeodUSA Class A common stock to 1,000,000,000 from
250,000,000. The proposed increase in the number of authorized shares of
McLeodUSA Class A common stock will alter the total authorized capital of
McLeodUSA as summarized below:
<TABLE>
<CAPTION>
Proposed Authorized Capital
---------------------------
<S> <C>
Class A common stock........................................... 1,000,000,000
Class B common stock........................................... 22,000,000
Preferred Stock................................................ 2,000,000
-------------
Total........................................................ 1,024,000,000
</TABLE>
<TABLE>
<CAPTION>
Existing Authorized Capital
---------------------------
<S> <C>
Class A common stock............................................. 250,000,000
Class B common stock............................................. 22,000,000
Preferred Stock.................................................. 2,000,000
-----------
Total.......................................................... 274,000,000
</TABLE>
Stockholders of McLeodUSA are asked to consider and vote on the proposed
amendment to Section 4.1 of the McLeodUSA certificate of incorporation, as set
forth in Appendix G, at the McLeodUSA special meeting. The merger cannot be
completed unless McLeodUSA stockholders approve the amendment. If the proposal
is approved by the stockholders, the proposed amendment to the McLeodUSA
certificate of incorporation will become effective upon the filing of a
certificate of amendment to the McLeodUSA certificate of incorporation with the
Secretary of State of the State of Delaware, which filing is likely to be made
promptly after the McLeodUSA special meeting.
The McLeodUSA board of directors recommends that the stockholders adopt the
proposal.
The affirmative vote of a majority of the outstanding shares of McLeodUSA
Class A common stock entitled to vote at the McLeodUSA special meeting is
required to approve the proposed amendment to the McLeodUSA certificate of
incorporation to increase the number of authorized shares of McLeodUSA Class A
common stock. Several directors, executive officers and stockholders of
McLeodUSA have entered into voting agreements with Splitrock by which such
persons have agreed to vote their shares in favor of this proposal. The
46,607,906 shares of McLeodUSA Class A common stock subject to these agreements
represent approximately 29% of the outstanding shares entitled to vote at the
McLeodUSA special meeting.
118
<PAGE>
In addition to the McLeodUSA Class A common stock issued and outstanding, as
of December 31, 1999, McLeodUSA also has reserved for issuance the following
number of shares of McLeodUSA Class A common stock:
<TABLE>
<CAPTION>
Number of
Reserved for Shares
------------ ----------
<S> <C>
Outstanding options to purchase McLeodUSA Class A common stock.. 35,070,056
Issuance pursuant to employee benefit plans..................... 2,947,360
Conversion of outstanding shares of McLeodUSA Series A, Series B
and Series C preferred stock................................... 37,390,583
Outstanding options to purchase shares of McLeodUSA Class B
common stock convertible to Class A common stock............... 2,601,376
Issuance in connection with the acquisition of the assets of
Millennium Telemanagement Group LLC in June 1999............... 15,424
Issuance in connection with the acquisition of Dakota
Telecommunications Group, Inc. in March 1999................... 268,816
----------
Total......................................................... 78,293,615
==========
</TABLE>
As a result, after including both the shares of McLeodUSA Class A common
stock issued and outstanding and the shares of McLeodUSA Class A common stock
reserved for issuance, McLeodUSA has utilized approximately 236,000,000 shares
of the 250,000,000 authorized. Thus, McLeodUSA currently has available for
future issuance approximately 14,000,000 shares of McLeodUSA Class A common
stock.
The McLeodUSA board of directors believes that the proposed increase in the
authorized shares of McLeodUSA Class A common stock is desirable in order to
permit the consummation of the merger and to enhance its flexibility with
possible future actions, including stock splits, stock dividends, acquisitions,
financing transactions, employee benefit plan issuances, and other corporate
purposes as may arise. Having this authorized McLeodUSA Class A common stock
available for issuance in the future will give the McLeodUSA board of directors
greater flexibility and will allow additional shares of McLeodUSA Class A
common stock to be issued without the expense and delay of a stockholders'
meeting. This kind of delay might deny McLeodUSA the flexibility the McLeodUSA
board of directors views as important in facilitating the effective use of
McLeodUSA securities. However, the ability of McLeodUSA to issue large blocks
of McLeodUSA Class A common stock is not unlimited. For example, the rules of
The National Association of Securities Dealers, Inc. ("NASD") currently require
stockholder approval by issuers of securities quoted on The Nasdaq National
Market, on which the McLeodUSA Class A common stock is currently quoted, as to
the issuance of shares of common stock or securities convertible into common
stock in various instances including:
. actions resulting in a change of control of the company
. acquisition transactions involving directors, officers or substantial
security holders where the present or potential issuance of these
securities could result in an increase in outstanding common shares or
voting power of 5% or more
. acquisition transactions generally where the present or potential
issuance of securities could result in an increase in the voting power
or outstanding common shares of 20% or more
. other sales or issuances of common stock, or securities convertible into
or exercisable for common stock, in a non-public offering equal to 20%
or more of the voting power outstanding before the issuance for less
than the greater of book or market value of stock.
Exceptions to these rules may be made upon application to the NASD. In other
instances, the issuance of additional shares remains within the discretion of
the board of directors without the requirement of further action by
stockholders except as otherwise required by applicable law or any stock
exchange on which McLeodUSA securities may then be listed.
119
<PAGE>
Except as described in this joint proxy statement/prospectus, McLeodUSA does
not have any current commitments, arrangements, understandings or plans with
respect to the issuance of these additional shares of McLeodUSA Class A common
stock. Of the 750 million additional shares of McLeodUSA Class A common stock,
if authorized:
. up to approximately 30.5 million shares will be issued upon the closing
of the merger to Splitrock stockholders in exchange for their shares of
Splitrock common stock, with each issued and outstanding share of
Splitrock common stock being converted into the right to receive 0.5347
of a share of McLeodUSA Class A common stock (see "Terms of the Merger
Agreement--Conversion of Splitrock Common Stock; Treatment of Options
and Warrants")
. approximately 2.8 million shares will be reserved for issuance under
Splitrock stock options and warrants which, in the merger, will become
exercisable to purchase McLeodUSA Class A common stock
. approximately 716.7 million shares will remain available for possible
future stock splits, stock dividends, acquisitions, financing
transactions, employee benefit plan issuances and other corporate
purposes as may arise
McLeodUSA is submitting this proposal in order to consummate the merger
agreement and the merger and to enhance its flexibility with possible future
actions, such as stock splits, stock dividends, acquisitions, financing
transactions, employee benefit plan issuances and such other corporate purposes
as may arise. McLeodUSA is not submitting this proposal to enable it to
frustrate any efforts by another party to acquire a controlling interest in
McLeodUSA or to seek representation on the McLeodUSA board of directors.
If the proposal to increase the number of authorized shares of McLeodUSA
Class A common stock is approved, the additional authorized shares will be part
of the existing McLeodUSA Class A common stock and will increase the number of
shares available for issuance by McLeodUSA, but will have no effect upon the
terms of this or any other class of McLeodUSA capital stock or the rights of
the holders of shares of McLeodUSA capital stock. If and when issued, the
proposed additional authorized shares of McLeodUSA Class A common stock will
have the same rights and privileges as the shares of McLeodUSA Class A common
stock currently outstanding. Holders of McLeodUSA Class A common stock do not
have preemptive rights to purchase additional shares.
The future issuance of additional shares of authorized but unissued
McLeodUSA Class A common stock on other than a pro rata basis will dilute the
ownership of current stockholders. These additional shares also could be used
to block an unsolicited acquisition through the issuance of large blocks of
stock to persons or entities considered by McLeodUSA officers and directors to
be opposed to the acquisition, which might be deemed to have an anti-takeover
effect, i.e., might impede the completion of a merger, tender offer or other
takeover attempt. In fact, the mere existence of a block of authorized but
unissued shares, and the ability of the McLeodUSA board of directors to issue
these shares without stockholder approval, might deter a bidder from seeking to
acquire shares of McLeodUSA Class A common stock on an unfriendly basis. The
McLeodUSA board of directors does not intend or view the proposed increase in
authorized McLeodUSA Class A common stock as an anti-takeover measure, nor is
it aware of any proposed transactions of this type.
McLeodUSA already has in place certain provisions which have an anti-
takeover effect including a classified board of directors, and the protections
of the provisions of Section 203 of the Delaware General Corporation Law. See
"McLeodUSA Capital Stock and Comparison of Stockholder Rights--Certain Charter
and Statutory Provisions."
THE McLEODUSA BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" PROPOSAL NO. 1.
----------------
120
<PAGE>
Proposal 2.
Approval of the Issuance of Shares of McLeodUSA Class A Common Stock in the
Merger
On January 6, 2000 and on February 7, 2000, the McLeodUSA board of directors
adopted a resolution approving the issuance of shares of McLeodUSA Class A
common stock, par value $.01 per share, in the merger, subject to completion of
the merger. These shares will not be issued unless the merger is completed.
This share issuance is being submitted for the approval of the stockholders of
McLeodUSA pursuant to the requirements of the NASD applicable to companies with
securities quoted on The Nasdaq National Market.
The merger cannot be completed unless McLeodUSA stockholders approve the
issuance of these shares of McLeodUSA Class A common stock in the merger. These
shares will be issued to Splitrock stockholders in exchange for their Splitrock
common stock, with each issued and outstanding share of Splitrock common stock
being converted into the right to receive 0.5347 of a share of McLeodUSA Class
A common stock. The NASD requirements provide that the affirmative vote of a
majority of all the votes cast on the proposal at the McLeodUSA special meeting
is required to approve this issuance of shares. Several directors, executive
officers and stockholders of McLeodUSA have entered into voting agreements with
Splitrock by which these persons have agreed to vote their shares in favor of
this proposal. The 46,607,906 shares of McLeodUSA Class A common stock subject
to these agreements represent approximately 29% of the outstanding shares
entitled to vote at the McLeodUSA special meeting.
See "Terms of the Merger Agreement and Related Transactions" for a
description of the terms of the merger.
THE McLEODUSA BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" PROPOSAL NO. 2.
----------------
121
<PAGE>
PROPOSAL TO SPLITROCK STOCKHOLDERS TO BE VOTED ON AT THE SPLITROCK SPECIAL
MEETING
The Merger Proposal
At the Splitrock special meeting, Splitrock stockholders will be asked to
approve and adopt the merger agreement. See "Terms of the Merger Agreement and
Related Transactions" for a description of the terms of the merger.
THE SPLITROCK BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF SPLITROCK
VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
----------------
122
<PAGE>
LEGAL MATTERS
The validity of the McLeodUSA Class A common stock offered in the merger and
the federal income tax consequences for McLeodUSA in connection with the merger
will be passed upon by Hogan & Hartson L.L.P., Washington, D.C.
Federal income tax consequences relating to the merger will be passed upon
for Splitrock by Fried, Frank, Harris, Shriver & Jacobson (a partnership
including professional corporations), Washington, D.C.
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 (date of
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.
The financial statements of Splitrock Services, Inc. as of December 31, 1998
and 1997 and for the period from March 5, 1997 (inception) to December 31, 1997
and the year ended December 31, 1998 incorporated in this joint proxy
statement/prospectus by reference to Splitrock Services, Inc.'s registration
statement on Form S-1 (No. 333-79909), as amended, have been so incorporated in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
OTHER MATTERS
As of the date of this joint proxy statement/prospectus, neither the
Splitrock board of directors nor the McLeodUSA board of directors knows of any
matters that will be presented for consideration at either special meeting
other than as described in this joint proxy statement/prospectus. If any other
matters come before either of the special meetings or any adjournments or
postponements of the special meetings and are voted upon, the enclosed proxies
will confer discretionary authority on the individuals named as proxies to vote
the shares represented by the proxies as to any other matters. The individuals
named as proxies intend to vote in accordance with their best judgment as to
any other matters.
123
<PAGE>
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS
McLeodUSA
Submission of Stockholder Proposals for Inclusion in this Year's Annual
Meeting Proxy Statement
Any proposal or proposals by a stockholder intended to be included in the
proxy statement and form of proxy relating to the 2000 McLeodUSA annual meeting
of stockholders must have been received by McLeodUSA no later than January 12,
2000 pursuant to the proxy solicitation rules of the SEC. No stockholder
proposals were received by McLeodUSA.
Other Stockholder Proposals for Presentation at this Year's Annual Meeting
For any proposal that is not submitted for inclusion in this year's annual
meeting proxy statement but is instead presented directly at the 2000 McLeodUSA
annual meeting of stockholders, management will be able to vote proxies in its
discretion if McLeodUSA:
. receives notice of the proposal before the close of business on March
27, 2000, and advises stockholders in the 2000 McLeodUSA annual meeting
proxy statement about the nature of the matter and how management
intends to vote on the matter, or
. does not receive notice of the proposal prior to the close of business
on March 27, 2000
Notices of intention to present proposals at the 2000 McLeodUSA annual
meeting should be addressed to Corporate Secretary, McLeodUSA Incorporated,
6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177.
Splitrock
Splitrock will hold an annual meeting of its stockholders in the year 2000
only if the merger has not already been completed. If an annual meeting is
held, a proposal by a stockholder intended to be included in the proxy
statement and form of proxy relating to the 2000 Splitrock annual meeting of
stockholders must be received by Splitrock no later than ninety days before the
date of the meeting.
WHERE YOU CAN FIND MORE INFORMATION
McLeodUSA has filed with the SEC a registration statement of which this
joint proxy statement/prospectus forms a part. The registration statement
registers the distribution to Splitrock stockholders of the shares of McLeodUSA
Class A common stock to be issued in connection with the merger. The
registration statement, including the attached exhibits and schedules, contains
additional relevant information about McLeodUSA Class A common stock. The rules
and regulations of the SEC allow us to omit certain information included in the
registration statement from this joint proxy statement/prospectus.
In addition, McLeodUSA and Splitrock file reports, proxy statements and
other information with the SEC under the Exchange Act. You may read and copy
any of this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
124
<PAGE>
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, including McLeodUSA and
Splitrock, who file electronically with the SEC. The address of that site is
http://www.sec.gov.
The SEC allows McLeodUSA and Splitrock to disclose important information to
you by referring you to another document filed separately with the SEC. This
information is considered to be a part of this joint proxy
statement/prospectus, except for any information that is superseded by
information included directly in this document.
The documents listed below that McLeodUSA and Splitrock have previously
filed or will file with the SEC are considered to be a part of this joint proxy
statement/prospectus. They contain important information about our companies
and their financial condition.
McLeodUSA SEC Filings (File No. 0-20763)
. Annual Report on Form 10-K for its fiscal year ended December 31, 1998,
filed on March 24, 1999, as amended on Form 10-K/A filed on April 22,
1999
. Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
1999, June 30, 1999 and September 30, 1999 filed on May 17, 1999, August
16, 1999 and November 15, 1999, respectively
. Current Reports on Form 8-K filed on October 29, 1999, January 19, 2000,
January 21, 2000, February 3, 2000 and February 11, 2000
. All documents filed with the SEC by McLeodUSA under Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date of this joint
proxy statement/prospectus and prior to the date of the McLeodUSA
special meeting are considered to be a part of this joint proxy
statement/prospectus, effective the date such documents are filed
. The description of McLeodUSA Class A common stock set forth in the
McLeodUSA 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).
Splitrock SEC Filings (File No. 0-26827)
. Annual Report on Form 10-K for its fiscal year ended December 31, 1998,
filed on March 31, 1999
. Registration Statement on Form S-1 (Registration No. 33-79909), filed on
June 3, 1999, as amended
. Quarterly Reports on Form 10-Q for the quarterly periods ended March 31,
1999, June 30, 1999 and September 30, 1999 filed on May 17, 1999, August
10, 1999 and October 29, 1999, respectively
. Current Report on Form 8-K filed on January 19, 2000
. All documents filed with the SEC by Splitrock under Sections 13(a),
13(c), 14 and 15(d) of the Exchange Act after the date of this joint
proxy statement/prospectus and prior to the date of the Splitrock
special meeting are considered to be a part of this joint proxy
statement/prospectus, effective the date such documents are filed.
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
125
<PAGE>
You can obtain any of the other documents listed above from the SEC, through
the SEC's web site at the address described above, or from McLeodUSA or
Splitrock, by requesting them in writing or by telephone at the following
addresses:
McLeodUSA Incorporated Splitrock Services, Inc.
McLeodUSA Technology Park 9012 New Trails Drive
6400 C Street SW, P.O. Box 3177 The Woodlands, TX 77381
Cedar Rapids, IA 52406-3177 Attn: General Counsel
Attn: General Counsel Telephone (281) 465-1200
Telephone (319) 364-0000
These documents are available from McLeodUSA and Splitrock without charge,
excluding any exhibits to them unless the exhibit is specifically listed as an
exhibit to the registration statement of which this joint proxy
statement/prospectus forms a part.
If you are a stockholder of McLeodUSA and would like to request documents,
please do so by March 23, 2000 to receive them before the McLeodUSA special
meeting. If you request any documents from McLeodUSA, McLeodUSA will mail them
to you by first class mail, or another equally prompt means, within two
business days after McLeodUSA receives your request.
If you are a stockholder of Splitrock and would like to request documents,
please do so by March 23, 2000 to receive them before the Splitrock special
meeting. If you request any documents from Splitrock, Splitrock will mail them
to you by first class mail, or another equally prompt means, within two
business days after Splitrock receives your request.
This document is a prospectus of McLeodUSA and is a joint proxy statement of
McLeodUSA and Splitrock for the McLeodUSA and Splitrock special meetings.
McLeodUSA has supplied all information contained in, or considered a part of,
this joint proxy statement/prospectus relating to McLeodUSA, and Splitrock has
supplied all information relating to Splitrock.
Neither McLeodUSA nor Splitrock has authorized anyone to give any
information or make any representation about the merger or McLeodUSA or
Splitrock that is different from, or in addition to, that contained in this
joint proxy statement/prospectus or in any of the materials that McLeodUSA or
Splitrock has incorporated into this document. Therefore, if anyone does give
you information of this sort, you should not rely on it. The information
contained in this document speaks only as of the date of this document unless
the information specifically indicates that another date applies.
126
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MCLEODUSA INCORPORATED,
SOUTHSIDE ACQUISITION CORPORATION,
SPLITROCK SERVICES, INC.,
SPLITROCK HOLDINGS, INC.
and
SPLITROCK MERGER SUB, INC.
Dated as of February 11, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE IA THE HOLDCO MERGER................................... A-2
Section 1A.01. The Holdco Merger.................................. A-2
Section 1A.02. The Holdco Merger Effective Time................... A-2
Section 1A.03. Effect of the Holdco Merger........................ A-2
Holdco Surviving Corporation Certificate of
Section 1A.04. Incorporation; Bylaws.............................. A-2
Section 1A.05. Directors and Officers............................. A-3
Section 1A.06. Conversion of Securities........................... A-3
Section 1A.07. Retention of Certificates.......................... A-4
Section 1A.08. Company Stock Transfer Books....................... A-4
Section 1A.09. Other Agreements................................... A-4
Section 1A.10. Reservation of Holdco Common Stock................. A-4
Section 1A.11. Contribution of Holdco Common Stock................ A-4
ARTICLE I THE MERGER......................................... A-4
Section 1.01. The Merger......................................... A-4
Section 1.02. Effective Time..................................... A-4
Section 1.03. Effect of the Merger............................... A-5
Surviving Corporation Certificate of Incorporation;
Section 1.04. Bylaws............................................. A-5
Section 1.05. Directors and Officers............................. A-5
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
AND OTHER INSTRUMENTS.............................. A-5
Section 2.01. Conversion of Securities........................... A-5
Section 2.02. Exchange of Certificates or Instruments............ A-6
Section 2.03. Stock Transfer Books............................... A-8
Section 2.04. Stock Options...................................... A-8
Section 2.05. Company Warrants................................... A-9
Section 2.06. Closing............................................ A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SPLITROCK
ENTITIES........................................... A-10
Section 3.01. Organization and Standing.......................... A-10
Section 3.02. Subsidiaries....................................... A-10
Section 3.03. Certificate of Incorporation and Bylaws............ A-11
Section 3.04. Capitalization..................................... A-11
Section 3.05. Authority; Binding Obligation...................... A-12
Section 3.06. No Conflict; Required Filings and Consents......... A-12
Section 3.07. Licenses; Compliance............................... A-13
Section 3.08. SEC Documents...................................... A-14
Section 3.09. Reorganization..................................... A-14
Section 3.10. Vote Required...................................... A-14
Section 3.11. Brokers............................................ A-14
Section 3.12. Disclosure......................................... A-15
Section 3.13. Intellectual Property.............................. A-15
Section 3.14. Absence of Undisclosed Liabilities................. A-15
Section 3.15. Absence of Certain Changes or Events............... A-15
Section 3.16. Litigation; Disputes............................... A-16
Section 3.17. Pension and Benefit Plans.......................... A-16
Section 3.18. Taxes and Tax Matters.............................. A-17
Section 3.19. Opinion of Financial Advisor....................... A-17
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<C> <S> <C>
Section 3.20. Board Recommendation.............................. A-18
Section 3.21. Intentionally Deleted............................. A-18
Section 3.22. Copies of Documents............................... A-18
Section 3.23. Affiliate Agreements.............................. A-18
State Takeover Statutes; Certain Charter
Section 3.24. Provisions........................................ A-18
Section 3.25. Dissenters' Rights................................ A-18
Foreign Corrupt Practices and International Trade
Section 3.26. Sanctions......................................... A-18
Section 3.27. Year 2000......................................... A-19
Section 3.28. Insurance......................................... A-19
Section 3.29. Environmental Matters............................. A-19
Section 3.30. Certain Contracts................................. A-19
Section 3.31. Ownership of Securities........................... A-20
Capitalization of Merger Sub; No Prior Activities
Section 3.32. of Merger Sub..................................... A-20
Capitalization of Holdco; No Prior Activities of
Section 3.33. Holdco............................................ A-20
Section 3.34. Holdco Merger and Governmental Approvals.......... A-20
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND
ACQUIROR SUB...................................... A-21
Section 4.01. Organization and Standing; Subsidiaries........... A-21
Section 4.02. Certificate of Incorporation and Bylaws........... A-21
Section 4.03. Capitalization.................................... A-21
Section 4.04. Authority; Binding Obligation..................... A-22
Section 4.05. No Conflict; Required Filings and Consents........ A-22
Section 4.06. Licenses; Compliance.............................. A-23
Section 4.07. SEC Documents..................................... A-23
Section 4.08. Reorganization.................................... A-24
Section 4.09. Vote Required..................................... A-24
Section 4.10. Brokers........................................... A-24
Section 4.11. Disclosure........................................ A-24
Capitalization of Acquiror Sub; No Prior
Section 4.12. Activities of Acquiror Sub........................ A-25
Section 4.13. Litigation........................................ A-25
Section 4.14. Board Recommendations............................. A-25
Section 4.15. Year 2000......................................... A-25
Section 4.16. Certain Contracts................................. A-25
Section 4.17. Acquiror Common Stock............................. A-26
Section 4.18. Pension and Benefit Plans......................... A-26
Section 4.19. Absence of Certain Changes or Events.............. A-27
Section 4.20. Absence of Undisclosed Liabilities................ A-27
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS......... A-27
Section 5.01. Conduct of Business of the Splitrock Entities..... A-27
Section 5.02. Other Actions..................................... A-29
Section 5.03. Certain Tax Matters............................... A-30
Section 5.04. Access and Information............................ A-30
Section 5.05. No Solicitation................................... A-30
ARTICLE VI ADDITIONAL AGREEMENTS............................. A-32
Section 6.01. Registration Statement; Joint Proxy Statement..... A-32
Section 6.02. Meetings of Stockholders.......................... A-33
Section 6.03. Appropriate Action; Consents; Filings............. A-34
Section 6.04. Intentionally Deleted............................. A-35
Section 6.05. Update Disclosure; Breaches....................... A-35
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 6.06. Public Announcements................................ A-35
Section 6.07. Employee Matters.................................... A-35
Section 6.08. Unaudited Financial Information..................... A-36
Section 6.09. Intentionally Deleted............................... A-36
Section 6.10. Post-Signing SEC Documents.......................... A-36
Section 6.11. Affiliates.......................................... A-36
Section 6.12. Tax Returns......................................... A-37
Section 6.13. Reorganization...................................... A-37
Directors' and Officers' Insurance;
Section 6.14. Indemnification..................................... A-37
Section 6.15. Obligations of Acquiror Sub......................... A-38
Section 6.16. Acquiror Option Shares.............................. A-38
Section 6.17. Obligations of Holdco and Merger Sub................ A-38
Section 6.18. Intentionally Deleted............................... A-38
Section 6.19. Debentures.......................................... A-38
Section 6.20. Company Warrants.................................... A-39
Section 6.21. Certain Additional Actions.......................... A-39
Section 6.22. Consummation of Holdco Merger....................... A-39
ARTICLE VII CONDITIONS PRECEDENT................................ A-39
Conditions to Obligations of Each Party Under This
Section 7.01. Merger Agreement.................................... A-39
Additional Conditions to Obligations of Acquiror and
Section 7.02. Acquiror Sub........................................ A-40
Additional Conditions to Obligations of the
Section 7.03. Splitrock Entities.................................. A-42
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER................... A-43
Section 8.01. Termination......................................... A-43
Section 8.02. Effect of Termination............................... A-44
Section 8.03. Expenses............................................ A-45
Section 8.04. Amendment........................................... A-45
Section 8.05. Extension; Waiver................................... A-45
ARTICLE IX GENERAL PROVISIONS.................................. A-45
Section 9.01. Non-Survival of Representations and Warranties...... A-45
Section 9.02. Notices............................................. A-46
Section 9.03. Headings............................................ A-46
Section 9.04. Severability........................................ A-46
Section 9.05. Entire Agreement.................................... A-47
Section 9.06. Assignment.......................................... A-47
Section 9.07. Parties in Interest................................. A-47
Section 9.08. Mutual Drafting..................................... A-47
Section 9.09. Specific Performance................................ A-47
Section 9.10. Governing Law....................................... A-47
Section 9.11. Counterparts........................................ A-47
Section 9.12. Confidentiality..................................... A-48
Section 9.13. Holdco Reorganization............................... A-48
Section 9.14. Option Exercise..................................... A-48
ARTICLE X DEFINITIONS......................................... A-48
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of February 11,
2000 ("Merger Agreement"), among McLeodUSA Incorporated, a Delaware corporation
("Acquiror"), Southside Acquisition Corporation, a Delaware corporation and
wholly owned subsidiary of Acquiror ("Acquiror Sub"), Splitrock Services, Inc.,
a Delaware corporation (the "Company"), Splitrock Holdings, Inc., a Delaware
corporation and wholly owned subsidiary of the Company ("Holdco"), and
Splitrock Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary
of Holdco ("Merger Sub" and, together with the Company and Holdco,
the"Splitrock Entities");
WHEREAS, the respective boards of directors of the Company, Holdco and
Merger Sub have approved this Merger Agreement pursuant to which, among other
things, Merger Sub will be merged with and into the Company (the "Holdco
Merger") on the terms and conditions contained herein and in accordance with
the General Corporation Law of the State of Delaware ("Delaware Law") and the
respective boards of directors of the constituent corporations of the Holdco
Merger have recommended approval and adoption of this Merger Agreement by the
stockholders of their respective corporations;
WHEREAS, the respective boards of directors of Acquiror, Acquiror Sub and
Holdco have approved this Merger Agreement pursuant to which, among other
things, Acquiror Sub will be merged with and into Holdco (the "Merger" and,
together with the Holdco Merger, the "Mergers") on the terms and conditions
contained herein and in accordance with Delaware Law and the respective boards
of directors of Acquiror Sub and Holdco have recommended approval and adoption
of this Merger Agreement by the stockholders of their respective corporations;
WHEREAS, for federal income tax purposes, it is intended that each of the
Mergers shall qualify as a tax-free reorganization under the provisions of
Section 368(a) of the United States Internal Revenue Code of 1986, as amended
(the "Code");
WHEREAS, in order to induce the Company and Holdco to enter into this Merger
Agreement, (i) Acquiror has entered into certain of the Network Agreements (as
defined in Article X) with the Company; and (ii) concurrently herewith certain
stockholders, directors and executive officers of Acquiror listed on Exhibit A1
are entering into amended and restated voting agreements in the form attached
hereto as Exhibit B1 (the "Acquiror Stockholder Voting Agreements") pursuant to
which, among other things, each such stockholder, director (in such director's
capacity as a stockholder) and officer (in such officer's capacity as a
stockholder) agrees to vote in favor of the Acquiror Charter Amendment (as
defined in Article X) and the issuance of Acquiror Common Stock (as defined in
Article X) pursuant to this Merger Agreement;
WHEREAS, in order to induce Acquiror and Acquiror Sub to enter into this
Merger Agreement, concurrently herewith (i) certain stockholders and the
directors and executive officers of the Company listed on Exhibit A2 are
entering into amended and restated voting agreements in the form attached
hereto as Exhibit B2 (the "Company Stockholder Voting Agreements") pursuant to
which, among other things, each such stockholder, director (in such director's
capacity as a stockholder) and executive officer (in such executive officer's
capacity as a stockholder) agrees to vote in favor of this Merger Agreement and
(ii) each of the Principal Company Stockholders (as defined in Article X) is
entering into an amended and restated stock option agreement in the form
attached hereto as Exhibit C (the "Option Agreement") pursuant to which, among
other things, such Principal Company Stockholder has granted Acquiror the right
to purchase up to all Company Common Stock (as defined in Section 1A.06(b))
beneficially owned by such Principal Company Stockholder; and
WHEREAS, Acquiror, Acquiror Sub and the Company have entered into a Merger
Agreement dated as of January 6, 2000 (the "Original Agreement"), and the
parties hereto desire herein and hereby to amend and restate the Original
Agreement;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this Merger
Agreement, and intending to be legally bound hereby, the parties hereto do
hereby amend and restate the Original Agreement and agree as follows.
A-1
<PAGE>
ARTICLE IA
The Holdco Merger
Section 1A.01. The Holdco Merger.
Upon the terms and subject to the conditions set forth in this Merger
Agreement, and in accordance with Delaware Law, at the Holdco Effective Time
(as defined in Section 1A.02), Merger Sub shall be merged with and into the
Company. As a result of the Holdco Merger, the separate existence of Merger Sub
shall cease and the Company shall continue as the surviving corporation of the
Holdco Merger (the "Holdco Surviving Corporation").
Section 1A.02. The Holdco Merger Effective Time.
Subject to the provisions of Section 2.06, as promptly as practicable after
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII (other than with respect to the foregoing the satisfaction of
Section 7.03(h)), the Splitrock Entities shall cause the Holdco Merger to be
consummated by filing this Merger Agreement, a certificate of merger or other
appropriate Documents (as defined in Article X) (in any such case, the "Holdco
Certificate of Merger") with the Secretary of State of the State of Delaware,
in such form as required by, and executed in accordance with the relevant
provisions of, Delaware Law (the date and time of such filing being the "Holdco
Effective Time").
Section 1A.03. Effect of the Holdco Merger.
At the Holdco Effective Time, the effect of the Holdco Merger shall be as
provided in the applicable provisions of Delaware Law. Without limiting the
generality of the foregoing, and subject thereto, at the Holdco Effective Time,
all of the property, rights, privileges, powers and franchises of Merger Sub
and the Company shall vest in the Holdco Surviving Corporation, and all debts,
liabilities and duties of Merger Sub and the Company shall become the debts,
liabilities and duties of the Holdco Surviving Corporation.
Section 1A.04. Holdco Surviving Corporation Certificate of Incorporation;
Bylaws.
(a) Unless otherwise mutually determined by Acquiror and the Company prior
to the Holdco Effective Time and subject to Delaware Law, at the Holdco
Effective Time, the certificate of incorporation of the Company, as in effect
immediately prior to the Holdco Effective Time, shall be the certificate of
incorporation of the Holdco Surviving Corporation, until thereafter amended as
provided by Delaware Law and such certificate of incorporation; provided,
however, Article IV of such certificate of incorporation shall be amended and a
new Article IX of such certificate of incorporation shall be added at the
Holdco Effective Time as set forth below:
(i) ARTICLE IV of such certificate of incorporation shall be amended to
read in its entirety as follows:
"ARTICLE IV
Capital Stock
The aggregate number of shares which the Corporation shall have the
authority to issue is one thousand (1,000) shares of Common Stock, par
value $.001 per share."
(ii) ARTICLE IX of such certificate of incorporation shall be added and
shall read as follows:
"ARTICLE IX
Vote of Stockholders of Splitrock Holdings, Inc. to Approve Certain Actions
Any act or transaction by or involving the Corporation other than the
election or removal of directors of the Corporation that requires for its
adoption under the DGCL or this Restated Certificate of
A-2
<PAGE>
Incorporation the approval of the Corporation's stockholders shall,
pursuant to Section 251(g) of the DGCL, require, in addition, the approval
of the stockholders of Splitrock Holdings, Inc. (or any successor by
merger) by the same vote as is required by the DGCL and/or by this Restated
Certificate of Incorporation."
(b) Unless otherwise mutually determined by Acquiror and the Company prior
to the Holdco Effective Time, at the Holdco Effective Time, the bylaws of the
Company, as in effect immediately prior to the Holdco Effective Time, shall be
the bylaws of the Holdco Surviving Corporation, until thereafter amended as
provided by Delaware Law, the certificate of incorporation and such bylaws.
Section 1A.05. Directors and Officers.
The directors of the Company immediately prior to the Holdco Effective Time
shall be the initial directors of the Holdco Surviving Corporation upon and
after the Holdco Effective Time, each to hold office in accordance with the
certificate of incorporation and bylaws of the Holdco Surviving Corporation,
and the officers of the Company immediately prior to the Holdco Effective Time
shall be the officers of the Holdco Surviving Corporation upon and after the
Holdco Effective Time, in each case until their respective successors are duly
elected or appointed and qualified.
Section 1A.06. Conversion of Securities.
At the Holdco Effective Time, by virtue of the Holdco Merger and without any
action on the part of the Company, Holdco, Merger Sub or the holders of any
securities of the foregoing entities:
(a) Common Stock of Merger Sub. Each share of common stock, par value $.001
per share, of Merger Sub issued and outstanding immediately prior to the Holdco
Effective Time, all of which are owned by Holdco, shall be converted into one
share of common stock, par value $.001 per share, of the Holdco Surviving
Corporation.
(b) Company Common Stock. Each share of common stock, par value $.001 per
share, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Holdco Effective Time shall be converted into the
right to receive one share of common stock, par value $.001 per share, of
Holdco (such shares of common stock or the right to receive such shares of
common stock pursuant to this Section 1A.06(b) referred to as "Holdco Common
Stock"). Each certificate representing Company Common Stock immediately prior
to the Holdco Effective Time shall be deemed, without the need for any exchange
or transfer, to represent the right to receive the same number of shares of
Holdco Common Stock.
(c) Company Stock Options. Holdco shall assume and continue all the rights
and obligations of the Company under (i) the Company's 1997 Incentive Share
Plan, and (ii) the Company's 1999 Stock Incentive Plan (together, the "Company
Stock Plans"). The outstanding options under the Company Stock Plans (the
"Company Stock Options") assumed by Holdco shall be exercisable upon the same
terms and conditions as under the Company Stock Plans immediately prior to the
Holdco Effective Time, except that, upon the exercise of each such Company
Stock Option exercisable for shares of Company Common Stock, the same number of
shares of Holdco Common Stock shall be issuable in lieu of such shares of
Company Common Stock issuable upon the exercise thereof immediately prior to
the Holdco Effective Time.
(d) Company Warrants. Holdco shall assume the Company Warrants (as defined
in Section 3.04) so that at the Holdco Effective Time, each Company Warrant
will become a warrant to purchase the same number of shares of Holdco Common
Stock as the number of shares of Company Common Stock that could have been
purchased upon the exercise thereof immediately prior to the Holdco Effective
Time.
(e) Successor Issuer. It is the intent of the parties hereto that Holdco, as
of the Holdco Effective Time, be deemed a "successor issuer" for purposes of
continuing offerings under the Securities Act (as defined in Article X).
A-3
<PAGE>
Section 1A.07 Retention of Certificates.
At the Holdco Effective Time, each outstanding certificate that immediately
prior to the Holdco Effective Time represented outstanding shares of Company
Common Stock shall be deemed, for all corporate purposes, to evidence ownership
of the right to receive the number of shares of Holdco Common Stock into which
such shares of Company Common Stock have been converted pursuant to Section
1A.06(b) hereof.
Section 1A.08. Company Stock Transfer Books.
At the Holdco Effective Time, the stock transfer books for the shares of
Company Common Stock which have been converted into the right to receive shares
of Holdco Common Stock pursuant to Section 1A.06(b) hereof shall be deemed
closed, and no transfer of such shares shall thereafter be made or consummated.
Section 1A.09. Other Agreements.
At the Holdco Effective Time, Holdco shall assume any obligation of the
Company to deliver or make available shares of Company Common Stock under any
Agreement (as defined in Article X) or employee benefit plan not referred to in
this Article IA to which the Company or any of the Subsidiaries is a party. All
such Agreements or employee benefit plans have been disclosed to Acquiror in
the Company Disclosure Schedule (as defined in Article III). At the Holdco
Effective Time, any reference to Company Common Stock under any such Agreement
or employee benefit plan shall be deemed to be a reference to Holdco Common
Stock and one share of Holdco Common Stock shall be issuable in lieu of each
share of Company Common Stock required immediately prior to the Holdco
Effective Time to be issued under any such Agreement or employee benefit plan,
subject to subsequent adjustment as provided in any such Agreement or employee
benefit plan.
Section 1A.10. Reservation of Holdco Common Stock.
At or prior to the Holdco Effective Time, Holdco shall take all action
necessary to authorize and reserve for issuance a sufficient number of shares
of Holdco Common Stock in respect of the options, warrants, Agreements and
employee benefit plans referred to in Sections 1A.06(c) and (d) and Section
1A.09 hereof, in an amount equal to the number of shares of Company Common
Stock reserved for issuance in respect of such options, warrants, Agreements
and employee benefit plans immediately prior to the Holdco Effective Time.
Section 1A.11. Contribution of Holdco Common Stock.
At the Holdco Effective Time, each share of Holdco Common Stock that is
issued and outstanding immediately prior to the Holdco Effective Time, all of
which are owned by the Company, shall be returned to Holdco as a contribution
to capital and retired.
ARTICLE I
The Merger
Section 1.01. The Merger.
Upon the terms and subject to the conditions set forth in this Merger
Agreement, and in accordance with Delaware Law, at the Effective Time (as
defined in Section 1.02) Acquiror Sub shall be merged with and into Holdco. As
a result of the Merger, the separate corporate existence of Acquiror Sub shall
cease and Holdco shall continue as the surviving corporation of the Merger (the
"Surviving Corporation").
Section 1.02. Effective Time.
Subject to the provisions of Section 2.06, as promptly as practicable after
the satisfaction or, if permissible, waiver of the conditions set forth in
Article VII, the parties hereto shall cause the Merger to be consummated by
filing this Merger Agreement, a certificate of merger or other appropriate
Documents (in any such case, the "Certificate of Merger") with the Secretary of
State of the State of Delaware, in such form as
A-4
<PAGE>
required by, and executed in accordance with the relevant provisions of,
Delaware Law (the date and time of such filing being the "Effective Time"). The
parties agree to file the Certificate of Merger with the Secretary of State of
the State of Delaware as soon as practicable following the filing of the Holdco
Certificate of Merger with the Secretary of State of the State of Delaware and
to use reasonable best efforts to cause the Effective Time to occur immediately
following the Holdco Effective Time.
Section 1.03. Effect of the Merger.
At the Effective Time, the effect of the Merger shall be as provided in the
applicable provisions of Delaware Law. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the property,
rights, privileges, powers and franchises of Acquiror Sub and Holdco shall vest
in the Surviving Corporation, and all debts, liabilities and duties of Acquiror
Sub and Holdco shall become the debts, liabilities and duties of the Surviving
Corporation.
Section 1.04. Surviving Corporation Certificate of Incorporation; Bylaws.
(a) Unless otherwise mutually determined by Acquiror and the Company prior
to the Effective Time and subject to Delaware Law, at the Effective Time, the
certificate of incorporation of Holdco shall be amended in its entirety to
conform to the certificate of incorporation of Acquiror Sub in effect
immediately prior to the Effective Time, and as amended shall be the
certificate of incorporation of the Surviving Corporation, until thereafter
amended as provided by Delaware Law and such certificate of incorporation;
provided, however, that Article 1 of the certificate of incorporation of the
Surviving Corporation shall read as follows: "The name of this corporation is
Splitrock Holdings, Inc. (the "Corporation")."
(b) Unless otherwise determined by Acquiror prior to the Effective Time, at
the Effective Time, the bylaws of Holdco shall be amended in their entirety to
conform to the bylaws of Acquiror Sub in effect immediately prior to the
Effective Time, and as amended shall be the bylaws of the Surviving Corporation
until thereafter amended as provided by Delaware Law, the certificate of
incorporation of the Surviving Corporation and such bylaws.
Section 1.05. Directors and Officers.
(a) The directors of Acquiror Sub immediately prior to the Effective Time
shall be the initial directors of the Surviving Corporation upon and after the
Effective Time, each to hold office in accordance with the certificate of
incorporation and bylaws of the Surviving Corporation, and the officers of
Acquiror Sub immediately prior to the Effective Time shall be the officers of
the Surviving Corporation upon and after the Effective Time, in each case until
their respective successors are duly elected or appointed and qualified.
(b) At the Effective Time, the directors and officers of the Holdco
Surviving Corporation shall resign. The directors of Acquiror Sub immediately
prior to the Effective Time shall be the directors of the Holdco Surviving
Corporation upon and after the Effective Time, each to hold office in
accordance with the certificate of incorporation and bylaws of the Holdco
Surviving Corporation, and the officers of Acquiror Sub immediately prior to
the Effective Time shall be the officers of the Holdco Surviving Corporation
upon and after the Effective Time, in each case until their respective
successors are duly elected or appointed and qualified.
ARTICLE II
Conversion of Securities; Exchange of Certificates and Other Instruments
Section 2.01. Conversion of Securities.
At the Effective Time, as provided in this Merger Agreement, by virtue of
the Merger and without any action on the part of Acquiror Sub, Holdco or the
holders of Holdco Common Stock (the "Holdco Stockholders"):
A-5
<PAGE>
(a) Holdco Common Stock. Each share of Holdco Common Stock issued and
outstanding immediately prior to the Effective Time (other than any shares of
Holdco Common Stock to be canceled pursuant to Section 2.01(c)), shall be
converted, subject to Section 2.02(e), into the right to receive .5347 of a
share of Acquiror Common Stock (the "Exchange Ratio"). In any event, if between
the date of this Merger Agreement and the Effective Time the outstanding shares
of Acquiror Common Stock, Company Common Stock or Holdco Common Stock shall
have been changed into a different number of shares or a different class, by
reason of any stock dividend, subdivision, reclassification, recapitalization,
split, combination or exchange of shares, the nature of the consideration to be
received by the Holdco Stockholders and the Exchange Ratio shall be
appropriately and correspondingly adjusted to reflect such stock dividend,
subdivision, reclassification, recapitalization, split, combination or exchange
of shares.
(b) Cancellation and Retirement of Holdco Common Stock. All such shares of
Holdco Common Stock referred to in Section 2.01(a) (other than any shares of
Holdco Common Stock to be canceled pursuant to Section 2.01(c)) shall no longer
be outstanding and shall automatically be canceled and retired, as appropriate,
and shall cease to exist, and each certificate or other instrument previously
representing any such shares shall thereafter represent the right to receive
the shares of Acquiror Common Stock into which such Holdco Common Stock were
converted pursuant to the Merger and any cash, without interest, in lieu of
fractional shares. The holders of certificates or other instruments which prior
to the Effective Time represented shares of Holdco Common Stock shall cease to
have any rights with respect thereto except as otherwise provided herein or by
Law (as defined in Article X). Certificates or other instruments previously
representing such shares of Holdco Common Stock shall be exchanged for the
whole shares of Acquiror Common Stock to be issued therefor upon the surrender
of such certificates or instruments in accordance with the provisions of
Section 2.02, without interest. No fractional share of Acquiror Common Stock
shall be issued, and, in lieu thereof, a cash payment shall be made pursuant to
Section 2.02(e) hereof.
(c) Cancellation of Treasury Stock. Any shares of Holdco Common Stock held
in the treasury of Holdco and any shares of Holdco Common Stock owned by
Acquiror or by any direct or indirect wholly owned subsidiary of Acquiror or of
Holdco immediately prior to the Effective Time shall be canceled and
extinguished without any conversion thereof and no payment shall be made with
respect thereto.
(d) Acquiror Sub Common Stock. Each share of common stock, par value $0.01
per share, of Acquiror Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and exchanged for one newly and validly
issued, fully paid and non-assessable share of common stock of the Surviving
Corporation.
Section 2.02. Exchange of Certificates or Instruments.
(a) Exchange Agent. As of the Effective Time, Acquiror shall deposit, or
shall cause to be deposited, with Norwest Bank Minnesota, N.A., or another bank
or trust company having (or whose parent has) net capital of not less than
$1,000,000,000 reasonably acceptable to Acquiror and the Company (the "Exchange
Agent"), for the benefit of the holders of shares of Holdco Common Stock issued
and outstanding immediately prior to the Effective Time, for exchange through
the Exchange Agent in accordance with this Article II, certificates
representing the whole shares of Acquiror Common Stock issuable to such holders
pursuant to Section 2.01 and cash in an amount sufficient to permit payment of
the cash payable in lieu of fractional shares pursuant to Section 2.02(e) (such
certificates for shares of Acquiror Common Stock, together with any dividends
or distributions with respect thereto, and such amounts of cash, being
hereafter referred to as the "Exchange Fund"). The Exchange Agent shall,
pursuant to irrevocable instructions from Acquiror, deliver out of the Exchange
Fund the shares of Acquiror Common Stock to be issued and the amount of cash to
be paid to the holders of Holdco Common Stock pursuant to Section 2.01.
(b) Exchange Procedures. Promptly after the Effective Time, Acquiror shall
cause the Exchange Agent to mail to each holder of record of a certificate or
certificates representing shares of Holdco Common Stock which immediately prior
to the Effective Time represented outstanding shares of Holdco Common Stock
(the
A-6
<PAGE>
"Certificates") (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent and shall
be in customary form) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of
Acquiror Common Stock. Upon surrender of a Certificate for cancellation to the
Exchange Agent, as specified in such letter of transmittal, together with such
letter of transmittal, duly executed, and such other Documents as may
reasonably be required pursuant to such instructions, the holder of such
Certificate shall be entitled to receive promptly in exchange therefor a
certificate representing that number of whole shares of Acquiror Common Stock
which such holder has the right to receive in respect of such Certificate
together with any dividends or other distributions to which such holder is
entitled pursuant to Section 2.02(c) and cash in lieu of fractional shares of
Acquiror Common Stock to which such holder is entitled pursuant to Section
2.02(e). The Certificates so surrendered shall forthwith be canceled. In the
event of a transfer of ownership of shares of Holdco Common Stock which is not
registered in the transfer records of Holdco, the proper number of shares of
Acquiror Common Stock may be issued and the proper amount of cash may be paid
pursuant hereto to a transferee if the Certificates representing such shares of
Holdco Common Stock, properly endorsed or otherwise in proper form for
transfer, are presented to the Exchange Agent, accompanied by all Documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 2.02, each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the shares of Acquiror Common Stock issuable in exchange therefor,
together with any dividends or other distributions to which such holder is
entitled pursuant to Section 2.02(c) and cash in lieu of any fractional shares
of Acquiror Common Stock to which such holder is entitled pursuant to Section
2.02(e). No interest will be paid or will accrue on any cash payable pursuant
to Sections 2.02(c) or 2.02(e).
(c) Distributions with Respect to Unexchanged Shares of Acquiror Common
Stock. No dividends or other distributions declared or made after the Effective
Time with respect to Acquiror Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Certificate
with respect to the whole shares of Acquiror Common Stock represented thereby,
and no cash payment in lieu of fractional shares shall be paid to any such
holder pursuant to Section 2.02(e), until the holder of such Certificate shall
surrender such Certificate. Subject to the effect of escheat, tax or other
applicable Laws, following surrender of any such Certificate, there shall be
paid to the record holder of the certificates representing whole shares of
Acquiror Common Stock issued in exchange therefor, without interest, (i)
promptly, the amount of any cash payable with respect to a fractional share of
Acquiror Common Stock to which such holder is entitled pursuant to Section
2.02(e) and the amount of dividends or other distributions with a record date
after the Effective Time theretofore paid with respect to such whole shares of
Acquiror Common Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions, with a record date after the Effective Time
but prior to surrender and a payment date occurring after surrender, payable
with respect to such whole shares of Acquiror Common Stock.
(d) No Further Rights in Holdco Common Stock. All shares of Acquiror Common
Stock issued upon conversion of the shares of Holdco Common Stock in accordance
with the terms hereof (including any cash paid pursuant to Sections 2.02(c) or
2.02(e)) shall be deemed to have been issued and paid in full satisfaction of
all rights pertaining to such shares of Holdco Common Stock.
(e) No Fractional Shares. No fractional shares of Acquiror Common Stock
shall be issued upon surrender for exchange of the Certificates, and any such
fractional share interests will not entitle the owner thereof to vote or to any
rights of a stockholder of Acquiror, but in lieu thereof each holder of shares
of Holdco Common Stock who would otherwise be entitled to receive a fraction of
a share of Acquiror Common Stock, after aggregating all Certificates delivered
by such holder, and rounding down to the nearest whole share, shall receive an
amount in cash equal to the Average Trading Price (as defined in Article X) on
the Closing Date (as defined in Section 2.06) multiplied by the fraction of a
share of Acquiror Common Stock to which such holder would otherwise be
entitled. Such payment in lieu of fractional shares shall be administered by
the Exchange Agent pursuant to the procedures set forth in Section 2.02(b).
A-7
<PAGE>
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the holders of Holdco Common Stock for one year after
the Effective Time shall be delivered to Acquiror, upon demand. Any holders of
Holdco Common Stock who have not theretofore complied with this Article II
shall thereafter look only to Acquiror for the shares of Acquiror Common Stock
to which they are entitled pursuant to Section 2.01, any dividends or other
distributions with respect to Acquiror Common Stock to which they are entitled
pursuant to Section 2.02(c) and any cash in lieu of fractional shares of
Acquiror Common Stock to which they are entitled pursuant to Section 2.02(e).
(g) No Liability. None of Acquiror, Acquiror Sub, Holdco, the Company, the
Surviving Corporation, the Holdco Surviving Corporation, Merger Sub or the
Exchange Agent shall be liable to any Person (as defined in Article X) for any
shares of Acquiror Common Stock (or dividends or distributions with respect
thereto) or cash delivered to a public official pursuant to any abandoned
property, escheat or similar Laws.
(h) Lost, Stolen or Destroyed Certificates. In the event any Certificate
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificate, upon the making of an
affidavit of that fact by the holder thereof, such shares of Acquiror Common
Stock and cash, if any, as may be required pursuant to this Article II;
provided, however, that the Exchange Agent or Acquiror may, in its reasonable
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificate to deliver a bond in such
sum as it may reasonably direct as indemnity against any claim that may be made
against Acquiror, the Surviving Corporation or the Exchange Agent or any of
their respective affiliates with respect to the Certificate alleged to have
been lost, stolen or destroyed.
(i) Payment of Exchange Agent Expenses. Acquiror shall pay all charges and
expenses of the Exchange Agent in connection with the exchange of Certificates
for Acquiror Common Stock and cash in lieu of fractional shares.
Section 2.03. Stock Transfer Books.
At the Effective Time, the stock transfer books of Holdco shall be closed
and there shall be no further registration of transfers of Holdco Common Stock
thereafter on the records of Holdco. From and after the Effective Time, the
holders of Certificates outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such Holdco Common Stock except
as otherwise provided herein or by Law.
Section 2.04. Stock Options.
(a) Prior to the Effective Time, the Company, Holdco and Acquiror shall take
such action as may be necessary or appropriate for Acquiror to assume or to
issue a substitute option, at its option, with respect to each outstanding
unexpired and unexercised option to purchase shares of Holdco Common Stock
(collectively, the "Holdco Stock Options") under the Company Stock Plans to be
assumed by Holdco pursuant to the Holdco Merger, so that at the Effective Time
each Holdco Stock Option will become or be replaced by an option to purchase a
number of whole shares of Acquiror Common Stock (an "Acquiror Option") equal to
the product of the Exchange Ratio and the number of shares of Holdco Common
Stock subject to such Holdco Stock Options under the Company Stock Plans (and
rounding any fractional share down to the nearest whole share), at a price per
share equal to the aggregate exercise price under such Holdco Stock Option for
the shares of Holdco Common Stock subject to such Holdco Stock Option divided
by the number of whole shares of Acquiror Common Stock purchasable pursuant to
such Acquiror Option; provided, however, that Acquiror shall not assume the
Company Stock Plans. Each substituted Acquiror Option shall otherwise be
subject to the same terms and conditions as apply to the related Holdco Stock
Option. The date of grant of each substituted Acquiror Option for purposes of
such terms and conditions shall be deemed to be the date on which the
corresponding Holdco Stock Option was granted. As to each substituted Holdco
Stock Option, at the Effective Time Acquiror shall issue to each holder of a
Holdco Stock Option a document evidencing the foregoing assumption or
substitution by Acquiror. Nothing in this Section 2.04 shall affect the
accelerated vesting with respect to the Holdco Stock Options in accordance with
the terms of such Holdco Stock Options at the
A-8
<PAGE>
Effective Time. Prior to the Effective Time, the Company shall have amended the
Company Stock Plans (such amendment shall be substantially in the form attached
hereto as Exhibit D) to provide that Acquiror may substitute in the manner
described in this Section 2.04(a) an Acquiror Option for each Holdco Stock
Option in accordance with the terms of the Company Stock Plans, as amended.
(b) Acquiror shall cause to be taken all corporate action necessary to
reserve for issuance a sufficient number of shares of Acquiror Common Stock for
delivery upon exercise of Acquiror Options in accordance with this Section
2.04. Within five (5) business days after the Effective Time, Acquiror shall
use its reasonable best efforts to cause the Acquiror Common Stock subject to
Acquiror Options to be registered under the Securities Act pursuant to a
registration statement on Form S-8 or Form S-3 (or any successor or other
appropriate forms) and shall use its reasonable best efforts to cause the
effectiveness of such registration statement (and current status of the
prospectus or prospectuses contained therein) to be maintained for so long as
Acquiror Options remain outstanding.
(c) The Board of Directors or Compensation Committee of the Company, Holdco
and Acquiror shall each grant all approvals and take all other actions required
pursuant to Rules 16b-3(d) and 16(b)-3(e) under the Exchange Act (as defined in
Article X) to cause the disposition in the Merger of the Holdco Common Stock
and Holdco Stock Options and the acquisition in the Merger of Acquiror Common
Stock and Acquiror Options including approving the right to surrender options
as set forth in Section 7.5(a) of the Company's 1999 Stock Incentive Plan to be
exempt from the provisions of Section 16(b) of the Exchange Act.
Section 2.05. Company Warrants.
(a) Prior to the Effective Time, the Company, Holdco and Acquiror shall take
such action as may be necessary or appropriate for Acquiror to assume the
Company Warrants to be assumed by Holdco pursuant to the Holdco Merger so that
at the Effective Time each Company Warrant will become a warrant to purchase a
number of whole shares of Acquiror Common Stock (an "Acquiror Warrant") equal
to the product of the Exchange Ratio and the number of shares of Holdco Common
Stock subject to such Company Warrant under the Company Warrant (and rounding
any fractional share up to the nearest whole share), at a price per share equal
to the aggregate exercise price for the shares of Holdco Common Stock subject
to such Company Warrant divided by the number of whole shares of Acquiror
Common Stock purchasable pursuant to such Acquiror Warrant. At the Effective
Time (i) Acquiror shall assume all of Holdco's obligations with respect to the
related Company Warrant; and (ii) subject to the Company Warrant Agreement
Amendment (as defined in Section 6.20), Acquiror shall issue to each holder of
a Company Warrant a document evidencing the foregoing assumption by Acquiror.
The Acquiror will enter into an agreement with the Warrant Agent (as defined in
the Company Warrants) confirming the rights of the holders of Company Warrants
to receive Acquiror Common Stock upon exercise of such Company Warrants and the
terms of such Company Warrants shall be adjusted as described in this Section
2.05.
(b) Subject to the Company Warrant Agreement Amendment, Acquiror shall cause
to be taken all corporate action necessary to reserve for issuance a sufficient
number of shares of Acquiror Common Stock for delivery upon exercise of Company
Warrants in accordance with this Section 2.05. Acquiror shall use its
reasonable best efforts to cause the Acquiror Common Stock subject to Company
Warrants to be registered under the Securities Act in accordance with the terms
of the Company Warrant Agreement (as defined in Section 3.04) and shall use its
reasonable best efforts to cause the effectiveness of such registration
statement (and current status of the prospectus or prospectuses contained
therein) to be maintained in accordance with the terms of the Company Warrant
Agreement for so long as Company Warrants remain outstanding.
Section 2.06. Closing.
Subject to the terms and conditions of this Merger Agreement, the closing of
the Mergers (the "Closing") will take place as soon as practicable (but, in any
event, within five (5) business days) after the satisfaction or,
A-9
<PAGE>
if permissible, waiver of the conditions set forth in Article VII hereof (other
than with respect to the closing of the Holdco Merger, the satisfaction of
Section 7.03(h)) (the "Closing Date"), at the offices of Hogan & Hartson
L.L.P., Columbia Square, 555 13th Street, N.W., Washington, D.C. 20004, unless
another date or place is agreed to in writing by the parties hereto.
ARTICLE III
Representations and Warranties of the Splitrock Entities
Except as disclosed in the Company SEC Documents (as defined in Section
3.08) or as specifically set forth in the disclosure schedule delivered by the
Company to Acquiror prior to the execution and delivery of this Merger
Agreement (the "Company Disclosure Schedule"), the Splitrock Entities hereby
jointly and severally represent and warrant (which representation and warranty
shall be deemed to include the disclosures with respect thereto so specified in
the Company Disclosure Schedule) to, and covenant and agree with, Acquiror and
Acquiror Sub as follows, in each case as of the date of this Merger Agreement,
unless otherwise specifically set forth herein or in the Company Disclosure
Schedule:
Section 3.01. Organization and Standing.
The Company is a corporation duly organized, validly existing and in good
standing under Delaware Law, and has the full and unrestricted corporate power
and authority to own, operate and lease its Assets (as defined in Article X),
to carry on its business as currently conducted, to execute and deliver this
Merger Agreement and to carry out the transactions contemplated hereby. The
Company is duly qualified to conduct business as a foreign corporation and is
in good standing in the states, countries and territories in which the nature
of the business conducted by the Company or the character of the Assets owned,
leased or otherwise held by it makes any such qualification necessary, except
where the absence of such qualification as a foreign corporation would not
reasonably be expected to have a Company Material Adverse Effect (as defined in
Article X).
Section 3.02. Subsidiaries.
Except as set forth in Section 3.02 of the Company Disclosure Schedule, the
Company has no Subsidiaries (as defined in Article X) and neither the Company
nor any Subsidiary has any equity investment or other interest in, nor has the
Company or any Subsidiary made advances or loans (other than for customary
credit extended to customers of the Company in the Ordinary Course of Business
(as defined in Article X) and reflected in the Financial Statements (as defined
in Section 3.08) or incurred in the Ordinary Course of Business since the date
of the latest Financial Statements, and other than transfers among the Company
and its wholly owned Subsidiaries) to, any corporation, association,
partnership, joint venture or other entity. Section 3.02 of the Company
Disclosure Schedule sets forth (a) the authorized capital stock or other equity
interests of each direct and indirect Subsidiary of the Company and the
percentage of the outstanding capital stock or other equity interests of each
Subsidiary directly or indirectly owned by the Company and (b) the nature and
amount of any such equity investment, other interest or advance. All of such
shares of capital stock or other equity interests of Subsidiaries directly or
indirectly held by the Company have been duly authorized and validly issued and
are outstanding, fully paid and nonassessable. Except as disclosed in Section
3.02 of the Company Disclosure Schedule, the Company directly, or indirectly
through wholly owned Subsidiaries, owns all such shares of capital stock or
other equity interests of the direct or indirect Subsidiaries free and clear of
all Encumbrances (as defined in Article X). Each Subsidiary is duly organized,
validly existing and in good standing under the Laws of its state or
jurisdiction of organization (as listed in Section 3.02 of the Company
Disclosure Schedule), and has the full and unrestricted corporate power and
authority to own, operate and lease its Assets and to carry on its business as
currently conducted. Each Subsidiary is duly qualified to conduct business and
is in good standing in the states, countries and territories in which the
nature of their businesses or the character of the Assets owned, leased or
otherwise held by them makes any qualification necessary, except where the
absence of such qualification would not reasonably be expected to have a
Company Material Adverse Effect. Except as set forth in Section 3.02 of the
Company Disclosure Schedule, there are no obligations, contingent or otherwise,
of the Company or any Subsidiary to provide funds to, make any
A-10
<PAGE>
investment (in the form of a loan, capital contribution or otherwise) in, or
provide any guarantee with respect to, any Subsidiary or any other Person.
Section 3.03. Certificate of Incorporation and Bylaws.
The Company has furnished to Acquiror a true and complete copy of the
certificate of incorporation or other organizational document, as the case may
be, of the Company and of each Subsidiary, as currently in effect, certified as
of a recent date by the Secretary of State (or comparable Governmental Entity
(as defined in Article X)) of the respective jurisdictions of incorporation or
organization, and a true and complete copy of the bylaws of the Company and of
each Subsidiary, as currently in effect, certified by their respective
corporate secretaries or assistant corporate secretaries. Such certified copies
are attached as exhibits to, and constitute an integral part of, the Company
Disclosure Schedule.
Section 3.04. Capitalization.
The authorized capital stock of the Company consists of (a) 150,000,000
shares of Company Common Stock, of which, as of December 31, 1999: (i)
57,030,590 shares were issued and outstanding, all of which were duly
authorized, validly issued, fully paid and nonassessable; (ii) no shares were
held in the treasury of the Company; (iii) 4,286,855 shares were reserved for
issuance pursuant to Company Stock Options; and (iv) 913,998 shares were
reserved for issuance upon the exercise of Company Warrants issued pursuant to
the terms of the Company Warrant Agreement; and (b) 25,000,000 shares of
Company preferred stock, $.001 par value per share ("Company Preferred Stock")
of which: (i) no shares are issued and outstanding; (ii) no shares are held in
the treasury of the Company; and (iii) no shares are reserved for issuance.
Warrants to purchase 913,998 shares of Company Common Stock (the "Company
Warrants") which were issued pursuant to that certain Warrant Agreement dated
July 24, 1998 (the "Company Warrant Agreement"), between the Company and Harris
Trust Company of New York (formerly Bank of Montreal Trust Company), as warrant
agent, are issued and outstanding as of December 31, 1999. The Company Common
Stock and the Company Preferred Stock are referred to collectively in this
Merger Agreement as the "Company Capital Stock." Except as described in this
Section 3.04 or Section 3.04 of the Company Disclosure Schedule, no other
securities of Company Capital Stock have been reserved for any purpose. Except
as set forth in clauses (a)(iii), (a)(iv) and the second sentence of this
Section 3.04, there are no outstanding securities convertible into or
exercisable or exchangeable for Company Common Stock, any other securities of
the Company, or any capital stock or other securities of any of the
Subsidiaries and no outstanding options, rights (preemptive or otherwise), or
warrants to purchase or to subscribe for any shares of such stock or other
securities of the Company or any of the Subsidiaries. Except as set forth in
Section 3.04 of the Company Disclosure Schedule, the Company has not granted or
awarded any Company Stock Options since September 30, 1999. Except as set forth
in Section 3.04 of the Company Disclosure Schedule, there are no outstanding
Agreements to which the Company, any Subsidiary or any Principal Company
Stockholder is a party affecting or relating to the voting, issuance, purchase,
redemption, registration, repurchase or transfer of Company Common Stock, any
other securities of the Company, or any capital stock or other securities of
any Subsidiary, except as contemplated hereunder. Since December 31, 1999, no
shares of Company Common Stock have been issued by the Company, except pursuant
to the exercise of Company Stock Options or Company Warrants in accordance with
their terms. Each of the outstanding shares of Company Common Stock and of
capital stock, or other equity interests in, the Subsidiaries was issued in
compliance with all applicable federal and state Laws concerning the issuance
of securities, and such shares or other equity interests owned by the Company
or any Subsidiary are owned free and clear of all Encumbrances, except as
described in Section 3.04 of the Company Disclosure Schedule. Each of the
Company Warrants, the Company's 11 3/4% Senior Notes due 2008 and the Company's
11 3/4% Series B Senior Notes due 2008 were issued in compliance with all
applicable federal and state Laws concerning the issuance of securities. No
bonds, debentures, notes or other indebtedness of the Company or any Subsidiary
having the right to vote on any matters on which the stockholders of the
Company or the Holdco Stockholders may vote are issued or outstanding except
for any securities issued after the date hereof in accordance with Section
5.01.
A-11
<PAGE>
Section 3.05. Authority; Binding Obligation.
The execution and delivery by the Splitrock Entities of this Merger
Agreement, the execution and delivery by the Splitrock Entities and the
Subsidiaries of all other Documents contemplated hereby, and the consummation
by the Splitrock Entities and the Subsidiaries of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action,
and no other corporate proceedings on the part of the Splitrock Entities or the
Subsidiaries are necessary to authorize this Merger Agreement and the other
Documents contemplated hereby, or to consummate the transactions contemplated
hereby and thereby, other than the approval and adoption of this Merger
Agreement by (a) the holders of a majority of the outstanding shares of Company
Common Stock in accordance with Delaware Law and the Company's certificate of
incorporation and bylaws, (b) Holdco as the sole stockholder of Merger Sub in
accordance with Delaware Law and Merger Sub's certificate of incorporation and
bylaws, and (c) the Company as the sole stockholder of Holdco in accordance
with Delaware Law and Holdco's certificate of incorporation and bylaws
(assuming neither Acquiror nor Acquiror Sub is an "interested stockholder" of
the Company under Section 203 of Delaware Law immediately before the execution
and delivery of this Merger Agreement). This Merger Agreement has been duly
executed and delivered by the Splitrock Entities and constitutes a legal, valid
and binding obligation of the Splitrock Entities, enforceable in accordance
with its terms, except as such enforceability may be subject to the effects of
any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar Laws affecting creditors' rights generally and subject to
the effects of general equitable principles (whether considered in a proceeding
in equity or at law).
Section 3.06. No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by the Splitrock Entities of
this Merger Agreement and all other Documents contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof
and thereof, and the consummation by the Splitrock Entities and the
Subsidiaries of the transactions contemplated hereby and thereby, do not and
will not: (i) conflict with, or violate any provision of, the certificate of
incorporation or bylaws of any of the Splitrock Entities or the certificate or
articles of formation or bylaws of any Subsidiary; (ii) subject to (A)
obtaining the requisite approval and adoption of this Merger Agreement by (1)
the holders of a majority of the outstanding shares of Company Common Stock in
accordance with Delaware Law and the Company's certificate of incorporation and
bylaws, (2) Holdco as the sole stockholder of Merger Sub in accordance with
Delaware Law and Merger Sub's certificate of incorporation and bylaws, and (3)
the Company as the sole stockholder of Holdco in accordance with Delaware Law
and Holdco's certificate of incorporation and bylaws, and (B) obtaining the
consents, approvals, authorizations and permits of, and making filings with or
notifications to, the applicable Governmental Entity pursuant to the applicable
requirements, if any, of the Securities Act, the Exchange Act, Blue Sky Laws
(as defined in Article X), the HSR Act (as defined in Article X), rules and
regulations of the NASD (as defined in Article X), applicable state utility and
communications Laws, applicable municipal franchise Laws and the filing and
recordation of the Holdco Certificate of Merger and the Certificate of Merger
as required by Delaware Law, conflict with or violate any Law applicable to any
of the Splitrock Entities or any Subsidiary, or any of their respective Assets;
(iii) subject to obtaining the consents and approvals set forth in Section
3.06(b) of the Company Disclosure Schedule, conflict with, result in any breach
of, or constitute a default (or an event that with notice or lapse of time or
both would become a default) under any Agreement to which any of the Splitrock
Entities or any Subsidiary is a party or by which any of the Splitrock Entities
or any Subsidiary, or any of their respective Assets, may be bound; or (iv)
except as disclosed in Section 3.06(b) of the Company Disclosure Schedule,
result in or require the creation or imposition of, or result in the
acceleration of, any indebtedness or any Encumbrance of any nature upon, or
with respect to, any of the Splitrock Entities or any Subsidiary or any of the
Assets now owned or hereafter acquired by any of the Splitrock Entities or any
Subsidiary; except for any such conflict or violation described in clause (ii),
any such conflict, breach or default described in clause (iii), or any such
creation, imposition or acceleration described in clause (iv) that would not
reasonably be expected to have a Company Material Adverse Effect and that would
not prevent consummation of the Mergers by the End Date (as defined in Section
8.01(b)(i)).
A-12
<PAGE>
(b) Except as set forth in Section 3.06(b) of the Company Disclosure
Schedule, the execution, delivery and performance by the Splitrock Entities and
the Subsidiaries of this Merger Agreement and all other Documents contemplated
hereby, the fulfillment of and compliance with the respective terms and
provisions hereof and thereof, and the consummation by the Splitrock Entities
and the Subsidiaries of the transactions contemplated hereby and thereby, do
not and will not: (i) require any consent, approval, authorization or permit
of, or filing with or notification to, any Person not party to this Merger
Agreement, except (A) the approval and adoption of this Merger Agreement by (1)
the holders of a majority of the outstanding shares of Company Common Stock in
accordance with Delaware Law and the Company's certificate of incorporation and
bylaws, (2) Holdco as the sole stockholder of Merger Sub in accordance with
Delaware Law and Merger Sub's certificate of incorporation and bylaws, and (3)
the Company as the sole stockholder of Holdco in accordance with Delaware Law
and Holdco's certificate of incorporation and bylaws, (B) pursuant to the
applicable requirements, if any, of the Securities Act, the Exchange Act, Blue
Sky Laws, the HSR Act, rules and regulations of the NASD, applicable state
utility and communications Laws and applicable municipal franchise Laws, and
(C) the filing and recordation of the Holdco Certificate of Merger and the
Certificate of Merger as required by Delaware Law; or (ii) result in or give
rise to any penalty, forfeiture, Agreement termination, right of termination,
amendment or cancellation, or restriction on business operations of Acquiror,
any of the Splitrock Entities, the Surviving Corporation or any Subsidiary,
except for any Agreement not required to be disclosed by the last sentence of
this Section 3.06(b). Section 3.06(b) of the Company Disclosure Schedule lists
all Agreements that reasonably could be interpreted or expected to require the
consent or acquiescence of any Person not party to this Merger Agreement with
respect to any aspect of the execution, delivery or performance of this Merger
Agreement by the Splitrock Entities and the Subsidiaries where (i) such
Agreements are material to the operation of the Splitrock Entities and the
Subsidiaries or (ii) the failure to obtain such consent or acquiescence would
reasonably be expected to result in a Company Material Adverse Effect or would
prevent the consummation of the Mergers on a timely basis.
Section 3.07. Licenses; Compliance.
(a) Each of the Company and each Subsidiary is in possession of all Licenses
(as defined in Article X) necessary for the Company or any Subsidiary to own,
lease and operate its Assets or to carry on its business as it is now being
conducted and as proposed to be conducted after the Holdco Effective Time and
prior to the Effective Time (the "Company Licenses"), except where the failure
to possess any such Company License would not reasonably be expected to have a
Company Material Adverse Effect. Neither the Company nor any Subsidiary is in
violation of or default under any Company License, except for any such
violation or default that would not reasonably be expected to have a Company
Material Adverse Effect.
(b) Neither the Company nor any Subsidiary is in violation of or default
under, nor has it breached, (i) any term or provision of its certificate or
articles of incorporation or formation or bylaws or (ii) any Agreement or
restriction to which the Company or any Subsidiary is a party or by which the
Company or any Subsidiary, or any of their respective Assets, is bound or
affected, except for any such violation, default or breach described in clause
(ii) that would not have a Company Material Adverse Effect. The Company and the
Subsidiaries have complied and are in full compliance with all Laws, except
where the failure so to comply would not have a Company Material Adverse
Effect.
(c) Except as set forth in Section 3.07(c) of the Company Disclosure
Schedule, all returns, reports, statements and other Documents required to be
filed by the Company or any Subsidiary with any Governmental Entity have been
filed and complied with and are true, correct and complete (and any related
fees required to be paid have been paid in full), except where the failure so
to file would not reasonably be expected to have a Company Material Adverse
Effect. Except as set forth in Section 3.07(c) of the Company Disclosure
Schedule, to the knowledge (as defined in Article X) of the Company and the
Subsidiaries, all records of every type and nature relating to the Company
Licenses or the business, operations or Assets of the Company or any Subsidiary
have been maintained in accordance with good business practices and the rules
of any Governmental Entity and are maintained at the Company or the appropriate
Subsidiary, except where the failure so to maintain would not reasonably be
expected to have a Company Material Adverse Effect.
A-13
<PAGE>
Section 3.08. SEC Documents.
Since January 1, 1998, the Company has filed or, in the case of the Company
Post-Signing SEC Documents (as defined in Section 6.10), will file all required
reports, schedules, forms, statements and other Documents with the SEC (as
defined in Article X) (collectively, including the Company Post-Signing SEC
Documents, the "Company SEC Documents"). As of their respective filing dates,
the Company SEC Documents complied or, in the case of the Company Post-Signing
SEC Documents, will comply as to form in all material respects with the
applicable requirements of the Securities Act or the Exchange Act, as the case
may be, and none of the Company SEC Documents contained or, in the case of the
Company Post-Signing SEC Documents, will contain, any untrue statement of a
material fact or omitted or, in the case of the Company Post-Signing SEC
Documents, will omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were or are made, not misleading. The
consolidated financial statements of the Company included in the Company SEC
Documents (the "Financial Statements") comply or, in the case of the Company
Post-Signing SEC Documents, will comply, as to form in all material respects
with applicable accounting requirements and the published rules and regulations
of the SEC with respect thereto, have been or, in the case of the Company Post-
Signing SEC Documents, will have been prepared in accordance with GAAP (as
defined in Article X) (except, in the case of unaudited statements, for the
lack of normal year-end adjustments, the absence of footnotes and as permitted
by Form 10-Q of the SEC) applied on a consistent basis during the periods
subject thereto (except as may be indicated in the notes thereto) and fairly
present the consolidated financial position of the Company and its consolidated
subsidiaries as of the dates thereof and the consolidated results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end adjustments and the absence of footnotes).
Except as disclosed in the Financial Statements, as required by GAAP or as
required by any Governmental Entity, the Company has not, since December 31,
1998, made any change in accounting practices or policies applied in the
preparation of the Financial Statements.
Section 3.09. Reorganization.
To the knowledge of the Company, neither it nor any of its affiliates has
taken any action or failed to take any action or is aware of any circumstances
that would prevent or impede the Holdco Merger or the Merger from qualifying as
a reorganization within the meaning of Section 368(a) of the Code.
Section 3.10. Vote Required.
(a) The affirmative vote of the holders of a majority of the outstanding
shares of Company Common Stock is the only vote of the holders of any class or
series of capital stock of the Company necessary to approve the transactions
contemplated by this Merger Agreement. The affirmative vote of Holdco as the
sole stockholder of Merger Sub prior to the Holdco Effective Time is the only
vote of the holders of any class or series of capital stock of Merger Sub
necessary to approve the transactions contemplated by this Merger Agreement.
The affirmative vote of the Company as the sole stockholder of Holdco prior to
the Holdco Effective Time is the only vote of the holders of any class or
series of capital stock of Holdco necessary to approve the transactions
contemplated by this Merger Agreement.
(b) Except as set forth in Section 3.10(a), no vote of the holders of any
class or series of capital stock or any other securities of the Splitrock
Entities is necessary to approve the Holdco Merger, the Merger or any of the
other transactions contemplated by this Merger Agreement.
Section 3.11. Brokers.
No broker, finder or investment banker (other than Credit Suisse First
Boston Corporation) is entitled to any brokerage, finder's or other fee or
commission in connection with the transactions contemplated by this Merger
Agreement based upon arrangements made by or on behalf of the Company or any
Subsidiary or any of their respective affiliates. Prior to the date of this
Merger Agreement, the Company has furnished to Acquiror a
A-14
<PAGE>
complete and correct copy of all Agreements between the Company and Credit
Suisse First Boston Corporation pursuant to which such firm will be entitled to
any payment relating to the transactions contemplated by this Merger Agreement.
Section 3.12. Disclosure.
(a) None of the information supplied or to be supplied by or on behalf of
the Company or any Subsidiary expressly for inclusion (and so included or
relied on for information included) in (i) the Registration Statement (as
defined in Section 6.01(a)) and (ii) the Joint Proxy Statement (as defined in
Section 6.01(a)), at the respective times that (w) the Registration Statement
is filed with the SEC, (x) the Registration Statement becomes effective, (y)
the Joint Proxy Statement is mailed, and (z) any meeting of stockholders (and
any adjournment thereof) is held to consider, or written consents are effective
with respect to approval of, the transactions contemplated by this Merger
Agreement, shall contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading.
(b) No representation or warranty contained in this Merger Agreement or the
Company Disclosure Schedule (giving full effect to the concepts and
qualifications of materiality and knowledge contained therein and not with the
intention or effect of eliminating or limiting such concepts and qualifications
in any way), and no other agreements, documents, certificates, instruments or
other information furnished or to be furnished, or made available or to be made
available to Acquiror by the Company or any Subsidiary pursuant to this Merger
Agreement or otherwise in connection herewith or with the transactions
contemplated hereby, contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact necessary in
order to make the statements contained therein, in light of the circumstances
under which they were made, not misleading; provided, however, that this
representation shall not apply to the matters specifically covered by any other
representation or warranty in this Merger Agreement, it being the intent of the
parties that this sentence not be applied so as to broaden the scope of those
representations and warranties.
Section 3.13. Intellectual Property.
The Company and its Subsidiaries have all right, title and interest in, or a
valid and binding license to use, all material Intellectual Property (as
defined in Article X) that is individually or in the aggregate material to the
conduct of the businesses of the Company and its Subsidiaries taken as a whole
("Company Intellectual Property"). Except as set forth in Section 3.13 of the
Company Disclosure Schedule, the Company and its Subsidiaries (a) have not
defaulted in any material respect under any license to use Company Intellectual
Property and (b) are not the subject of any proceeding or litigation for
infringement of any third party Intellectual Property or for infringement of
any Company Intellectual Property, other than a default, proceeding or
litigation that is not having or would not be reasonably expected to have a
Company Material Adverse Effect.
Section 3.14. Absence of Undisclosed Liabilities.
There are no liabilities or obligations (whether absolute or contingent,
matured or unmatured) of the Company or any Subsidiary, including but not
limited to liabilities for Taxes (as defined in Article X), of a nature
required by GAAP to be reflected, or reserved against, in the balance sheet
included in the Financial Statements and that are not so reflected, or reserved
against, therein. Except as described in Section 3.14 of the Company Disclosure
Schedule or reflected or reserved against in the Financial Statements, since
December 31, 1998, neither the Company nor any Subsidiary has incurred any
material liabilities or obligations (whether absolute or contingent, matured or
unmatured) other than in the Ordinary Course of Business.
Section 3.15. Absence of Certain Changes or Events.
Except as set forth in Section 3.15 of the Company Disclosure Schedule or as
disclosed in the Company SEC Documents filed with the SEC prior to the date
hereof, since December 31, 1998 and prior to the date hereof, there has been no
adverse change, and no change except in the Ordinary Course of Business, in the
business, operations, condition (financial or otherwise), of the Company and
its Subsidiaries, taken as a whole,
A-15
<PAGE>
except such changes that would not reasonably be expected to have a Company
Material Adverse Effect. Except as set forth in Section 3.15 of the Company
Disclosure Schedule or as disclosed in the Company SEC Documents filed with the
SEC prior to the date hereof, since December 31, 1998, (a) the Company and the
Subsidiaries have conducted their respective businesses substantially in the
manner theretofore conducted and only in the Ordinary Course of Business
(excluding the incurrence of reasonable and customary liabilities related to
this Merger Agreement and the transactions contemplated hereby), and (b)
neither the Company nor any Subsidiary has taken any action or omitted to take
any action, or entered into any contract, Agreement, commitment or arrangement
to take any action or omit to take any action, which, if taken or omitted after
the date hereof, would violate Section 5.01 or would reasonably be expected to
have a Company Material Adverse Effect. At the Closing, the Company shall
deliver to Acquiror an updated Section 3.15 to the Company Disclosure Schedule
in accordance with the provisions of Section 6.05.
Section 3.16. Litigation; Disputes.
Except as disclosed in Section 3.16 of the Company Disclosure Schedule,
there are no material actions, suits, claims, arbitrations, proceedings or
investigations pending or, to the knowledge of the Company or any Subsidiary,
threatened or reasonably anticipated against, affecting or involving the
Company or any Subsidiary or their respective businesses, current or former
employees, or Assets, or the transactions contemplated by this Merger
Agreement, at law or in equity, or before or by any court, arbitrator or
Governmental Entity, domestic or foreign. Neither the Company nor any
Subsidiary is (i) operating under or subject to any order (except for orders
that Persons similarly situated, engaged in similar businesses and owning
similar Assets are operating under or subject to), award, writ, injunction,
decree or judgment of any court, arbitrator or Governmental Entity, or (ii) in
default with respect to any order, award, writ, injunction, decree or judgment
of any court, arbitrator or Governmental Entity.
Section 3.17. Pension and Benefit Plans.
(a) Except as set forth in Section 3.17(a) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary (i) maintains or during the
past three (3) years has maintained any Plan (as defined in Article X) or Other
Arrangement (as defined in Article X), (ii) is or during the past three (3)
years has been a party to any Plan or Other Arrangement, or (iii) has
obligations under any Plan or Other Arrangement.
(b) The Company has made available to Acquiror true and complete copies of
each of the following Documents: (i) the Documents setting forth the terms of
each Plan; (ii) all related trust Agreements or annuity Agreements (and any
other funding Document) for each Plan; (iii) for the three (3) most recent plan
years, all annual reports (Form 5500 series) on each Plan that have been filed
with any Governmental Entity; and (iv) the current summary plan description and
subsequent summaries of material modifications for each Title I Plan (as
defined in Article X). For each Other Arrangement, the Company has made
available to Acquiror true and complete copies of each policy, Agreement or
other Document setting forth or explaining the current terms of the Other
Arrangement, all related trust Agreements or other funding Documents
(including, without limitation, insurance contracts, certificates of deposit,
money market accounts, etc.), all significant employee communications which
could materially increase the liability under such arrangement, and all
material correspondence with or other submissions to any Governmental Entity.
(c) No Plan is a Multiemployer Plan (as defined in Article X) or an ESOP (as
defined in Article X).
(d) To their knowledge, the Company and the Subsidiaries have complied in
all material respects with all applicable provisions of the Code, ERISA (as
defined in Article X), the National Labor Relations Act, Title VII of the Civil
Rights Act of 1964, the Age Discrimination in Employment Act, the Fair Labor
Standards Act, the Securities Act, the Exchange Act, and all other Laws
pertaining to the Plans, Other Arrangements and other employee or employment
related benefits, and all premiums and assessments relating to all Plans or
Other Arrangements.
A-16
<PAGE>
(e) Except as set forth in Section 3.17(e) of the Company Disclosure
Schedule, no Plan or Other Arrangement, individually or collectively, provides
for any payment by the Company or any Subsidiary to any employee or independent
contractor that, to the knowledge of the Company, is not deductible under
Section 162(a)(1) or 404 of the Code, or that is an "excess parachute payment"
pursuant to Section 280G of the Code.
(f) Except as set forth in Section 3.17(f) of the Company Disclosure
Schedule, no Welfare Plan (as defined in Article X) provides or promises post-
retirement medical, life insurance or other benefits due now or in the future
to current, former or retired employees of the Company or any Subsidiary other
than benefits necessary to comply with Section 4980B(f) of the Code and
Sections 601 through 607 of ERISA.
Section 3.18. Taxes and Tax Matters.
(a) The Company and the Subsidiaries have (or, in the case of Company Tax
Returns (as defined in Article X) becoming due after the date hereof and before
the Effective Time, will have prior to the Effective Time) duly and timely
filed all Company Tax Returns required to be filed by the Company and the
Subsidiaries at or before the Effective Time with respect to all applicable
Taxes other than those the failure of which to file would not have a Company
Material Adverse Effect. All such Company Tax Returns are (or, in the case of
returns becoming due after the date hereof and before the Effective Time, will
be) true and complete in all material respects. The Company and the
Subsidiaries: (i) have paid all Taxes due or claimed to be due by any Taxing
authority (without regard to whether or not such Taxes are shown as due on any
Company Tax Returns) or are contesting such Taxes in good faith; or (ii) have
established (or, in the case of amounts becoming due after the date hereof,
prior to the Effective Time will have paid or established) in the Financial
Statements adequate reserves (in conformity with GAAP consistently applied) for
the payment of such Taxes.
(b) Except as set forth in Section 3.18(b) of the Company Disclosure
Schedule, all Company Tax Returns have been examined by the relevant Taxing
authorities, or closed without audit by applicable Law, and all deficiencies
proposed as a result of such examinations have been paid, settled or reserved
for in the Financial Statements, for all taxable years prior to and including
the taxable year ended December 31, 1998. Except as set forth in Section
3.18(b) of the Company Disclosure Schedule, there is no action, suit,
proceeding, audit, investigation or claim pending or, to the knowledge of the
Company or any Subsidiary, threatened in respect of any material Taxes for
which the Company or any Subsidiary is or may become liable, nor has any
deficiency or claim for any such Taxes been proposed, asserted or, to the
knowledge of the Company or any Subsidiary, threatened.
(c) Except as set forth in Section 3.18(c) of the Company Disclosure
Schedule, neither the Company nor any Subsidiary (i) has executed or filed with
the IRS (as defined in Article X) any consent to have the provisions of Section
341(f) of the Code apply to it; (ii) is subject to Section 999 of the Code; or
(iii) is a party to an Agreement relating to the sharing, allocation or payment
of, or indemnity for, Taxes (other than an Agreement the only parties to which
are the Company and the Subsidiaries).
(d) The Company and the Subsidiaries have complied in all material respects
with all rules and regulations relating to the withholding of Taxes.
Section 3.19. Opinion of Financial Advisor.
The Company has received the written opinion of Credit Suisse First Boston
Corporation on or prior to the date of this Merger Agreement to the effect
that, as of the date of such opinion, the consideration to be received pursuant
to the transactions contemplated under this Merger Agreement is fair to the
stockholders of the Company from a financial point of view. The Company has
previously delivered a copy of such opinion to Acquiror.
A-17
<PAGE>
Section 3.20. Board Recommendation.
At a meeting duly called and held or pursuant to a unanimous written consent
in compliance with Delaware Law, the Boards of Directors of each of the
Splitrock Entities has adopted a resolution approving, adopting and declaring
the advisability of this Merger Agreement and the transactions contemplated
hereby. The Board of Directors of the Company has adopted a resolution
recommending approval and adoption of this Merger Agreement and the
transactions contemplated hereby by the stockholders of the Company. The Board
of Directors of Merger Sub has adopted a resolution recommending approval and
adoption of this Merger Agreement and the transactions contemplated hereby by
the sole stockholder of Merger Sub. The Board of Directors of Holdco has
adopted a resolution recommending approval and adoption of this Merger
Agreement and the transactions contemplated hereby by the sole stockholder of
Holdco.
Section 3.21. Intentionally Deleted.
Section 3.22. Copies of Documents.
True and complete copies of all Documents listed in the Company Disclosure
Schedule have been furnished to Acquiror prior to the execution of this Merger
Agreement.
Section 3.23. Affiliate Agreements.
In accordance with Section 6.11, the executive officers, directors and
certain stockholders of the Company specified in Section 3.23 of the Company
Disclosure Schedule ("Company Affiliates") have indicated to the Company that
they intend to execute and deliver to Acquiror affiliate agreements in
substantially the form attached hereto as Exhibit E (the "Affiliate
Agreements") and each such Affiliate Agreement, when so executed and delivered,
will, to the knowledge of the Company, constitute a legal, valid and binding
obligation of the respective Company Affiliate who is a party thereto,
enforceable against such Company Affiliate in accordance with its terms. Except
as set forth in Section 3.23 of the Company Disclosure Schedule, to the
Company's knowledge, there are no affiliates of the Company as of the date
hereof as that term is used in SEC Rule 145.
Section 3.24. State Takeover Statutes; Certain Charter Provisions.
The Boards of Directors of the Splitrock Entities have, to the extent such
statutes are applicable, taken all action (including appropriate approvals of
the Boards of Directors of the Splitrock Entities) necessary to exempt the
Splitrock Entities, the Subsidiaries and affiliates, the Mergers, this Merger
Agreement, the Option Agreements and the transactions contemplated hereby and
thereby from Section 203 of Delaware Law. To the Company's knowledge, no other
state takeover statutes or charter or bylaw provisions are applicable to the
Mergers, this Merger Agreement, the Option Agreements or the transactions
contemplated hereby or thereby.
Section 3.25. Dissenters' Rights.
The Company Common Stock is listed on The Nasdaq Stock Market's National
Market System and no stockholder of the Company has any appraisal or
dissenters' rights pursuant to the certificate of incorporation of the Company
or any Law arising from, or in connection with, the consummation of the Mergers
and the other transactions contemplated hereby. The Company and Holdco, if
required by The Nasdaq Stock Market, will use their reasonable best efforts to
list the Holdco Common Stock on The Nasdaq Stock Market's National Market
System at and after the Holdco Effective Time and no Holdco Stockholder has or
will have any appraisal or dissenters' rights pursuant to the certificate of
incorporation of Holdco or any Law arising from, or in connection with, the
consummation of the Mergers and the other transactions contemplated hereby.
Section 3.26. Foreign Corrupt Practices and International Trade Sanctions.
To the Company's knowledge, neither the Company, nor any of its
Subsidiaries, nor any of their respective directors, officers, agents,
employees or any other Persons acting on their behalf has, in connection with
the operation of their respective businesses, (a) used any corporate or other
funds for unlawful contributions, payments, gifts or entertainment, or made any
unlawful expenditures relating to political activity to government
A-18
<PAGE>
officials, candidates or members of political parties or organizations, or
established or maintained any unlawful or unrecorded funds in violation of
Section 104 of the Foreign Corrupt Practices Act of 1977, as amended, or any
other similar applicable foreign, federal or state law, (b) paid, accepted or
received any unlawful contributions, payments, expenditures or gifts, or (c)
violated or operated in non-compliance with any export restrictions, anti-
boycott regulations, embargo regulations or other applicable domestic or
foreign laws and regulations, except in each case where such action would not
reasonably be expected to have Company Material Adverse Effect.
Section 3.27. Year 2000.
The Company has (a) initiated a review and assessment of all areas within
its and each of its Subsidiaries' business and operations that could be
adversely affected by a failure of any of its Systems (as defined in Article X)
to be Year 2000 Compliant (as defined in Article X), (b) developed a plan and
timeline for addressing Year 2000 compliance, and (c) implemented that plan.
Subject to the qualification contained in the Company SEC Documents, based on
the foregoing and the Company SEC Documents, to the Company's knowledge, all
Systems owned by or under the control of the Company or any of its Subsidiaries
are Year 2000 Compliant except where the failure to be non-Year 2000 Compliant
will not have a Company Material Adverse Effect.
Section 3.28. Insurance.
Each of the Company and its Subsidiaries is insured with financially
responsible insurers in such amounts and against such risks and losses as are
customary for companies conducting business as conducted by the Company and its
Subsidiaries during such time period. Since January 1, 1998, neither the
Company nor any of its Subsidiaries has received notice of cancellation or
termination with respect to any material insurance policy of the Company or its
Subsidiaries which has not been cured. The insurance policies of the Company
and its Subsidiaries are valid and enforceable policies.
Section 3.29. Environmental Matters.
Except for such matters that are not reasonably likely to have a Company
Material Adverse Effect, or would not otherwise require disclosure under the
Securities Act, or except as set forth on Section 3.29 of the Company
Disclosure Schedule (a) each of the Company and its Subsidiaries has complied
and is in compliance with all applicable Environmental Laws (as defined in
Article X); (b) to the Company's knowledge, the properties currently owned or
operated by the Company and its Subsidiaries (including soils, groundwater,
surface water, buildings or other structures) are not contaminated with any
Hazardous Materials (as defined in Article X); (c) to the Company's knowledge,
Hazardous Materials were not present, disposed, released or otherwise deposited
on, under, at or from the properties formerly owned or operated by it or any of
its Subsidiaries during the period of ownership or operation by it or any of
its Subsidiaries; (d) to the Company's knowledge, neither it nor any of its
Subsidiaries is subject to liability for any Hazardous Material disposal or
contamination on any third-party property; (e) to the Company's knowledge,
neither it nor any of its Subsidiaries has been associated with any release or
threat of release of any Hazardous Materials; (f) neither it nor any of its
Subsidiaries has received any written notice, demand, threat, letter, claim or
request for information from a Governmental Entity alleging that it or any of
its Subsidiaries may be in violation of or liable under any Environmental Law
(including any claims relating to electromagnetic fields or microwave
transmissions); (g) neither it nor any of its Subsidiaries is subject to any
orders, decrees, injunctions or other arrangements with any Governmental Entity
or is subject to any indemnity or other agreement with any third party relating
to liability under any Environmental Law or relating to Hazardous Materials;
and (h) to the Company's knowledge, there are no circumstances or conditions
involving it or any of its Subsidiaries that could reasonably be expected to
result in any claims, liability, investigations, costs or restrictions on
ownership, use, or transfer of any of its properties pursuant to any
Environmental Law.
Section 3.30. Certain Contracts.
All material contracts required to be described in Item 601(b)(10) of
Regulation S-K to which the Company or its Subsidiaries is a party or may be
bound have been filed as exhibits to the Company's SEC Documents. Section 3.30
of the Company Disclosure Schedule lists all material joint venture or
strategic
A-19
<PAGE>
alliance agreements to which the Company is a party. All contracts, licenses,
consents, royalty or other agreements which are material to the Company and its
Subsidiaries, taken as a whole, to which the Company or any of its Subsidiaries
is a party (the "Company Contracts") are valid and in full force and effect on
the date hereof except to the extent they have previously expired in accordance
with their terms or to the extent that such invalidity would not have a Company
Material Adverse Effect, and, to the Company's knowledge, neither the Company
nor any of its Subsidiaries has violated any provision of, or committed or
failed to perform any act which with or without notice, lapse of time or both
would constitute a default under the provisions of, any Company Contract,
except for defaults which would not reasonably be expected to result in a
Company Material Adverse Effect. Section 3.30 of the Company Disclosure
Schedule separately identifies each Company Contract which contains a change-
of-control or similar type provision which will be "triggered" and/or require a
consent as a result of the transactions contemplated hereby. Except as set
forth in Section 3.30 of the Company Disclosure Schedule, there are no written
Agreements pursuant to which any Person is or may be entitled to receive any of
the revenues or earnings, or any payment based thereon or calculated in
accordance therewith, of the Company or any Subsidiary, other than employee
bonus compensation (including, without limitation, sales commission
arrangements) entered into in the Ordinary Course of Business.
Section 3.31. Ownership of Securities.
As of the date hereof, neither the Company nor, to the Company's knowledge,
any of its affiliates or associates (as such terms are defined under the
Exchange Act), (a)(i) beneficially owns, directly or indirectly, or (ii) is
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of Acquiror, which in the aggregate represent ten percent (10%) or more
of the outstanding shares of Acquiror Common Stock (other than shares held by
the Company Benefit Plans (as defined in Article X)), nor (b) is an "interested
stockholder" of Acquiror within the meaning of Section 203 of Delaware Law.
Section 3.32. Capitalization of Merger Sub; No Prior Activities of Merger
Sub.
Merger Sub was formed solely for the purpose of engaging in the transactions
contemplated by this Merger Agreement and has engaged in no other business
activities and has conducted its operations only as contemplated hereby. The
authorized capital stock of Merger Sub consists of 100 shares of common stock,
par value $.001 per share, all of which are duly authorized, validly issued,
fully paid and nonassessable and held of record by Holdco.
Section 3.33. Capitalization of Holdco; No Prior Activities of Holdco.
Holdco was formed solely for the purpose of engaging in the transactions
contemplated by this Merger Agreement and has engaged in no other business
activities and has conducted its operations only as contemplated hereby. The
authorized capital stock of Holdco consists of (a) 150,000,000 shares of common
stock, par value $.001 per share, of which, as of the date hereof: 1,000 shares
were issued and outstanding, all of which were (A) duly authorized, validly
issued, fully paid and nonassessable, (B) initially issued to the Company after
the board of directors of Holdco had approved this Merger Agreement, and (C)
held of record by the Company; and (b) 25,000,000 shares of preferred stock,
$.001 par value per share of which no shares are issued and outstanding.
Section 3.34. Holdco Merger and Governmental Approvals.
Consummation of the Holdco Merger by the Splitrock Entities does not and
will not (a) require the registration of shares of Holdco Common Stock under
the Securities Act or (b) require any consent, approval, authorization or
permit of, or the making of filings with or notifications to, the applicable
Governmental Entity
pursuant to the applicable requirements, if any, of the Securities Act, the
Exchange Act, Blue Sky Laws, the
rules and regulations of the NASD or any other Law, except the filing and
recordation of the Holdco Certificate of Merger.
A-20
<PAGE>
ARTICLE IV
Representations And Warranties Of Acquiror And Acquiror Sub
Except as disclosed in the Acquiror SEC Documents (as defined in Section
4.07) or as specifically set forth in the disclosure schedule delivered by
Acquiror and Acquiror Sub to the Company prior to the execution and delivery of
this Merger Agreement (the "Acquiror Disclosure Schedule"), Acquiror and
Acquiror Sub hereby jointly and severally represent and warrant (which
representation and warranty shall be deemed to include the disclosures with
respect thereto so specified in the Acquiror Disclosure Schedule) to, and
covenant and agree with, the Company as follows, in each case as of the date of
this Merger Agreement, unless otherwise specifically set forth herein or in the
Acquiror Disclosure Schedule:
Section 4.01. Organization and Standing; Subsidiaries.
Each of Acquiror, Acquiror Sub and the Significant Subsidiaries (as defined
in Article X) is a corporation duly organized, validly existing and in good
standing under the Laws of the jurisdiction of its incorporation or
organization, and has the full and unrestricted corporate power and authority
to own, operate and lease its Assets, and to carry on its business as currently
conducted. Each of Acquiror, Acquiror Sub and the Significant Subsidiaries is
duly qualified to conduct business as a foreign corporation and is in good
standing in the states, countries and territories in which the nature of the
business conducted by it or the character of the Assets owned, leased or
otherwise held by it makes such qualification necessary, except where the
absence of such qualification as a foreign corporation would not reasonably be
expected to have an Acquiror Material Adverse Effect (as defined in Article X).
Section 4.02. Certificate of Incorporation and Bylaws.
Acquiror has furnished to the Company a true and complete copy of the
certificate of incorporation of Acquiror and the certificate of incorporation
of Acquiror Sub, as currently in effect, certified as of a recent date by the
Secretary of State (or comparable Governmental Entity) of their respective
jurisdictions of incorporation, and a true and complete copy of the bylaws of
Acquiror and the bylaws of Acquiror Sub, as currently in effect, certified by
their respective corporate secretaries. Such certified copies are attached as
exhibits to, and constitute an integral part of, the Acquiror Disclosure
Schedule.
Section 4.03. Capitalization.
The authorized capital stock of Acquiror consists of (a) 250,000,000 shares
of Acquiror Common Stock, of which, as of November 30, 1999: (i) 156,167,497
shares were issued and outstanding, all of which were duly authorized, validly
issued, fully paid and nonassessable; (ii) no shares were held in the treasury
of Acquiror; (iii) 33,254,788 shares were reserved for issuance pursuant to
outstanding options to purchase Acquiror Common Stock granted to employees and
certain other Persons; (iv) 491,072 shares were reserved for issuance pursuant
to a Stock Option Agreement dated August 21, 1998 between Acquiror and QST
Enterprises, Inc.; (v) 20,828 shares were reserved for issuance pursuant to
Stock Option Agreements dated December 29, 1998 between Acquiror and certain
stockholders of Inlet, Inc.; (vi) 1,658,054 shares were reserved for issuance
pursuant to the McLeodUSA Incorporated Employee Stock Purchase Plan; (vii)
1,609,727 shares were reserved for issuance pursuant to the McLeodUSA
Incorporated 401(k) Profit Sharing Plan; (viii) 282,183 shares were reserved
for issuance in connection with the acquisition by Acquiror of Dakota
Telecommunications Group, Inc. on March 5, 1999; (ix) 179,825 shares were
reserved for issuance in connection with the acquisition by Acquiror of the
assets of Noverr Publishing, Inc. on June 16, 1999; (x) 76,343 shares were
reserved for issuance in connection with the Stock Option Agreement dated
January 28, 1998 between Acquiror and Diamond Partners Incorporated; (xi)
37,290,583 shares were reserved for issuance upon conversion of outstanding
shares of Acquiror Preferred Stock (as defined below); (xii) 2,601,376 shares
were reserved for issuance upon the exercise and conversion of options to
purchase Acquiror Class B Common Stock (as defined below) as described in
clause (b)(iii) below; and (xiii) 15,424 shares were reserved for issuance in
connection with the acquisition by Acquiror of the assets of The Millennium
Group Telemanagement LLC on June 7, 1999; (b) 22,000,000 shares of Class B
common stock, par value $.01 per share ("Acquiror Class B Common
A-21
<PAGE>
Stock"), of which, as of the date hereof: (i) no shares are issued and
outstanding; (ii) no shares are held in the treasury of Acquiror; and (iii)
2,601,376 shares are reserved for issuance pursuant to outstanding options to
purchase Acquiror Class B Common Stock granted to a significant stockholder of
Acquiror; and (c) 2,000,000 shares of serial preferred stock, par value $.01
per share, of which, as of the date hereof (i)(A) 1,150,000 shares of 6.75%
Series A preferred stock, par value $.01 per share ("Acquiror Series A
Preferred Stock"), (B) 275,000 shares of Series B preferred stock, par value
$.01 per share ("Acquiror Series B Preferred Stock"), and (C) 125,000 shares of
Series C preferred stock, par value $.01 per share ("Acquiror Series C
Preferred Stock" and together with Acquiror Series A Preferred Stock and
Acquiror Series B Preferred Stock, "Acquiror Preferred Stock") are issued and
outstanding, all of which were duly authorized, validly issued, fully paid and
nonassessable; and (ii) no shares are held in the treasury of Acquiror.
However, as of the date hereof, no more than 165,000,000 shares of Acquiror
Common Stock were issued and outstanding. Except as set forth in Section
4.03(a) of the Acquiror Disclosure Schedule and except for the options set
forth in clauses (a)(iii), (a)(iv), (a)(v), (a)(x), (a)(xiii) and (b)(iii)
above and the Acquiror Preferred Stock set forth in clause (c) above, as of
November 30, 1999, there were no outstanding securities convertible into or
exchangeable for capital stock or any other securities of Acquiror, or any
capital stock or other securities of any of the Significant Subsidiaries and no
outstanding options, rights (preemptive or otherwise), or warrants to purchase
or to subscribe for any shares of such capital stock or other securities of
Acquiror or any of the Significant Subsidiaries. Except as set forth in Section
4.03(a) of the Acquiror Disclosure Schedule and except for Agreements relating
to the options specified in clauses (a)(iii), (a)(iv), (a)(v), (a)(x),
(a)(xiii) and (b)(iii) above, there are no outstanding Agreements to which
Acquiror or any of the Significant Subsidiaries is a party affecting or
relating to the voting, issuance, purchase, redemption, registration,
repurchase or transfer of capital stock or any other securities of Acquiror, or
any capital stock or other securities of any of the Significant Subsidiaries,
except as contemplated hereunder. Each of the outstanding shares of Acquiror
Common Stock, and of capital stock of, or other equity interests in, the
Significant Subsidiaries was issued in compliance with all applicable federal
and state Laws concerning the issuance of securities, and, except as set forth
in Section 4.03(b) of the Acquiror Disclosure Schedule, such shares or other
equity interests owned by Acquiror or any of the Significant Subsidiaries are
owned free and clear of all Encumbrances.
Section 4.04. Authority; Binding Obligation.
The execution and delivery by Acquiror and Acquiror Sub of this Merger
Agreement and all other Documents contemplated hereby, and the consummation by
Acquiror and Acquiror Sub of the transactions contemplated hereby and thereby,
have been duly authorized by all necessary corporate action and no other
corporate proceedings on the part of Acquiror or Acquiror Sub are necessary to
authorize this Merger Agreement and the other Documents contemplated hereby, or
to consummate the transactions contemplated hereby and thereby, other than the
approval by the stockholders of Acquiror of both the Acquiror Charter Amendment
and the issuance of Acquiror Common Stock pursuant to the Merger Agreement.
This Merger Agreement has been duly executed and delivered by Acquiror and
Acquiror Sub and constitutes a legal, valid and binding obligation of Acquiror
and Acquiror Sub in accordance with its terms, except as such enforceability
may be subject to the effect of any applicable bankruptcy, insolvency
fraudulent conveyance, reorganization, moratorium or similar Laws affecting
creditors' rights generally and subject to the effect of general equitable
principles (whether considered in a proceeding in equity or at law).
Section 4.05. No Conflict; Required Filings and Consents.
(a) The execution, delivery and performance by Acquiror and Acquiror Sub of
this Merger Agreement and all other Documents contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof
and thereof, and the consummation by Acquiror and Acquiror Sub of the
transactions contemplated hereby and thereby, do not and will not: (i) subject
to obtaining the requisite approval of the Acquiror Charter Amendment by the
stockholders of Acquiror, conflict with, or violate any provision of, the
certificate of incorporation or the bylaws of Acquiror, or the certificate or
articles of incorporation or formation or bylaws of Acquiror Sub or any of the
Significant Subsidiaries; (ii) subject to (A) obtaining the requisite
A-22
<PAGE>
approval of the Acquiror Charter Amendment and the issuance of Acquiror Common
Stock pursuant to the Merger Agreement by the stockholders of Acquiror, and (B)
obtaining the consents, approvals, authorizations and permits of, and making
filings with or notifications to, the applicable Governmental Entity pursuant
to the applicable requirements, if any, of the Securities Act, the Exchange
Act, Blue Sky Laws, the HSR Act, the NASD, applicable state utility and
communications Laws and applicable municipal franchise Laws, and the filing and
recordation of the Certificate of Merger as required by Delaware Law, conflict
with or violate any Law applicable to Acquiror, Acquiror Sub or any of the
Significant Subsidiaries, or any of their respective Assets; (iii) conflict
with, result in any breach of, constitute a default (or an event that with
notice or lapse of time or both would become a default) under any Agreement to
which Acquiror, Acquiror Sub or any of the Significant Subsidiaries is a party
or by which Acquiror, Acquiror Sub or any of the Significant Subsidiaries, or
any of their respective Assets, may be bound; or (iv) result in or require the
creation or imposition of, or result in the acceleration of, any indebtedness
or any Encumbrance of any nature upon, or with respect to, Acquiror, Acquiror
Sub or any of the Significant Subsidiaries or any of the Assets of Acquiror,
Acquiror Sub or any of the Significant Subsidiaries; except for any such
conflict or violation described in clause (ii), any such conflict, breach or
default described in clause (iii), or any such creation, imposition or
acceleration described in clause (iv) that would not reasonably be expected to
have an Acquiror Material Adverse Effect and that would not prevent
consummation of the Merger by the End Date.
(b) The execution, delivery and performance by Acquiror and Acquiror Sub of
this Merger Agreement and all other Documents contemplated hereby, the
fulfillment of and compliance with the respective terms and provisions hereof
and thereof, and the consummation by Acquiror and Acquiror Sub of the
transactions contemplated hereby and thereby, do not and will not: (i) require
any consent, approval, authorization or permit of, or filing with or
notification to, any Person not party to this Merger Agreement, except (A) the
requisite approval of the Acquiror Charter Amendment and the issuance of
Acquiror Common Stock pursuant to the Merger Agreement by the stockholders of
Acquiror, (B) pursuant to the applicable requirements, if any, of the
Securities Act, the Exchange Act, Blue Sky Laws, the HSR Act, the NASD and
applicable state utility and communications Laws and applicable municipal
franchise Laws and (C) the filing and recordation of the Acquiror Charter
Amendment and Certificate of Merger as required by Delaware Law; or (ii) result
in or give rise to any penalty, forfeiture, Agreement termination, right of
termination, amendment or cancellation, or restriction on the business
operations of Acquiror, the Surviving Corporation or any of the Significant
Subsidiaries, except with respect to any Agreement not material to the
operation of Acquiror, Acquiror Sub and the Significant Subsidiaries.
Section 4.06. Licenses; Compliance.
(a) Each of Acquiror and each Significant Subsidiary is in possession of all
Licenses necessary for Acquiror or any Significant Subsidiary to own, lease and
operate its Assets or to carry on its business as it is now being conducted
(the "Acquiror Licenses"), except where the failure to possess any such
Acquiror License would not reasonably be expected to have an Acquiror Material
Adverse Effect. Neither the Acquiror nor any Significant Subsidiary is in
violation of or default under any Acquiror License, except for any such
violation or default that would not reasonably be expected to have an Acquiror
Material Adverse Effect.
(b) Neither Acquiror nor any Significant Subsidiary is in violation of or
default under, nor has it breached, (i) any term or provision of its
certificate or articles of incorporation or formation or bylaws or (ii) any
Agreement or restriction to which Acquiror or any Significant Subsidiary is a
party or by which Acquiror or any Significant Subsidiary, or any of their
respective Assets, is bound or affected, except for any such violation, default
or breach described in clause (ii) that would not have an Acquiror Material
Adverse Effect. Acquiror and the Significant Subsidiaries have complied and are
in full compliance with all Laws, except where the failure so to comply would
not have an Acquiror Material Adverse Effect.
Section 4.07. SEC Documents.
Since January 1, 1997, Acquiror has filed or, in the case of the Acquiror
Post-Signing SEC Documents (as defined in Section 6.10), will file all required
reports, schedules, forms, statements and other Documents with
A-23
<PAGE>
the SEC (collectively, including the Acquiror Post-Signing SEC Documents, the
"Acquiror SEC Documents"). As of their respective filing dates, the Acquiror
SEC Documents complied or, in the case of the Acquiror Post-Signing SEC
Documents, will comply as to form in all material respects with the applicable
requirements of the Securities Act or the Exchange Act, as the case may be, and
none of the Acquiror SEC Documents contained or, in the case of the Acquiror
Post-Signing SEC Documents, will contain, any untrue statement of a material
fact or omitted or, in the case of the Acquiror Post-Signing SEC Documents,
will omit to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were or are made, not misleading. The consolidated financial
statements of Acquiror included in the Acquiror SEC Documents comply or, in the
case of the Acquiror Post-Signing SEC Documents, will comply, as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been or, in the
case of the Acquiror Post-Signing SEC Documents, will have been prepared in
accordance with GAAP (except, in the case of unaudited statements, for the lack
of normal year-end adjustments and the absence of footnotes and as permitted by
Form 10-Q of the SEC) applied on a consistent basis during the periods subject
thereto (except as may be indicated in the notes thereto) and fairly present
the consolidated financial position of Acquiror and its consolidated
subsidiaries as of the dates thereof and the consolidated results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
statements, to normal year-end adjustments and the absence of footnotes).
Except as disclosed in the Acquiror SEC Documents, as required by GAAP or as
required by any Governmental Entity, Acquiror has not, since December 31, 1998,
made any change in accounting practices or policies applied in the preparation
of financial statements.
Section 4.08. Reorganization.
To the knowledge of Acquiror, neither Acquiror, Acquiror Sub nor any of the
Significant Subsidiaries has taken any action or failed to take any action or
is aware of any circumstance that would prevent or impede the Holdco Merger or
the Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
Section 4.09. Vote Required.
The approval of the Acquiror Charter Amendment by the affirmative vote of
the holders of a majority of the outstanding shares of Acquiror Common Stock
and the approval of the issuance of Acquiror Common Stock pursuant to the
Merger Agreement by the affirmative vote of a majority of the total votes cast
by holders of the outstanding shares of Acquiror Common Stock are the only
votes of the holders of any class or series of capital stock of Acquiror
necessary to approve the transactions contemplated by this Merger Agreement.
Section 4.10. Brokers.
No broker, finder or investment banker (other than Salomon Smith Barney
Inc.) is entitled to any brokerage, finder's or other fee or commission in
connection with the transactions contemplated by this Merger Agreement based
upon arrangements made by or on behalf of Acquiror or any of its affiliates.
Section 4.11. Disclosure.
(a) None of the information supplied or to be supplied by or on behalf of
Acquiror or Acquiror Sub expressly for inclusion (and so included or relied on
for information included) in (i) the Registration Statement
and (ii) the Joint Proxy Statement, at the respective times that (w) the
Registration Statement is filed with the SEC, (x) the Registration Statement
becomes effective, (y) the Joint Proxy Statement is mailed, and (z) any meeting
of stockholders (and any adjournment thereof) is held to consider, or written
consents are effective with respect to approval of, the transactions
contemplated by this Merger Agreement, shall contain any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading.
(b) No representation or warranty contained in this Merger Agreement or the
Acquiror Disclosure Schedule (giving full effect to the concepts and
qualifications of materiality and knowledge contained therein
A-24
<PAGE>
and not with the intention or effect of eliminating or limiting such concepts
and qualifications in any way), and no other agreements, documents,
certificates, instruments or other information furnished or to be furnished, or
made available or to be made available to the Company by Acquiror or Acquiror
Sub pursuant to this Merger Agreement or otherwise in connection herewith or
with the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
necessary in order to make the statements contained therein, in light of the
circumstances under which they were made, not misleading; provided, however,
that this representation shall not apply to the matters specifically covered by
any other representation or warranty in this Merger Agreement, it being the
intent of the parties that this sentence not be applied so as to broaden the
scope of those representations and warranties.
Section 4.12. Capitalization of Acquiror Sub; No Prior Activities of
Acquiror Sub.
Acquiror Sub was formed solely for the purpose of engaging in the
transactions contemplated by this Merger Agreement and has engaged in no other
business activities and has conducted its operations only as contemplated
hereby. The authorized capital stock of Acquiror Sub consists of 1,000 shares
of common stock, par value $.01 per share, all of which are duly authorized,
validly issued, fully paid and nonassessable and held of record by Acquiror.
Section 4.13. Litigation.
Except as set forth in Section 4.13 of the Acquiror Disclosure Schedule,
there are no material actions, suits, claims, arbitrations, proceedings or
investigations pending or, to the knowledge of Acquiror or any Significant
Subsidiary, threatened against, affecting or involving Acquiror or any
Significant Subsidiary or their respective businesses or Assets, or the
transactions contemplated by this Merger Agreement, at law or in equity, or
before or by any court, arbitrator or Governmental Entity, domestic or foreign.
Neither Acquiror nor any Significant Subsidiary is in default with respect to
any order, award, writ, injunction, decree or judgment of any court, arbitrator
or Governmental Entity except for such defaults that, individually or in the
aggregate, would not reasonably be expected to have an Acquiror Material
Adverse Effect.
Section 4.14. Board Recommendations.
At a meeting duly called and held in compliance with Delaware Law or
pursuant to a written consent, the Board of Directors of each of Acquiror and
Acquiror Sub has adopted a resolution approving, adopting and declaring the
advisability of this Merger Agreement and the transactions contemplated hereby
and the Board of Directors of Acquiror has adopted a resolution recommending
approval and adoption of the Acquiror Charter Amendment and the issuance of
Acquiror Common Stock pursuant to this Merger Agreement by the stockholders of
Acquiror.
Section 4.15. Year 2000.
Acquiror has (a) initiated a review and assessment of all areas within its
and each of its Subsidiaries' businesses and operations that could be adversely
affected by a failure of any of its Systems to be Year 2000 Compliant, (b)
developed a plan and timeline for addressing Year 2000 compliance, and (c)
implemented that plan.
Based on this review, Acquiror believes the Year 2000 problem which impacts
computer programs and hardware timers using two digits (rather than four) to
define the applicable year will not have an Acquiror Material Adverse Effect.
Section 4.16. Certain Contracts.
(a) All material contracts required to be described in Item 601(b)(10) of
Regulation S-K to which Acquiror or its Significant Subsidiaries is a party or
may be bound have been filed as exhibits to Acquiror's SEC Documents.
A-25
<PAGE>
(b) All contracts, licenses, consents, royalty or other agreements which are
material to Acquiror and its Significant Subsidiaries, taken as a whole, to
which Acquiror or any of its Significant Subsidiaries is a party (the "Acquiror
Contracts") are valid and in full force and effect on the date hereof except to
the extent they have previously expired in accordance with their terms or to
the extent that such invalidity would not have an Acquiror Material Adverse
Effect, and, to Acquiror's knowledge, neither Acquiror nor any of its
Significant Subsidiaries has violated any provision of, or committed or failed
to perform any act which with or without notice, lapse of time or both would
constitute a default under the provisions of, any Acquiror Contract, except for
defaults which would not reasonably be expected to result in an Acquiror
Material Adverse Effect.
Section 4.17. Acquiror Common Stock.
The Acquiror Common Stock to be issued and delivered to the Holdco
Stockholders pursuant to the Merger, or upon the exercise of Acquiror Warrants
or Acquiror Options, when issued in accordance with this Merger Agreement, will
be duly authorized, validly issued, fully paid and nonassessable, will not have
been issued in violation of any subscriptive or preemptive rights and will have
been approved for listing (subject to official notice of issuance) by The
Nasdaq Stock Market's National Market System.
Section 4.18. Pension and Benefit Plans.
(a) Except as set forth in Section 4.18(a) of the Acquiror Disclosure
Schedule, neither Acquiror nor any Significant Subsidiary (i) maintains or
during the past three (3) years has maintained any Plan or Other Arrangement,
(ii) is or during the past three (3) years has been a party to any Plan or
Other Arrangement, or (iii) has obligations under any Plan or Other
Arrangement.
(b) Acquiror has made available to the Company true and complete copies of
each of the following Documents: (i) the Documents setting forth the terms of
each Plan; (ii) all related trust Agreements or annuity Agreements (and any
other funding Document) for each Plan; (iii) for the three (3) most recent plan
years, all annual reports (Form 5500 series) on each Plan that have been filed
with any Governmental Entity; and (iv) the current summary plan description and
subsequent summaries of material modifications for each Title I Plan. For each
Other Arrangement, Acquiror has made available to the Company true and complete
copies of each policy, Agreement or other Document setting forth or explaining
the current terms of the Other Arrangement, all related trust Agreements or
other funding Documents (including, without limitation, insurance contracts,
certificates of deposit, money market accounts, etc.), all significant employee
communications which could materially increase the liability under such
arrangement, and all material correspondence with or other submissions to any
Governmental Entity.
(c) No Plan is a Multiemployer Plan or an ESOP.
(d) To their knowledge, Acquiror and its Significant Subsidiaries have
complied in all material respects with all applicable provisions of the Code,
ERISA, the National Labor Relations Act, Title VII of the Civil Rights Act of
1964, the Age Discrimination in Employment Act, the Fair Labor Standards Act,
the Securities Act, the Exchange Act, and all other Laws pertaining to the
Plans, Other Arrangements and other employee or employment related benefits,
and all premiums and assessments relating to all Plans or Other Arrangements.
(e) Except as set forth in Section 4.18(e) of the Acquiror Disclosure
Schedule, no Plan or Other Arrangement, individually or collectively, provides
for any payment by Acquiror or any of its Significant Subsidiaries to any
employee or independent contractor that, to the knowledge of Acquiror, is not
deductible under Section 162(a)(1) or 404 of the Code, or that is an "excess
parachute payment" pursuant to Section 280G of the Code.
(f) Except as set forth in Section 4.18(f) of the Acquiror Disclosure
Schedule, no Welfare Plan provides or promises post-retirement medical, life
insurance or other benefits due now or in the future to current, former
A-26
<PAGE>
or retired employees of Acquiror or any of its Significant Subsidiaries other
than benefits necessary to comply with Section 4980B(f) of the Code and
Sections 601 through 607 of ERISA.
Section 4.19. Absence of Certain Changes or Events.
Except as set forth in Section 4.19 of the Acquiror Disclosure Schedule or
as disclosed in the Acquiror SEC Documents filed with the SEC prior to the date
hereof, since December 31, 1998 and prior to the date hereof, there has been no
adverse change, and no change except in the Ordinary Course of Business, in the
business, operations, condition (financial or otherwise), of Acquiror or any
Significant Subsidiary except such changes that would not reasonably be
expected to have an Acquiror Material Adverse Effect. Except as set forth in
Section 4.19 of the Acquiror Disclosure Schedule or as disclosed in the
Acquiror SEC Documents filed with the SEC prior to the date hereof, since
December 31, 1998, (a) Acquiror and its Significant Subsidiaries have conducted
their respective businesses substantially in the manner theretofore conducted
and only in the Ordinary Course of Business (excluding the incurrence of
reasonable and customary liabilities related to this Merger Agreement and the
transactions contemplated hereby), and (b) neither Acquiror nor any of its
Significant Subsidiaries has taken any action or omitted to take any action, or
entered into any contract, Agreement, commitment or arrangement to take any
action or omit to take any action, which, if taken or omitted after the date
hereof, would reasonably be expected to have an Acquiror Material Adverse
Effect. At the Closing, Acquiror shall deliver to the Company an updated
Section 4.19 to the Company Disclosure Schedule in accordance with the
provisions of Section 6.05.
Section 4.20. Absence of Undisclosed Liabilities.
Except as set forth in Section 4.20 of the Acquiror Disclosure Schedule,
there are no liabilities or obligations (whether absolute or contingent,
matured or unmatured) of Acquiror or any Significant Subsidiary, including but
not limited to liabilities for Taxes, of a nature required by GAAP to be
reflected, or reserved against, in the balance sheet included in the
consolidated financial statements of Acquiror included in the Acquiror SEC
Documents and that are not so reflected, or reserved against, therein. Except
as described in Section 4.20 of the Acquiror Disclosure Schedule or reflected
or reserved against in the consolidated financial statements of Acquiror
included in the Acquiror SEC Documents, since December 31, 1998, neither
Acquiror nor any Significant Subsidiary has incurred any material liabilities
or obligations (whether absolute or contingent, matured or unmatured) other
than in the Ordinary Course of Business.
ARTICLE V
Covenants Relating To Conduct of Business
Section 5.01. Conduct of Business of the Splitrock Entities.
Each of the Splitrock Entities hereby covenants and agrees that, from the
date of this Merger Agreement until the Effective Time, such Splitrock Entity,
unless set forth in Section 5.01 of the Company Disclosure Schedule, otherwise
expressly contemplated by this Merger Agreement or consented to in writing by
Acquiror (which consent will not be unreasonably withheld), will, and will
cause the Subsidiaries to, carry on their respective businesses only in the
Ordinary Course of Business in all material respects, use their respective
reasonable best efforts to preserve substantially intact their business
organizations and Assets, maintain their rights and franchises, keep available
the services of their current officers and retain key employees and maintain
their current relationships with current customers, suppliers, licensors,
licensees and others having business dealings with them, and use their
respective reasonable best efforts to keep in full force and effect liability
insurance and bonds comparable in amount and scope of coverage to that
currently maintained. Without limiting the generality of the foregoing, except
as otherwise expressly contemplated by this Merger Agreement, as set forth in
Section 5.01 of the Company Disclosure Schedule, or as consented to in writing
by Acquiror (which consent will not be unreasonably withheld), from the date of
this Merger Agreement until the Effective Time each of the Splitrock Entities
shall not, and shall not permit any of the Subsidiaries to:
(a) (i) increase in any manner the compensation or fringe benefits of, or
pay any bonus to, any director, officer or employee, except for (A) increases
or bonuses in the Ordinary Course of Business and retention
A-27
<PAGE>
arrangements not to exceed in the aggregate the dollar limit established
pursuant to Section 6.07; or (B) increases required by Law; (ii) grant any
severance or termination pay (other than pursuant to the normal severance
practices or existing Agreements of the Company or any Subsidiary in effect on
the date of this Merger Agreement as described in Section 5.01(a) of the
Company Disclosure Schedule) to, or enter into any severance Agreement with,
any director, officer or employee, or enter into any employment Agreement with
any director, officer or employee; (iii) establish, adopt, enter into or amend
any Plan or Other Arrangement, except as may be required to comply with
applicable Law; (iv) pay any material benefits not provided for under any Plan
or Other Arrangement; (v) grant any awards under any bonus, incentive,
performance or other compensation plan or arrangement or Plan or Other
Arrangement (including the grant of stock options, stock appreciation rights,
stock-based or stock-related awards, performance units or restricted stock, or
the removal of existing restrictions in any Plan or Other Arrangement or
Agreement or awards made thereunder), except for grants in the Ordinary Course
of Business or as required under the Agreements set forth in Section 5.01(a) of
the Company Disclosure Schedule; or (vi) take any action to fund or in any
other way secure the payment of compensation or benefits under any Agreement,
except as required under the Agreements set forth in Section 5.01(a) of the
Company Disclosure Schedule;
(b) declare, set aside or pay any dividend on, or make any other
distribution in respect of, outstanding shares of capital stock (other than a
dividend declared or paid by a wholly owned Subsidiary to its parent consistent
with the terms and conditions of this Merger Agreement);
(c) (i) redeem, purchase or otherwise acquire any shares of capital stock of
the Splitrock Entities or any Subsidiary or any securities or obligations
convertible into or exchangeable for any shares of capital stock of the
Splitrock Entities or any Subsidiary, or any options, warrants or conversion or
other rights to acquire any shares of capital stock of the Splitrock Entities
or any Subsidiary or any such securities or obligations, or any other
securities thereof (other than (A) any issuance of Company Common Stock in
connection with a cashless exercise of Company Stock Options or Company
Warrants, or (B) pursuant to an Agreement set forth in Section 5.01(c) of the
Company Disclosure Schedule); (ii) effect any reorganization or
recapitalization (other than the Holdco Merger for the sole purpose of
consummating the transactions contemplated by this Merger Agreement); or (iii)
split, combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock (other than the issuance of
Holdco Common Stock to holders of Company Common Stock in connection with the
Holdco Merger and the authorization of the issuance of Holdco Common Stock in
connection with the Company Stock Options and Company Warrants assumed by
Holdco pursuant to the Holdco Merger in each case as expressly provided in this
Merger Agreement);
(d) except (i) upon the exercise of Company Stock Options or Company
Warrants in accordance with their terms, or (ii) for grants of Company Stock
Options to new or existing employees who are not executive officers in the
Ordinary Course of Business, to the extent that the aggregate number of shares
of Company Common Stock issuable under such grants (whether or not vested) does
not exceed 500,000, issue, deliver, award, grant or sell, or authorize the
issuance, delivery, award, grant or sale (including the grant of any
limitations in voting rights or other Encumbrances) of, any shares of any class
of its capital stock (including shares held in treasury), any securities
convertible into or exercisable or exchangeable for any such shares, or any
rights, warrants or options to acquire any such shares, or amend or otherwise
modify the terms of any such rights, warrants or options the effect of which
shall be to make such terms more favorable to the holders thereof;
(e) except as contemplated by Agreements set forth in Section 5.01(e) of the
Company Disclosure Schedule, acquire or agree to acquire, by merging or
consolidating with, by purchasing an equity interest in or a portion of the
Assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof, or
otherwise acquire or agree to acquire any Assets of any other Person (other
than the purchase of assets from suppliers or vendors in the Ordinary Course of
Business);
A-28
<PAGE>
(f) sell, lease, exchange, mortgage, pledge, transfer or otherwise subject
to any Encumbrance or dispose of, or agree to sell, lease, exchange, mortgage,
pledge, transfer or otherwise subject to any Encumbrance or dispose of, any of
its Assets, except for sales, dispositions or transfers in the Ordinary Course
of Business;
(g) adopt any amendments to its certificate of incorporation, bylaws or
other comparable charter or organizational documents (other than the amendment
to the Company's certificate of incorporation as provided in Section 1A.04(a));
(h) make or rescind any express or deemed material election relating to
Taxes, settle or compromise any material claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to Taxes,
or change any of its methods of reporting income or deductions for federal
income tax purposes from those employed in the preparation of the federal
income tax returns for the taxable year ended December 31, 1998, except in
either case as may be required by Law, the IRS or GAAP;
(i) make or agree to make (A) any new capital expenditure or expenditures
which are not included in the Company's January '00 through March '01 Cash
Flow--8 Fiber Scenario, a copy of which was furnished to Acquiror, or (B)
expenditures which are, individually, in excess of $1,000,000 or, in the
aggregate, in excess of $10,000,000;
(j) (i) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another Person (other than the Company or any wholly owned
Subsidiary), issue or sell any debt securities or warrants or other rights to
acquire any debt securities, guarantee any debt securities of another Person
(other than the Company or any wholly owned Subsidiary), enter into any "keep
well" or other Agreement to maintain any financial statement condition of
another Person (other than the Company or any wholly owned Subsidiary) or enter
into any Agreement having the economic effect of any of the foregoing, except
for short-term borrowings incurred in the Ordinary Course of Business, or (ii)
make any loans, advances or capital contributions to, or investments in, any
other Person other than intra-group loans, advances, capital contributions or
investments between or among the Company and any of its wholly owned
Subsidiaries and other than the extension of credit to customers of the Company
or any Subsidiary in the Ordinary Course of Business;
(k) pay, discharge, settle or satisfy any material claims, liabilities or
obligations (whether absolute or contingent, matured or unmatured, known or
unknown), other than the payment, discharge or satisfaction, in the Ordinary
Course of Business or in accordance with their terms, of liabilities reflected
or reserved against in, or contemplated by, the most recent Financial Statement
or incurred in the Ordinary Course of Business, or waive any material benefits
of, or agree to modify in any material respect, any confidentiality, standstill
or similar Agreements to which any Splitrock Entity or Subsidiary is a party;
(l) except in the Ordinary Course of Business, waive, release or assign any
rights or claims, or modify, amend or terminate any material Agreement to which
any Splitrock Entity or Subsidiary is a party;
(m) make any change in any method of accounting or accounting practice or
policy other than those required by GAAP or a Governmental Entity; or
(n) authorize, or commit or agree to do any of the foregoing.
Section 5.02. Other Actions.
The Splitrock Entities and Acquiror shall not, and shall not permit any of
their respective affiliates to, knowingly take any action that could reasonably
be expected to result in (a) any of the representations and warranties of such
party set forth in this Merger Agreement becoming untrue; (b) any of the
conditions to the Merger set forth in Article VII not being satisfied; or (c)
prevent or impede the Merger or the Holdco Merger from qualifying as a
reorganization within the meaning of Section 368(a) of the Code.
A-29
<PAGE>
Section 5.03. Certain Tax Matters.
From the date hereof until the Effective Time, each of the Splitrock
Entities and the Subsidiaries (a) will prepare and timely file with the
relevant Taxing authority all Company Tax Returns ("Post-Signing Returns")
required to be filed, which Post-Signing Returns shall be accurate in all
material respects, (b) will timely pay all Taxes due and payable with respect
to such Post-Signing Returns, (c) will pay or otherwise make adequate provision
for all Taxes payable by the Splitrock Entities and the Subsidiaries for which
no Post-Signing Return is due prior to the Effective Time, and (d) will
promptly notify Acquiror of any action, suit, proceeding, claim or audit
pending against or with respect to any Splitrock Entity or Subsidiary in
respect of any Taxes, except in clauses (a) and (d) hereof where any failure
would not reasonably be expected to have a Company Material Adverse Effect.
Section 5.04. Access and Information.
(a) For so long as this Merger Agreement is in effect, each of the Splitrock
Entities shall, and shall cause each Subsidiary to, (i) afford to Acquiror and
its officers, employees, accountants, consultants, legal counsel and other
representatives reasonable access during normal business hours, subject to
reasonable advance notice, to all of their respective properties, Agreements,
books, records and personnel and (ii) furnish promptly to Acquiror all
information concerning their respective businesses, operations, prospects,
conditions (financial or otherwise), Assets, liabilities and personnel as
Acquiror may reasonably request. To the Company's knowledge, all Documents
furnished to Acquiror pursuant to this Section 5.04 shall be true and complete.
The Company and its Subsidiaries shall not be required to provide access to or
to disclose information where such access or disclosure would be prohibited or
otherwise limited by (i) any Law, rule, regulation, order, judgment, decree or
Agreement or (ii) an item as set forth in Section 5.04 of the Company
Disclosure Schedule. Any information so provided to Acquiror shall be subject
to the Confidentiality Agreement (as defined in Article X).
(b) The parties shall comply with, and shall cause their respective
directors, officers, employees and other representatives to comply with, all of
their respective obligations under the Confidentiality Agreement.
Section 5.05. No Solicitation.
(a) The Company shall cause its directors (other than Roy A. Wilkens),
officers, employees, representatives, agents and its Subsidiaries and their
respective directors (other than Roy A. Wilkens), officers, employees,
representatives and agents to immediately cease any discussions or negotiations
with any Person that may be ongoing with respect to a Competing Transaction (as
defined in Section 5.05(c)). The Company shall not, and shall direct and cause
the Subsidiaries and the directors (other than Roy A. Wilkens), officers,
employees, agents and representatives of the Company and the Subsidiaries
(including, without limitation, any investment banker, financial advisor,
attorney or accountant retained by the Company or any Subsidiary) not to,
directly or indirectly: (i) initiate, solicit or encourage (including by way of
furnishing information or assistance), or take any other action to facilitate,
any inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Competing Transaction; (ii) enter into or
participate in any discussions or negotiations with any Person regarding a
Competing Transaction, or furnish to any Person any information regarding a
Competing Transaction, or take any other action to facilitate or cooperate with
the making of any inquiry or proposal regarding a Competing Transaction; (iii)
grant any waiver or release under any standstill or similar agreement with
respect to any class of the equity securities of the Company; or (iv) agree to
or endorse any Competing Transaction.
(b) The Company shall: (i) notify Acquiror orally (within one (1) business
day) and in writing (as promptly as practicable) if any inquiries or proposals,
including a request for information, regarding a Competing Transaction are
received by the Company or any Subsidiary, or any of its or their respective
directors, officers, employees, agents, investment bankers, financial advisors,
attorneys, accountants or other representatives; (ii) include in such notice to
Acquiror the identity of the person making any such inquiry or proposal, the
material terms of such inquiry or proposal and, if in writing, the Company
shall promptly deliver or cause to be delivered to Acquiror a copy of such
inquiry or proposal, along with all other documentation and related
correspondence; (iii) in the event that pursuant to Section 5.05(d) the Company
elects to engage in
A-30
<PAGE>
discussions or negotiations with, or furnish any information to, any Person
regarding a Superior Proposal (as defined below), the Company shall at least
two (2) business days prior to engaging in such discussions or negotiations or
furnishing such information, provide written notice to Acquiror of (A) its
intent to do so, (B) the identity of such Person and (C) the material terms of
such proposal including copies thereof; and (iv) keep Acquiror informed, on a
current basis, of the nature of any such inquiries and the status and terms of
any such proposals, discussions or negotiations including copies of any and all
written inquiries, proposals or correspondence relating thereto, as well as any
amendments or proposed amendments thereto.
(c) For purposes of this Merger Agreement, "Competing Transaction" shall
mean any of the following involving the Company or the Subsidiaries (other than
the transactions contemplated by this Merger Agreement): (i) any merger,
consolidation, share exchange, business combination, or other similar
transaction (other than mergers, consolidation or similar transactions
involving solely the Company and/or one or more wholly owned Subsidiaries of
the Company); (ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition of twenty-five percent (25%) or more of the Assets of the
Company and the Subsidiaries, taken as a whole, or issuance of twenty-five
percent (25%) or more of the outstanding voting securities of the Company or
any Subsidiary in a single transaction or series of transactions; (iii) any
tender offer or exchange offer for twenty-five percent (25%) or more of the
outstanding shares of capital stock of the Company or any Subsidiary or the
filing of a registration statement under the Securities Act in connection
therewith; (iv) any solicitation of proxies in opposition to approval by the
stockholders of the Company of the Merger Agreement; (v) any Person shall have
acquired beneficial ownership or the right to acquire beneficial ownership of,
or any "group" (as such term is defined under Section 13(d) of the Exchange
Act) shall have been formed after the date of this Merger Agreement which
beneficially owns or has the right to acquire beneficial ownership of, twenty-
five percent (25%) or more of the then outstanding shares of capital stock of
the Company or any Subsidiary; or (vi) any Agreement to, or public announcement
by the Company or any other Person of, a proposal, plan or intention to do any
of the foregoing.
(d) Notwithstanding anything to the contrary set forth in subsections (a),
(b) and (c) above or elsewhere in this Merger Agreement, nothing contained in
this Merger Agreement shall prohibit the Board of Directors of the Company
from: (i) complying with Rules 14d-9 and 14e-2 promulgated under the Exchange
Act or publicly disclosing the existence of any Competing Transaction as
required by applicable law; or (ii) prior to the time of the Company
Stockholders' Meeting (as defined in Section 6.01(b)), furnishing information
to, or entering into discussions or negotiations with, any Person in connection
with an unsolicited bona fide inquiry or proposal from such Person for a
Competing Transaction which involves a merger, consolidation, share exchange,
business combination, or the acquisition of more than 51% of the aggregate
voting power of the Company if before doing so: (A) the Company enters into
with such Person a confidentiality agreement in reasonably customary form on
terms not more favorable to such Person than the terms contained in the
Confidentiality Agreement (it being understood and agreed that the Company
Board of Directors and/or its financial advisors may in any event have limited
discussions with such Person to determine such Person's financial capability
and intent to make a Superior Proposal (as defined below)); (B) the Board of
Directors of the Company, after consultation with independent financial
advisors, reasonably determines in good faith that the Competing Transaction,
if consummated, would result in a transaction more favorable to the Company's
stockholders from a financial point of view than the Merger (any such more
favorable Competing Transaction being referred to in this Merger Agreement as a
"Superior Proposal"); (C) the Board of Directors of the Company reasonably
determines in its good faith judgment, after consultation with independent
financial advisors, that such Person has the financial ability to consummate
such proposal; (D) the Board of Directors of the Company, after consultation
with independent legal counsel, determines in good faith that such action is
appropriate for such Board of Directors to comply with its fiduciary duties to
the Company's stockholders under applicable Law; and (E) the Company shall have
otherwise complied with the terms of this Section 5.05.
(e) Notwithstanding anything to the contrary set forth in subsections (a),
(b), (c) and (d) above or elsewhere in this Merger Agreement, in the event that
a proposal for a Competing Transaction constitutes a Superior Proposal, nothing
contained in this Merger Agreement shall prohibit the Board of Directors of the
A-31
<PAGE>
Company from withdrawing its recommendation in favor of this Merger Agreement
as required under Sections 6.01(a) and 6.02(a) hereof and recommending such
Superior Proposal to its stockholders: (i) if, but only if, the
Company: (A) complies fully with this Section 5.05 and (B) provides Acquiror
with at least three (3) business days' prior written notice of its intent to
withdraw its recommendation of this Merger Agreement and (ii) if, in the event
that during such three (3) business days Acquiror makes a counter proposal to
such Superior Proposal (any such counter proposal being referred to in this
Merger Agreement as the "Acquiror Counter Proposal"), the Company's Board of
Directors in good faith, taking into account the advice of its outside
financial advisors, determines that the Acquiror Counter Proposal is not at
least as favorable to the Company's stockholders as the Superior Proposal, from
a financial point of view.
ARTICLE VI
Additional Agreements
Section 6.01. Registration Statement; Joint Proxy Statement.
(a) As promptly as practicable after the execution of this Merger Agreement,
Acquiror and the Company shall prepare and file with the SEC a registration
statement on Form S-4 (such registration statement, together with the
amendments thereto being the "Registration Statement") containing a joint proxy
statement/prospectus (such joint proxy statement/prospectus, together with any
amendments thereof or supplements thereto, in each case in the form or forms to
be mailed to the stockholders of Acquiror and to the stockholders of the
Company, being the "Joint Proxy Statement") in connection with the registration
under the Securities Act of the shares of Acquiror Common Stock issuable
pursuant to Section 2.01, the vote of the stockholders of Acquiror with respect
to the Acquiror Charter Amendment, the issuance of Acquiror Common Stock
pursuant to the Merger Agreement and the vote of the stockholders of the
Company with respect to this Merger Agreement. Acquiror agrees to provide the
Company with an opportunity to review and comment on the Registration Statement
and the Joint Proxy Statement before filing. Each party agrees promptly to
provide the other parties with copies of all correspondence from and all
responsive correspondence to the SEC regarding the Registration Statement and
Joint Proxy Statement. Each party agrees promptly to notify the other parties
of all stop orders or threatened stop orders of which it becomes aware with
respect to the Registration Statement. Each of Acquiror and the Company will
use all reasonable best efforts to have or cause the Registration Statement to
become effective as promptly as practicable, and shall take any action required
to be taken under any applicable federal or state securities Laws in connection
with the issuance of shares of Acquiror Common Stock in the Merger. Each of
Acquiror and the Company shall furnish all information concerning it and the
holders of its capital stock as the other may reasonably request in connection
with such actions. As promptly as practicable after the Registration Statement
shall have become effective, the Company and Acquiror shall mail the Joint
Proxy Statement to their respective stockholders and shall comply with the
proxy solicitation rules and regulations under the Exchange Act in connection
with the solicitation of such stockholders. The Company covenants and agrees
that the Joint Proxy Statement shall include the recommendation of the
Company's Board of Directors to the stockholders of the Company to vote to
approve this Merger Agreement and the transactions contemplated hereby, subject
to Section 5.05 above.
(b) The information supplied by the Company and its Subsidiaries for
inclusion in the Registration Statement shall not, at the time the Registration
Statement is declared effective, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading. The
information supplied by the Company and its Subsidiaries for inclusion in the
Joint Proxy Statement to be sent to the stockholders of the Company in
connection with the meeting of the stockholders of the Company to consider this
Merger Agreement (the "Company Stockholders' Meeting") shall not, at the date
the Joint Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to the stockholders of the Company and the stockholders of
Acquiror, at the time of the Company Stockholders' Meeting and the Acquiror
Stockholders' Meeting (as defined in Section 6.01(c)), or at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event or
circumstance
A-32
<PAGE>
relating to the Company or any of its affiliates, or its or their respective
officers or directors, should be discovered by the Company which should be set
forth in an amendment to the Registration Statement or a supplement to the
Joint Proxy Statement, the Company shall promptly inform Acquiror. All
documents that the Company is responsible for filing with the SEC in connection
with the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(c) The information supplied by Acquiror for inclusion in the Registration
Statement shall not, at the time the Registration Statement is declared
effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. The information supplied by Acquiror for
inclusion in the Joint Proxy Statement to be sent to the stockholders of
Acquiror in connection with the meeting of the stockholders of Acquiror to
consider the Acquiror Charter Amendment and the issuance of Acquiror Common
Stock pursuant to the Merger Agreement (the "Acquiror Stockholders' Meeting")
shall not, at the date the Joint Proxy Statement (or any amendment thereof or
supplement thereto) is first mailed to the stockholders of the Company and the
stockholders of Acquiror, at the time of the Company Stockholders' Meeting and
the Acquiror Stockholders' Meeting, or at the Effective Time, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein, in
the light of the circumstances under which they are made, not misleading. If at
any time prior to the Effective Time any event or circumstance relating to
Acquiror or any of its respective affiliates, or its or their respective
officers or directors, should be discovered by Acquiror which should be set
forth in an amendment to the Registration Statement or a supplement to the
Joint Proxy Statement, Acquiror shall promptly inform the Company. All
documents that Acquiror is responsible for filing with the SEC in connection
with the transactions contemplated herein will comply as to form and substance
in all material respects with the applicable requirements of the Securities Act
and the rules and regulations thereunder and the Exchange Act and the rules and
regulations thereunder.
(d) The Company and Acquiror each hereby (i) consents to the use of its name
and, on behalf of its subsidiaries and affiliates, the names of such
subsidiaries and affiliates, and to the inclusion of financial statements and
business information relating to such party and its subsidiaries and affiliates
(in each case, to the extent required by applicable securities Laws) in any
registration statement or proxy statement prepared by the Company or Acquiror
pursuant to this Merger Agreement; (ii) agrees to use its reasonable best
efforts to obtain the written consent of any Person retained by it which may be
required to be named (as an expert or otherwise) in such registration statement
or proxy statement; and (iii) agrees to cooperate, and to use its reasonable
best efforts to cause its subsidiaries and affiliates to cooperate, with any
legal counsel, investment banker, accountant or other agent or representative
retained by any of the parties specified in clause (i) in connection with the
preparation of any and all information required, as determined after
consultation with each party's counsel, to be disclosed by applicable
securities Laws in any such registration statement or proxy statement.
Section 6.02. Meetings of Stockholders.
(a) The Company shall promptly after the date of this Merger Agreement take
all action necessary in accordance with Delaware Law and its certificate of
incorporation and bylaws to duly call, give notice of, convene and hold the
Company Stockholders' Meeting (or, at the Company's election, submit written
consents in lieu of the Company Stockholders' Meeting), and the Company shall
consult with Acquiror in connection therewith. Subject to Section 5.05(e)
above, the Company shall use its reasonable best efforts to solicit from the
stockholders of the Company proxies or consents to approve this Merger
Agreement and shall take all other actions reasonably necessary or advisable to
secure the vote or consent of the stockholders of the Company required by
Delaware Law to approve this Merger Agreement and the transactions contemplated
hereby.
(b) Acquiror shall promptly after the date of this Merger Agreement take all
action necessary in accordance with Delaware Law and its certificate of
incorporation and bylaws to duly call, give notice of, convene and hold the
Acquiror Stockholders' Meeting (or, at Acquiror's election, submit written
consents in lieu of the Acquiror's Stockholders' Meeting), and Acquiror shall
consult with the Company in connection
A-33
<PAGE>
therewith. Acquiror shall use its reasonable best efforts to solicit from its
stockholders proxies or consents to approve the Acquiror Charter Amendment and
the issuance of Acquiror Common Stock pursuant to the Merger Agreement and
shall take all other actions reasonably necessary or advisable to secure the
vote or consent of its stockholders required by Delaware Law to approve the
Acquiror Charter Amendment and the issuance of Acquiror Common Stock pursuant
to the Merger Agreement.
(c) Acquiror and the Company shall coordinate and cooperate with respect to
the timing of the Acquiror Stockholders' Meeting and the Company Stockholders'
Meeting and shall use their respective reasonable best efforts to hold the
Acquiror Stockholders' Meeting and the Company Stockholders' Meeting on the
same day as soon as practicable after the date on which the Registration
Statement becomes effective.
(d) If a party elects hereto to obtain stockholder approval by written
consent, (i) each reference in this Merger Agreement to a vote of stockholders
at a stockholders meeting of such party or the holding thereof shall mean and
be a reference to obtaining the written consent of such party's stockholders
and (ii) each reference to a solicitation of proxies by such party shall mean
and be a reference to the solicitation of written consents.
Section 6.03. Appropriate Action; Consents; Filings.
(a) Upon the terms and subject to the conditions set forth in this Merger
Agreement, the Company and its Subsidiaries and Acquiror shall use their
reasonable best efforts to take, or cause to be taken, all appropriate action,
and do, or cause to be done, and to assist and cooperate with the other parties
in doing all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the transactions contemplated by
this Merger Agreement as promptly as practicable, including (i) executing and
delivering any additional instruments necessary, proper or advisable to
consummate the transactions contemplated by, and to carry out fully the
purposes of, this Merger Agreement, (ii) obtaining from any Governmental
Entities any Licenses required to be obtained or made by Acquiror or the
Company or any of their subsidiaries in connection with the authorization,
execution and delivery of this Merger Agreement and the consummation of the
transactions contemplated herein, including, without limitation, the Holdco
Merger and the Merger, and (iii) making all necessary filings, and thereafter
making any other required submissions, with respect to this Merger Agreement
and the Holdco Merger and the Merger required under (A) the Securities Act, the
Exchange Act and any other applicable federal or state securities Laws, (B) the
HSR Act and (C) any other applicable Law; provided that Acquiror and the
Company and its Subsidiaries shall cooperate with each other in connection with
the making of all such filings, including providing copies of all such
Documents to the non-filing party and its advisors prior to filing and
discussing all reasonable additions, deletions or changes suggested in
connection therewith. The Company and its Subsidiaries and Acquiror shall
furnish to each other all information required for any application or other
filing to be made pursuant to the rules and regulations of any applicable Law
in connection with the transactions contemplated by this Merger Agreement.
(b) (i) The Company and its Subsidiaries and Acquiror shall give (or shall
cause their respective subsidiaries to give) any notices to third parties, and
use, and cause their respective subsidiaries to use, their reasonable best
efforts to obtain any third party consents, approvals or waivers (A) necessary,
proper or advisable to consummate the transactions contemplated in this Merger
Agreement, (B) disclosed or required to be disclosed in the Company Disclosure
Schedule or the Acquiror Disclosure Schedule, as the case may be, or (C)
required to prevent a Company Material Adverse Effect from occurring prior to
or after the Effective Time or an Acquiror Material Adverse Effect from
occurring prior to or after the Effective Time.
(ii) In the event that any party shall fail to obtain any third-party
consent, approval or waiver described in subsection (b)(i) above, such party
shall use its reasonable best efforts, and shall take any such actions
reasonably requested by the other parties hereto, to minimize any adverse
effect upon the Company and Acquiror, their respective subsidiaries, and their
respective businesses resulting, or which could reasonably be expected to
result after the Effective Time, from the failure to obtain such consent,
approval or waiver.
(c) From the date of this Merger Agreement until the Effective Time, the
Company and its Subsidiaries and Acquiror shall promptly notify each other in
writing of any pending or, to the knowledge of the Company
A-34
<PAGE>
and its Subsidiaries or Acquiror (or their respective subsidiaries), threatened
action, proceeding or investigation by any Governmental Entity or any other
Person (i) challenging or seeking damages in connection with the Mergers, the
conversion of the Company Common Stock into Holdco Common Stock pursuant to the
Holdco Merger, or the conversion of the Holdco Common Stock into Acquiror
Common Stock pursuant to the Merger or (ii) seeking to restrain or prohibit the
consummation of the Mergers or otherwise limit the right of Acquiror or its
subsidiaries to own or operate all or any portion of the businesses or Assets
of the Company or any Subsidiary. The Company and its Subsidiaries and Acquiror
shall cooperate with each other in defending any such action, proceeding or
investigation, including seeking to have any stay or temporary restraining
order entered by any court or other Governmental Entity vacated or reversed.
Section 6.04. Intentionally Deleted.
Section 6.05. Update Disclosure; Breaches.
From and after the date of this Merger Agreement until the Effective Time,
each party hereto shall promptly notify the other parties hereto by written
update to the Company Disclosure Schedule or Acquiror Disclosure Schedule, as
the case may be, of (a) any representation or warranty made by it in connection
with this Merger Agreement becoming untrue or inaccurate in any material
respect, (b) the occurrence, or non-occurrence, of any event the occurrence, or
non-occurrence, of which would be likely to cause any condition to the
obligations of any party to effect the Merger and the other transactions
contemplated by this Merger Agreement not to be satisfied, or (c) the failure
of any party to comply with or satisfy any covenant, condition or agreement to
be complied with or satisfied by it pursuant to this Merger Agreement which
would be likely to result in any condition to the obligations of any party to
effect the Merger and the other transactions contemplated by this Merger
Agreement not to be satisfied; provided, however, that the delivery of any
notice pursuant to this Section 6.05 shall not cure any breach of any
representation or warranty requiring disclosure of such matter prior to the
date of this Merger Agreement or otherwise limit or affect the rights and
remedies available hereunder to the party receiving such notice. The Company
and its Subsidiaries shall deliver to Acquiror an updated version of Section
3.15 of the Company Disclosure Schedule as of the Closing Date (other than
events disclosed in Company SEC Documents filed prior to the Closing Date),
solely to reflect events occurring between the date of this Merger Agreement
and the Closing Date, or shall have notified Acquiror that no changes to such
Section of the Company Disclosure Schedule are required. Acquiror shall deliver
to the Company an updated version of Section 4.19 of the Acquiror Disclosure
Schedule as of the Closing Date (other than events disclosed in Acquiror SEC
Documents filed prior to the Closing Date), solely to reflect events occurring
between the date of this Merger Agreement and the Closing Date, or shall have
notified the Company that no changes to such Section of the Acquiror Disclosure
Schedule are required.
Section 6.06. Public Announcements.
Acquiror, Acquiror Sub and the Splitrock Entities shall consult with each
other before issuing or making, and shall give each other the opportunity to
review and comment upon, any press release or other public statement with
respect to the Mergers and the other transactions contemplated in this Merger
Agreement, and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by Law or any
listing agreement with The Nasdaq Stock Market.
Section 6.07. Employee Matters.
(a) The Company may establish retention and severance and other compensation
arrangements for its and its Subsidiaries' officers or employees in an amount
not to exceed in the aggregate the amounts set forth in Section 6.07 of the
Company Disclosure Schedule. Each of the Company and its Subsidiaries and the
Acquiror shall consult with the other on the design and implementation of such
arrangements.
(b) From and after the Effective Time, Acquiror will cause the Company and
its Subsidiaries to honor, in accordance with their terms, all existing written
employment and severance agreements between the Company and its Subsidiaries
and any current or former officer, director or employee of the Company or any
of its Subsidiaries.
A-35
<PAGE>
(c) From and after the Effective Time and for the period ending no sooner
than December 31, 2000 (the "Transition Period"), Acquiror shall cause the
Holdco Surviving Corporation to either maintain the total package of employee
compensation, benefits and options provided by the Company and its Subsidiaries
immediately before the Effective Time or replace all or any such programs with
a similar aggregate package of employee compensation, benefits and options
maintained for similarly situated employees of Acquiror; provided, that the
aggregate level of such similar aggregate package provided during the
Transition Period shall be substantially similar to the aggregate level of the
total package provided by the Company and its Subsidiaries immediately before
the Effective Time. To the extent that any plan of Acquiror or any of its
Significant Subsidiaries (an "Acquiror Plan") becomes applicable to any
employee or former employee of the Company or its Subsidiaries, Acquiror shall
grant, or cause to be granted, to such employees or former employees credit for
their service with the Company and its Subsidiaries (and any of their
predecessors) for the purpose of determining eligibility to participate and
nonforfeitability of benefits under such Acquiror Plan and for purposes of
benefit accrual under vacation and severance pay plans (but only to the extent
such service was credited under similar plans of the Company and its
Subsidiaries).
(d) With respect to any Welfare Plan of Acquiror or its Significant
Subsidiaries made available to individuals who immediately prior to the Closing
Date were employees of the Company or any of its Subsidiaries, from and after
the Effective Time Acquiror shall, or shall cause the Holdco Surviving
Corporation to, waive any waiting periods, pre-existing condition exclusions
and actively-at-work requirements to the extent such provisions were
inapplicable immediately before such plan was made available and provide that
any expenses incurred on or before the date such plan was made available by any
such individual or such individual's covered dependents shall be taken into
account for purposes of satisfying applicable deductible, coinsurance and
maximum out-of-pocket provisions under the Welfare Plan.
Section 6.08. Unaudited Financial Information.
The Company will cause to be prepared and will furnish to Acquiror as
promptly as practicable an unaudited consolidated balance sheet of the Company
and the Subsidiaries as of the last day of each month ending after November 30,
1999 (the "Unaudited Balance Sheets") and the related unaudited consolidated
statements of income and cash flows of the Company and the Subsidiaries for the
one-month periods then ended (together with the Unaudited Balance Sheets, the
"Unaudited Financial Statements"). The Company will ensure that such Unaudited
Financial Statements are complete and correct in all material respects, have
been prepared in accordance with the books and records of the Company and the
Subsidiaries, and present fairly the consolidated financial position of the
Company and the Subsidiaries and their consolidated results of operations and
cash flows as of and for the respective dates and time periods in accordance
with GAAP applied on a basis
consistent with prior accounting periods, except as noted thereon and subject
to normal and recurring year-end adjustments which are not expected to be
material in amount.
Section 6.09. Intentionally Deleted.
Section 6.10. Post-Signing SEC Documents.
Each of the Company and Acquiror will file with the SEC all reports,
schedules, forms, statements and other Documents required to be filed by it
after the date of this Merger Agreement but before the Effective Time (in the
case of the Company, the "Company Post-Signing SEC Documents" and, in the case
of Acquiror, the "Acquiror Post-Signing SEC Documents").
Section 6.11. Affiliates.
Prior to the Effective Time, the Company shall use its reasonable best
efforts to obtain Affiliate Agreements from each Person listed in Section 3.23
of the Company Disclosure Schedule and any Person who may be deemed to have
become an affiliate of the Company after the date of this Merger Agreement and,
if at or after the Holdco Effective Time, any Person who may be deemed to have
become an affiliate of Holdco, at or prior to the Effective Time for purposes
of compliance with Securities Act Rule 145, provided that the
A-36
<PAGE>
Company shall use its reasonable best efforts to obtain Affiliate Agreements
from each such Person as soon as practicable after the date of this Merger
Agreement or the date on which such Person attains such status, as the case may
be.
Section 6.12. Tax Returns.
To the extent permitted under applicable Tax Laws, the Holdco Merger and the
Merger shall each be reported as a "reorganization" within the meaning of
Section 368(a) of the Code in all material federal, state and local Tax Returns
filed after the Effective Time. Notwithstanding any other provision of this
Merger Agreement, the obligations set forth in this Section 6.12 shall survive
the Effective Time without limitation as to time or in any other respect.
Section 6.13. Reorganization.
During the period from the date of this Merger Agreement through the
Effective Time, unless Acquiror and the Company shall otherwise agree in
writing, Acquiror and the Splitrock Entities shall not, and shall cause their
respective subsidiaries not to, knowingly take or fail to take any action which
action or failure would jeopardize the qualification of the Holdco Merger or
the Merger as a reorganization within the meaning of Section 368(a) of the
Code.
Section 6.14. Directors' and Officers' Insurance; Indemnification.
(a) Acquiror agrees that for the entire period from the Effective Time until
six (6) years after the Effective Time, (a) Acquiror will cause the Surviving
Corporation to maintain and to honor (including, without limitation, by
providing the Surviving Corporation with sufficient funding) the Company's
current directors' and officers' insurance and indemnification policy and
related arrangements, or an equivalent policy and related arrangements, subject
in either case to terms and conditions no less advantageous to the present and
former directors and officers of the Company than those contained in the policy
and arrangements in effect on the date hereof, for all present and former
directors and officers of the Company, covering claims made and insurable
events occurring prior to or within six (6) years after the Effective Time
(provided that the Surviving Corporation will not be required to maintain such
policy except to the extent that the aggregate annual cost of maintaining such
policy is not in excess of two hundred percent (200%) of the current annual
cost, in which case the Surviving Corporation shall maintain such policies up
to an annual cost of two hundred percent (200%) of the current annual cost);
and (b) Acquiror will and will cause the Surviving Corporation to fulfill and
honor indemnification provisions, including, without limitation, provisions for
expense advances, for present and former officers and directors under the
Company's certificate of incorporation or bylaws as in effect
immediately prior to the Effective Time. In the event of any threatened or
actual claim, action, suit, proceeding or investigation, whether civil,
criminal or administrative, including, without limitation, any such claim,
action, suit proceeding or investigation in which any of the present or former
officers or directors (the "Managers") of the Company is, or is threatened to
be, made a party by reason of the fact that such Manager is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other entity, whether before
or after the Effective Time, the parties hereto agree to cooperate and use
their reasonable best efforts to defend against and respond thereto. It is
understood and agreed that the Company shall indemnify and hold harmless, and
after the Effective Time each of the Surviving Corporation and Acquiror shall
indemnify and hold harmless in accordance with the provisions under the
Company's certificate of incorporation or bylaws as in effect immediately prior
to the Effective Time, to the full extent that the Surviving Corporation would
be permitted by applicable Law (and as to matters arising from or relating to
this Merger Agreement and the possible change in control of the Company, to the
full extent that Acquiror would be permitted under applicable Law), each such
Manager against any losses, claims, damages, liabilities, costs, expenses
(including reasonable attorneys' fees), judgments, fines and amounts paid in
settlement in connection with any such claim, action, suit, proceeding or
investigation; and in the event of any such claim, action, suit, proceeding or
investigation (whether arising before or after the Effective Time), (i) the
Managers may retain counsel satisfactory to them, and the Company, or the
Surviving Corporation and Acquiror after the Effective Time,
A-37
<PAGE>
shall pay all reasonable fees and expenses of such counsel for the Managers
promptly as statements therefor are received whether before or after final
determination of the matter, and (ii) the Company, or the Surviving Corporation
and Acquiror after the Effective Time, will use their respective reasonable
best efforts to assist in the vigorous defense of any such matter; provided
that none of the Company, its Subsidiaries, the Surviving Corporation or
Acquiror shall be liable for any settlement effected without its prior written
consent (which consent shall not be unreasonably withheld); and provided,
further, that the Company's, the Surviving Corporation's and Acquiror's
obligations hereunder shall only be reduced or relieved when and if a court of
competent jurisdiction shall ultimately determine, and such determination shall
have become final and non-appealable, that indemnification of such Manager in
the manner contemplated is prohibited by applicable Law.
(b) If Acquiror or any of its successors or assigns shall consolidate with
or merge into any other entity and shall not be the continuing or surviving
entity of such consolidation or merger or shall transfer all or substantially
all of its assets to any entity, then and in each case, proper provision shall
be made so that the successors and assigns of Acquiror shall assume the
obligations set forth in this Section 6.14.
Section 6.15. Obligations of Acquiror Sub.
Acquiror shall take all action necessary to cause Acquiror Sub and, after
the Effective Time, the Surviving Corporation, to perform its obligations under
this Merger Agreement and to cause Acquiror Sub to consummate the Merger on the
terms and conditions set forth in this Merger Agreement.
Section 6.16. Acquiror Option Shares.
Acquiror will use its reasonable best efforts to insure that any shares of
Acquiror Common Stock issued upon exercise of the Acquiror Options referred to
in Section 2.04 and upon exercise of Acquiror Warrants referred to in Section
2.05 will be registered under the Securities Act pursuant to registration
statements on Form S-8, Form S-3 or Form S-4 (or any successor or other
appropriate forms) and will be approved for listing (subject to official notice
of issuance) on The Nasdaq Stock Market's National Market System or an
exchange, if shares of Acquiror Common Stock are traded on such exchange.
Acquiror shall use its reasonable best efforts to cause the effectiveness of
such registration statements on Form S-8, Form S-3 or Form S-4 (and current
status of the prospectus or prospectuses contained therein) to be maintained
for so long as Acquiror Options and Acquiror Warrants remain outstanding.
Section 6.17. Obligations of Holdco and Merger Sub.
The Company shall take all action necessary to cause Holdco and Merger Sub
to perform their obligations under this Merger Agreement and to cause Holdco
and Merger Sub to consummate the Mergers on the terms and conditions set forth
in this Merger Agreement. In addition to and not in limitation of the
foregoing, (a) the Company shall cause Merger Sub and Holdco to, and Merger Sub
and Holdco shall, promptly after the date of this Merger Agreement, take all
action necessary in accordance with Delaware Law and the certificate of
incorporation and bylaws of Merger Sub to effect the approval of the Holdco
Merger and this Merger Agreement by Holdco as the sole stockholder of Merger
Sub, and (b) the Company shall, and shall cause Holdco to, and Holdco shall,
promptly after the date of this Merger Agreement, take all action necessary in
accordance with Delaware Law and the certificate of incorporation and bylaws of
Holdco to effect the approval of the Merger and this Merger Agreement by the
Company as the sole stockholder of Holdco.
Section 6.18. Intentionally Deleted.
Section 6.19. Debentures.
(a) Promptly following the date of this Merger Agreement, the Company shall
commence a consent solicitation ("Consent Solicitation") with respect to all
holders of the Company's outstanding 11 3/4 % Senior Notes due 2008 (the
"Debentures") and shall use reasonable best efforts to amend the related
Indenture, dated as of July 24, 1998 (the "Indenture"), between the Company and
Harris Trust Company of New York (formerly Bank of Montreal Trust Company), as
trustee (the "Indenture Trustee") or obtain appropriate waivers
A-38
<PAGE>
from the noteholders under the Indenture in order that the transactions
contemplated by this Merger Agreement shall not violate the Indenture;
provided, however, that the Company shall only be required to take the
foregoing actions if, after consultation with Acquiror, the Company reasonably
believes that such actions are necessary so that the transactions contemplated
by this Merger Agreement will not violate the Indenture. Upon the receipt of
the Requisite Consent (as defined in Article X) with respect to such Consent
Solicitation, the Company shall execute and use its reasonable best efforts to
cause the Indenture Trustee to execute the amendment to the Indenture. The
Company shall consult with Acquiror with respect to the Consent Solicitation
and provide copies of any materials prepared in connection therewith to
Acquiror prior to the mailing or distribution thereof to the noteholders or the
Indenture Trustee.
(b) Acquiror agrees that it will cause the Holdco Surviving Corporation
following the Effective Time to comply with the provisions of Section 4.08 of
the Indenture relating to a "Change of Control Offer" (as defined in such
Indenture) to the holders of the Company's 11 3/4% Senior Notes due 2008.
Section 6.20. Company Warrants.
The Company, with the prior consent of Acquiror (which consent will not be
unreasonably withheld), may enter into an amendment to the Company Warrant
Agreement (the "Company Warrant Agreement Amendment") or obtain appropriate
waivers from the holders of Company Warrants to provide that the Company may
issue to the Warrant Agent (as defined in Company Warrant Agreement) all
Warrant Shares (as defined in Company Warrant Agreement) for which the
outstanding Company Warrants are exercisable.
Section 6.21. Certain Additional Actions.
(a) The Splitrock Entities will use their reasonable best efforts to insure
that each of the Mergers is consummated in accordance with all applicable Laws
and does not conflict with, result in a breach of, or constitute a default (or
an event that with notice or lapse of time or both would become a default)
under any Agreement to which any of the Splitrock Entities or any Subsidiary is
a party or by which any of the Splitrock Entities or any Subsidiary, or any of
their respective Assets, may be bound, or otherwise result in or require the
creation or imposition of, or result in the acceleration of, any indebtedness
or any Encumbrance of any nature upon, or with respect to, any of the Splitrock
Entities or any Subsidiary or any of the Assets now owned or hereafter acquired
by any of the Splitrock Entities or any Subsidiary.
(b) Acquiror will use its reasonable best efforts to insure that the Merger
is consummated in accordance with all applicable Laws and does not conflict
with, result in a breach of, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under any Agreement to
which Acquiror or any Significant Subsidiary is a party or by which Acquiror or
any Significant Subsidiary, or any of their Assets, may be bound, or otherwise
result in or require the creation or imposition of, or result in the
acceleration of, any indebtedness or any Encumbrance of any nature upon, or
with respect to, Acquiror or any Significant Subsidiary or any of the Assets
now owned or hereafter acquired by Acquiror or any Significant Subsidiary.
Section 6.22. Consummation of Holdco Merger.
The Splitrock Entities shall take all action necessary to consummate or
cause the consummation of the Holdco Merger on the terms and conditions set
forth in this Merger Agreement.
ARTICLE VII
Conditions Precedent
Section 7.01. Conditions to Obligations of Each Party Under This Merger
Agreement.
The respective obligations of each party to effect the Merger and the other
transactions contemplated herein shall be subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all
A-39
<PAGE>
of which may be waived by agreement of Acquiror and the Company, in whole or in
part, to the extent permitted by applicable Law:
(a) Effectiveness of the Registration Statement. The Registration Statement
shall have been declared effective by the SEC under the Securities Act. No stop
order suspending the effectiveness of the Registration Statement shall have
been issued by the SEC and no proceedings for that purpose shall have been
initiated or, to the knowledge of Acquiror or the Company, threatened by the
SEC and not concluded or withdrawn. Acquiror shall have received all other
federal or state securities permits and other authorizations necessary to issue
Acquiror Common Stock in exchange for Holdco Common Stock and upon exercise of
Acquiror Options and Acquiror Warrants and to consummate the Merger.
(b) Stockholder Approval. The Acquiror Charter Amendment and the issuance of
Acquiror Common Stock pursuant to the Merger Agreement shall have been duly
approved and adopted by the requisite vote of the stockholders of Acquiror at
the Acquiror Stockholders' Meeting in accordance with applicable Law and the
certificate of incorporation and bylaws of Acquiror, and the Acquiror Charter
Amendment shall be in full force and effect. This Merger Agreement shall have
been duly approved and adopted by the vote of a majority of the outstanding
shares of Company Common Stock at the Company Stockholders' Meeting, such vote
to be obtained in accordance with applicable Law and the certificate of
incorporation and bylaws of the Company.
(c) No Order. No Governmental Entity or federal or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, executive order, decree, judgment, injunction or
other order (whether temporary, preliminary or permanent), in any case which is
in effect and which prevents or prohibits consummation of the Mergers;
provided, however, that each of the parties shall use its reasonable best
efforts to cause any such decree, judgment, injunction or other order to be
vacated or lifted.
(d) HSR Act. The applicable waiting period with respect to the Merger and
the other transactions contemplated hereby, together with any extensions
thereof, under the HSR Act shall have expired or been terminated.
(e) Other Approvals. All consents, waivers, approvals and authorizations
required to be obtained, and all filings or notices required to be made, by
Acquiror, the Company, Holdco or any Subsidiary prior to consummation of the
transactions contemplated in this Merger Agreement (other than the filing of
the Holdco Certificate of Merger and the Certificate of Merger in accordance
with Delaware Law) shall have been obtained from and made with all required
Governmental Entities, except for such consents, waivers, approvals or
authorizations which the failure to obtain, or such filings or notices which
the failure to make, would not have a Company Material Adverse Effect or an
Acquiror Material Adverse Effect or be reasonably likely to subject the
Company, any Subsidiary, Acquiror, Acquiror Sub or any of their respective
directors or officers to criminal liability or substantial penalties.
Section 7.02. Additional Conditions to Obligations of Acquiror and Acquiror
Sub.
The obligations of Acquiror and Acquiror Sub to effect the Merger and the
other transactions contemplated herein are also subject to the satisfaction at
or prior to the Effective Time of the following conditions, any or all of which
may be waived by Acquiror, in whole or in part, to the extent permitted by
applicable Law:
(a) Representations and Warranties. Each of the representations and
warranties of the Splitrock Entities contained in this Merger Agreement shall
be true and correct as of the date of this Merger Agreement and shall be true
and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects giving effect to such
standard) as of the Effective Time as though made as of the Effective Time,
except that those representations and warranties which address matters only as
of a particular date shall remain true and correct in all material respects
(except that where any statement in a representation or warranty expressly
includes a
A-40
<PAGE>
standard of materiality, such statement shall be true and correct in all
respects giving effect to such standard) as of such date, and except for (i)
changes permitted or contemplated by this Merger Agreement, or (ii) in a
representation and warranty that does not expressly include a standard of
materiality, any untrue or incorrect statements therein that, considered in the
aggregate, do not indicate a Company Material Adverse Effect. Acquiror shall
have received a certificate of the chief executive officer and chief financial
officer of each of the Company and Holdco to that effect.
(b) Intentionally Deleted.
(c) Agreements and Covenants. The Splitrock Entities shall have performed or
complied in all material respects with all agreements and covenants required by
this Merger Agreement to be performed or complied with by them on or prior to
the Effective Time. Acquiror shall have received a certificate of the chief
executive officer and chief financial officer of each of the Company and Holdco
to that effect.
(d) Consents Under Agreements. The Company or the appropriate Subsidiary
shall have obtained the consent or approval of each Person whose consent or
approval shall be required in connection with the Mergers under all Agreements
to which the Company or any Subsidiary is a party, except where the failure to
obtain any such consents or approvals, considered in the aggregate, would not
have a Company Material Adverse Effect or an Acquiror Material Adverse Effect.
(e) No Challenge. There shall not be pending any action, proceeding or
investigation by any Governmental Entity (i) challenging or seeking material
damages in connection with the Mergers, the conversion of the Company Common
Stock into Holdco Common Stock pursuant to the Holdco Merger or the conversion
of Holdco Common Stock into Acquiror Common Stock pursuant to the Merger, or
(ii) seeking to restrain or prohibit the consummation of the Mergers.
(f) Intentionally Deleted.
(g) Fractional Shares. The aggregate of the fractional share interests in
Acquiror Common Stock to be paid in cash pursuant to Section 2.02(e) of this
Merger Agreement shall not be more than five percent (5%) of the maximum
aggregate number of shares of Acquiror Common Stock which could be issued as a
result of the Merger.
(h) Non-Competition Agreements. Acquiror shall have received executed copies
of Non-Competition Agreements in the form of Exhibit F hereto from each of the
Key Persons (as defined in Article X) unless the failure to receive an executed
Non-Competition Agreement from any such Key Person is the result of the death
or disability of such Key Person.
(i) Company Material Adverse Effect. Since the date of this Merger
Agreement, there shall not have occurred a Company Material Adverse Effect;
provided, however, no decrease in the trading price of the Company Common Stock
on The Nasdaq Stock Market's National Market System in and of itself shall
constitute a Company Material Adverse Effect. Acquiror shall have received a
certificate of the chief executive officer and chief financial officer of each
of the Company and Holdco to that effect.
(j) Affiliate Agreements. Acquiror shall have received, after the date of
this Merger Agreement and on or prior to the Closing Date, a signed Affiliate
Agreement from each Person listed in Section 3.23 of the Company Disclosure
Schedule and any other Person who may be deemed to have become an affiliate of
the Company after the date of this Merger Agreement, or if at or after the
Holdco Effective Time, an affiliate of Holdco (under Rule 145 of the Securities
Act).
(k) Tax Opinion. Acquiror shall have received the opinion of Hogan & Hartson
L.L.P., counsel to Acquiror, in the form of Exhibit G, dated the Closing Date,
to the effect that the Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Code or, if viewed as a single integrated
transaction together with the Holdco Merger, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code. In rendering
such
A-41
<PAGE>
opinion, Hogan & Hartson L.L.P. shall require delivery of and rely upon the
representation letters delivered by Acquiror and Holdco substantially in the
forms of Exhibit H1 and Exhibit H2 hereto with respect to the Merger and
representation letters delivered by Holdco and the Company substantially in the
forms of Exhibit I1 and Exhibit I2 hereto with respect to the Holdco Merger.
(l) Stockholders' Agreement. Each of the Key Persons shall have executed and
delivered to Acquiror a Stockholders' Agreement (as defined in Article X).
(m) Opinions to Indenture Trustee. If the Company has elected to amend the
Indenture as contemplated by Section 6.19 hereof or if the Company is otherwise
required to deliver or otherwise delivers an opinion of its counsel to the
Indenture Trustee in connection with the transactions contemplated by this
Merger Agreement, Acquiror shall have received a copy of such opinion or
opinions.
(n) Consent Solicitation. To the extent necessary so that the transactions
contemplated by this Merger Agreement will not violate the Indenture, the
Company shall have obtained the Requisite Consent in form and substance
reasonably satisfactory to Acquiror with respect to the Consent Solicitation
and the Indenture Trustee shall have executed and delivered the amendment of
the Indenture in connection therewith.
(o) Holdco Effective Time. The Holdco Effective Time shall have occurred.
(p) Dissenters' Rights. No stockholder of the Company and no Holdco
Stockholder shall have any appraisal or dissenters' rights pursuant to the
certificate of incorporation of the Company or Holdco, as the case may be, or
any Law arising from, or in connection with, the consummation of the Mergers
and the other transactions contemplated by this Merger Agreement.
(q) Holdco and Merger Sub Stockholder Approval. The approval of the
stockholders of Holdco and Merger Sub shall have occurred as provided in
Section 3.10(a).
(r) Intentionally Deleted.
(s) Listing of Holdco Common Stock. The Holdco Common Stock to be issued in
the Holdco Merger shall have been listed on The Nasdaq Stock Market's National
Market System at and after the Holdco Effective Time.
(t) Resignation of Directors and Officers. Each of the directors and
officers of the Holdco Surviving Corporation shall have delivered letters of
resignation to Acquiror resigning as directors and officers of the Holdco
Surviving Corporation effective at the Effective Time.
Section 7.03. Additional Conditions to Obligations of the Splitrock
Entities.
The obligations of the Splitrock Entities to effect the Merger and the other
transactions contemplated herein are also subject to the satisfaction at or
prior to the Effective Time of the following conditions, any or all of which
may be waived by the Company, in whole or in part, to the extent permitted by
applicable Law:
(a) Representations and Warranties. Each of the representations and
warranties of Acquiror and Acquiror Sub contained in this Merger Agreement
shall be true and correct as of the date of this Merger Agreement and shall be
true and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects giving effect to such
standard) as of the Effective Time as though made as of the Effective Time,
except that those representations and warranties which address matters only as
of a particular date shall remain
A-42
<PAGE>
true and correct in all material respects (except that where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be true and correct in all respects giving effect to such
standard) as of such date, and except for (i) changes permitted or contemplated
by this Merger Agreement or (ii) in a representation and warranty that does not
expressly include a standard of materiality, any untrue or incorrect statements
therein that, considered in the aggregate, do not indicate an Acquiror Material
Adverse Effect. The Company shall have received a certificate of the chief
executive officer and chief financial officer of Acquiror to that effect.
(b) Agreements and Covenants. Acquiror and Acquiror Sub shall have performed
or complied in all material respects with all agreements and covenants required
by this Merger Agreement to be performed or complied with by them on or prior
to the Effective Time. The Company shall have received a certificate of the
chief executive officer and chief financial officer of Acquiror to that effect.
(c) No Challenge. There shall not be pending any action, proceeding or
investigation by any Governmental Entity (i) challenging or seeking material
damages in connection with the Mergers, the conversion of the Company Common
Stock into Holdco Common Stock pursuant to the Holdco Merger or the conversion
of Holdco Common Stock into Acquiror Common Stock pursuant to the Merger, or
(ii) seeking to restrain or prohibit the consummation of the Mergers.
(d) Tax Opinion. The Company shall have received the opinion of Fried,
Frank, Harris, Shriver & Jacobson, counsel to the Company, in the form of
Exhibit J, dated the Closing Date, to the effect that the Mergers will each
qualify as a reorganization within the meaning of Section 368(a) of the Code or
if the Mergers are viewed as a single integrated transaction, the Mergers
together will qualify as a reorganization within the meaning of Section 368(a)
of the Code. In rendering such opinion, Fried, Frank, Harris, Shriver &
Jacobson shall require delivery of and rely upon the representation letters
delivered by Acquiror and Holdco substantially in the forms of Exhibit H1 and
Exhibit H2 hereto with respect to the Merger and representation letters
delivered by Holdco and the Company substantially in the forms of Exhibit I1
and Exhibit I2 hereto with respect to the Holdco Merger.
(e) Intentionally Deleted.
(f) Listing of Acquiror Common Stock. The Acquiror Common Stock to be issued
in the Merger and upon exercise of the Acquiror Options and Acquiror Warrants
will be approved for listing (subject to official notice of issuance) on The
Nasdaq Stock Market's National Market System.
(g) Acquiror Material Adverse Effect. Since the date of this Merger
Agreement, there shall not have occurred an Acquiror Material Adverse Effect;
provided, however, no decrease in the trading price of the Acquiror Common
Stock on The Nasdaq Stock Market's National Market System in and of itself
shall constitute an Acquiror Material Adverse Effect. The Company shall have
received a certificate of the chief executive officer and the chief financial
officer of Acquiror to that effect.
(h) Holdco Effective Time. The Holdco Effective Time shall have occurred.
ARTICLE VIII
Termination, Amendment and Waiver
Section 8.01. Termination.
This Merger Agreement may be terminated at any time prior to the Effective
Time by written notice by the terminating party to the other party (except if
such termination is pursuant to Section 8.01(a)), notwithstanding approval of
this Merger Agreement by the stockholders of the Company and the approval of
the Acquiror Charter Amendment and the issuance of Acquiror Common Stock
pursuant to the Merger Agreement by the stockholders of Acquiror:
(a) by mutual written agreement of Acquiror and the Company;
A-43
<PAGE>
(b) by either Acquiror or the Company, if
(i) the Merger shall not have been consummated by July 30, 2000 (the
"End Date"); provided, however, that the right to terminate this Merger
Agreement under this Section 8.01(b)(i) shall not be available to any party
whose breach of any provision of this Merger Agreement has resulted in the
failure of the Merger to occur on or before the End Date;
(ii) there shall be any law or regulation that makes consummation of the
Merger illegal or otherwise prohibited or any judgment, injunction, order
or decree of any Governmental Entity having competent jurisdiction
enjoining Acquiror, Acquiror Sub or the Company from consummating the
Merger is entered and such judgment, injunction, judgment or order shall
have become final and nonappealable and, prior to such termination, the
parties shall have used reasonable best efforts to resist, resolve or lift,
as applicable, such law, regulation, judgment, injunction, order or decree;
(iii) the holders of Acquiror Common Stock do not approve the Acquiror
Charter Amendment and the issuance of Acquiror Common Stock pursuant to the
Merger Agreement; or
(iv) the holders of Company Common Stock do not approve this Merger
Agreement;
(c) by Acquiror, (i) if the Company's Board of Directors shall have (A)
amended, modified, withdrawn, conditioned or qualified its recommendation in
favor of approval of this Merger Agreement in a manner adverse to Acquiror or
(B) recommended any Superior Proposal for the Company to its stockholders; (ii)
if there shall have occurred a willful and material breach of Section 5.05 by
the Company, any Subsidiary or any of their respective officers, directors,
employees, representatives or agents; (iii) if following the announcement or
receipt of a proposal for a Competing Transaction, the Company shall have
failed to proceed to hold the Company Stockholders' Meeting pursuant to the
first sentence of Section 6.02(a) by the End Date; or (iv) if a breach of any
representation, warranty, covenant or agreement on the part of any of the
Splitrock Entities set forth in this Merger Agreement shall have occurred that
would cause the conditions set forth in Section 7.02(a) or Section 7.02(c) not
to be satisfied, and such condition shall be incapable of being satisfied by
the End Date;
(d) by the Company, (i) if Acquiror's Board of Directors shall have amended,
modified, withdrawn, conditioned or qualified its recommendation in favor of
approval of the Acquiror Charter Amendment or the issuance of Acquiror Common
Stock pursuant to the Merger Agreement; (ii) if a breach of any representation,
warranty, covenant or agreement on the part of Acquiror set forth in this
Merger Agreement shall have occurred that would cause the conditions set forth
in Section 7.03(a) or Section 7.03(b) not to be satisfied, and such condition
shall be incapable of being satisfied by the End Date; (iii) if Acquiror
materially breaches its obligations under the Network Agreements, which breach
is not capable of being cured or has not been cured ten (10) calendar days
after the Company gives written notice to Acquiror of such breach; or (iv)
except in the event of the announcement or receipt of a proposal for a
Competing Transaction which has not been publicly rejected by the Company,
Acquiror shall have failed to hold the Acquiror Stockholders' Meeting pursuant
to the first sentence of Section 6.02(b) by the End Date; or
(e) by the Company in order to enter into an agreement with respect to a
Superior Proposal (provided the Company has complied with terms of Section
5.05).
Section 8.02. Effect of Termination.
If this Merger Agreement is terminated pursuant to Section 8.01, the
provisions of Sections 8.02, 8.03, 9.02, 9.05, 9.06, 9.07, 9.10 and 9.12 of
this Merger Agreement shall remain in full force and effect and survive any
termination of this Merger Agreement. Nothing herein shall release any party
from liability for a breach of this Merger Agreement.
A-44
<PAGE>
Section 8.03. Expenses.
(a) Except as set forth in this Section 8.03, all fees and expenses incurred
in connection herewith and the transactions contemplated hereby shall be paid
by the party incurring such expenses, whether or not the Merger is consummated,
except that expenses incurred in connection with the filing, printing and
mailing of the Joint Proxy Statement and the Registration Statement shall be
shared equally by Acquiror and the Company.
(b) If this Merger Agreement is terminated pursuant to Section 8.01(b)(i) or
(iv) or Section 8.01(c)(i), (ii) or (iii) (in each case only if the Company or
its stockholders have received in writing, or there shall have been publicly
disclosed, a Competing Transaction for the Company on or before the date of
such termination and an agreement or agreements to effect a Competing
Transaction are entered into within one year of such termination (a "Company
Subsequent Alternate Transaction")), then the Company shall pay to Acquiror a
termination fee equal to $68,000,000 (the "Company Termination Fee").
(c) If this Merger Agreement is terminated pursuant to Section 8.01(e), the
Company shall pay to Acquiror the Company Termination Fee.
(d) Any payment of the Company Termination Fee pursuant to Section 8.03(b)
shall be made by wire transfer in immediately available funds within two (2)
business days after entering into the Company Subsequent Alternate Transaction.
Any payment of the Company Termination Fee pursuant to Section 8.03(c) shall be
made by wire transfer in immediately available funds within two (2) business
days after termination of this Merger Agreement pursuant to Section 8.01(e). If
the Company fails to pay any fee or expense due
hereunder (including the Company Termination Fee), the Company shall pay the
costs and expenses (including legal fees and expenses) in connection with any
action, including the filing of any lawsuit or other legal action, taken to
collect payment, together with interest on the amount of any unpaid fee and/or
expense at the publicly announced prime rate of Citibank, N.A. from the date
such fee was required to be paid to the date it is paid.
(e) The remedies provided for in this Section 8.03 shall not be exclusive of
any rights at law or in equity that any party may have in the event of a
termination of this Merger Agreement.
Section 8.04. Amendment.
This Merger Agreement may be amended by the parties hereto at any time prior
to the Effective Time; provided, however, that, after approval of this Merger
Agreement by the stockholders of the Company, there may not be, without further
approval of such stockholders, any amendment which by law requires further
approval by such stockholders without such further approval. This Merger
Agreement may not be amended except by an instrument in writing signed by the
parties hereto.
Section 8.05. Extension; Waiver.
At any time prior to the Effective Time, the parties hereto may (a) extend
the time for the performance of any of the obligations or other acts of the
other parties hereto, (b) waive any inaccuracies in the representations and
warranties contained herein or in any Document delivered pursuant hereto and
(c) subject to the proviso of Section 8.04, waive compliance with any of the
agreements or conditions contained herein. Any such extension or waiver shall
be valid if set forth in an instrument in writing signed by the party or
parties to be bound thereby. The failure of any party to assert any of its
rights under this Merger Agreement or otherwise shall not constitute a waiver
of such rights.
ARTICLE IX
General Provisions
Section 9.01. Non-Survival of Representations and Warranties.
The representations and warranties contained herein and in any certificate
or other writing delivered pursuant hereto shall not survive the Effective
Time.
A-45
<PAGE>
Section 9.02. Notices.
All notices and other communications given or made pursuant hereto shall be
in writing and shall be deemed to have been duly given or made as of the date
delivered, if delivered personally, three (3) business days after being mailed
by registered or certified mail (postage prepaid, return receipt requested) or
one (1) business day after being sent by overnight courier (providing proof of
delivery) to the parties at the following addresses or sent by electronic
transmission (with confirmation) to the following telecopier numbers (or at
such other address or telecopier number for a party as shall be specified by
like notice):
(a) If to Acquiror or Acquiror Sub:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
Telecopier No.: (319) 790-7901
Attention: Randall Rings
Vice President, General Counsel and Secretary
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004
Telecopier No.: (202) 637-5910
Attention: Joseph G. Connolly, Jr.
(b) If to the Splitrock Entities:
Splitrock Services, Inc.
9012 New Trails Drive
The Woodlands, TX 77381
Telecopier No.: (281) 465-1953
Attention: Patrick J. McGettigan, Jr.
With a copy (which shall not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue
Washington, DC 20004
Telecopier No.: 202-639-7003
Attention: Richard A. Steinwurtzel, Esq.
Section 9.03. Headings.
The headings contained in this Merger Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Merger Agreement.
Section 9.04. Severability.
If any term or other provision of this Merger Agreement is invalid, illegal
or incapable of being enforced by any rule of Law or public policy, all other
conditions and provisions of this Merger Agreement shall nevertheless remain in
full force and effect so long as the economic or legal substance of the
transactions contemplated hereby is not affected in any manner materially
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
A-46
<PAGE>
negotiate in good faith to modify this Merger Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner
to the end that transactions contemplated hereby are fulfilled to the extent
possible.
Section 9.05. Entire Agreement.
This Merger Agreement (together with the Exhibits, Schedules, the Company
Disclosure Schedule and the Acquiror Disclosure Schedule and the other
Documents delivered pursuant hereto) and the Confidentiality Agreement
constitute the entire agreement of the parties and supersede all prior
agreements and undertakings, both written and oral, among the parties, or any
of them, with respect to the subject matter hereof and, except as expressly
provided herein, are not intended to confer upon any other Person any rights or
remedies hereunder.
Section 9.06. Assignment.
This Merger Agreement shall not be assigned by operation of Law or otherwise
without the prior written consent of the other parties, which may be withheld
in either party's sole discretion.
Section 9.07. Parties in Interest.
This Merger Agreement shall be binding upon, inure solely to the benefit of
and be enforceable by each party and its respective successors and assigns
hereto, and, except for Sections 2.01, 2.02, 2.04, 2.05, 6.07 and 6.14, nothing
in this Merger Agreement, express or implied, is intended to or shall confer
upon any other Person other than the parties hereto and the stockholders of the
Company any right, benefit or remedy of any nature whatsoever under or by
reason of this Merger Agreement.
Section 9.08. Mutual Drafting.
Each party hereto has participated in the drafting of this Merger Agreement,
which each party acknowledges is the result of extensive negotiations between
the parties.
Section 9.09. Specific Performance.
In addition to any other remedies which any party may have at law or in
equity, (a) each of the Splitrock Entities hereby acknowledges that the Company
Common Stock, Holdco Common Stock and the Company and the Subsidiaries are
unique, and that the harm to Acquiror resulting from breaches by any of the
Splitrock Entities of their obligations cannot be adequately compensated by
damages and (b) Acquiror and Acquiror Sub hereby acknowledge that the Acquiror
Common Stock and Acquiror and Acquiror Sub are unique, and that the harm to the
Company resulting from breaches by Acquiror or Acquiror Sub of their respective
obligations cannot be adequately compensated by damages. Accordingly, each
party agrees that the other parties shall have the right to have all
obligations, undertakings, agreements, covenants and other provisions of this
Merger Agreement specifically performed by such party and that the other
parties shall have the right to obtain an order or decree of such specific
performance in any of the courts of the United States of America or of any
state or other political subdivision thereof.
Section 9.10. Governing Law.
This Merger Agreement shall be governed by, and construed in accordance
with, the Laws of the State of Delaware without regard to any principles of
Delaware conflicts of law.
Section 9.11. Counterparts.
This Merger Agreement may be executed and delivered in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed and delivered shall be deemed to be an original but
all of which taken together shall constitute one and the same agreement.
A-47
<PAGE>
Section 9.12. Confidentiality.
All information delivered to or obtained by or on behalf of any party to
this Merger Agreement shall be held pursuant to the Confidentiality Agreement.
Section 9.13. Holdco Reorganization.
In connection with the Holdco Merger, all of the rights and obligations of
the Company under this Merger Agreement shall be deemed to have been assigned
to and assumed by Holdco; it being understood and agreed that the Company shall
continue to be obligated under this Merger Agreement notwithstanding such
assignment and assumption. All references to the Company herein shall be deemed
at and after the Holdco Effective Time to refer to Holdco as appropriate
consistent with the immediately preceding sentence.
Section 9.14. Option Exercise.
(a) Acquiror will not exercise any Option (as defined in an Option
Agreement) granted under an Option Agreement, in whole or in part for cash, and
then proceed with the Merger unless Hogan & Hartson L.L.P. and Fried, Frank,
Harris, Shriver & Jacobson are able to opine that the Merger qualifies as a tax
free reorganization within the meaning of Section 368(a) of the Code.
(b) If Acquiror exercises any Option granted under an Option Agreement (i)
the forms of the tax opinions received from Hogan & Hartson L.L.P. and Fried,
Frank, Harris, Shriver & Jacobson, attached as Exhibit G and Exhibit J
respectively, and/or (ii) the forms of representation letters delivered by
Acquiror and Holdco attached as Exhibit H1 and Exhibit H2, respectively, with
respect to the Merger, and by Holdco and the Company attached as Exhibit I1 and
Exhibit I2, respectively, with respect to the Holdco Merger, and relied upon by
Hogan & Hartson L.L.P. and Fried, Frank, Harris, Shriver & Jacobson in
rendering their respective opinions will be modified as necessary.
ARTICLE X
Definitions
For purposes of this Merger Agreement, the following terms, and the singular
and plural thereof, shall have the meanings set forth below:
"Acquiror" is defined in the Preamble to this Merger Agreement.
"Acquiror Charter Amendment" means the amendment of the certificate of
incorporation of Acquiror to increase the number of authorized shares of
Acquiror Common Stock to 1,000,000,000 from 250,000,000 by the requisite vote
of the stockholders of Acquiror and the filing of the requisite certificate of
amendment to the certificate of incorporation of Acquiror with the Secretary of
State of the State of Delaware.
"Acquiror Class B Common Stock" is defined in Section 4.03.
"Acquiror Common Stock" means the Class A common stock, par value $.01 per
share, of Acquiror.
"Acquiror Contracts" is defined in Section 4.16.
"Acquiror Counter Proposal" is defined in Section 5.05(e).
"Acquiror Disclosure Schedule" is defined in Article IV.
"Acquiror Licenses" is defined in Section 4.06(a).
"Acquiror Material Adverse Effect" means any event, change or effect that,
individually or when taken together with all other such events, changes or
effects, is or is reasonably likely to be materially adverse to the business,
operations, condition (financial or otherwise), Assets or liabilities of
Acquiror and its subsidiaries, taken as a whole, other than adverse effects
caused by changes in the economy generally or in securities markets generally
or in Acquiror's industry (and those of its Significant Subsidiaries) in
general and not specifically relating to such entity.
A-48
<PAGE>
"Acquiror Option" is defined in Section 2.04(a).
"Acquiror Post-Signing SEC Documents" is defined in Section 6.10.
"Acquiror Preferred Stock" is defined in Section 4.03
"Acquiror SEC Documents" is defined in Section 4.07.
"Acquiror Series A Preferred Stock" is defined in Section 4.03.
"Acquiror Series B Preferred Stock" is defined in Section 4.03.
"Acquiror Series C Preferred Stock" is defined in Section 4.03.
"Acquiror Stockholders' Meeting" is defined in Section 6.01(c).
"Acquiror Sub" is defined in the Preamble to this Merger Agreement.
"Acquiror Stockholder Voting Agreements" is defined in the Preamble to this
Merger Agreement.
"Acquiror Warrant" is defined in Section 2.05(a).
"affiliate" means, with respect to any Person, a Person that directly or
indirectly, through one or more intermediaries, Controls, is Controlled by, or
is under common Control with, such Person.
"Affiliate Agreement" is defined in Section 3.23.
"Agreement" means any concurrence of understanding and intention between two
or more Persons with respect to their relative rights and/or obligations or
with respect to a thing done or to be done (whether or not conditional,
executory, express, implied, in writing or meeting the requirements of
contract), including, without limitation, contracts, leases, promissory notes,
covenants, easements, rights of way, covenants, commitments, arrangements and
understandings.
"Assets" means assets of every kind and everything that is or may be
available for the payment of liabilities (whether inchoate, tangible or
intangible), including, without limitation, real and personal property.
"Average Trading Price" means, on any given date, the average, during the
five (5) trading days immediately prior to such date, of the daily closing
prices for Acquiror Common Stock on The Nasdaq Stock Market's National Market
System as reported by Nasdaq.
"beneficial owner" means, with respect to any shares of Company Common
Stock, Holdco Common Stock or Acquiror Common Stock, as the case may be, a
Person who shall be deemed to be the beneficial owner of such shares (i) which
such Person or any of its affiliates or associates beneficially owns, directly
or indirectly, (ii) which such Person or any of its affiliates or associates
(as such term is defined in Rule 12b-2 under the Exchange Act) has, directly or
indirectly, (A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time), pursuant to any Agreement
or upon the exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (B) the right to vote pursuant to any Agreement,
(iii) which are beneficially owned, directly or indirectly, by any other
Persons with whom such Person or any of its affiliates or associates has any
Agreement for the purpose of acquiring, holding, voting or disposing of any
such shares, or (iv) pursuant to Section 13(d) of the Exchange Act and any
rules or regulations promulgated thereunder.
"Blue Sky Laws" means state securities or blue sky laws and the rules and
regulations thereunder.
"business day" means a day other than a Saturday, a Sunday or any other day
on which commercial banks in the State of Texas and in the State of Iowa are
authorized or obligated to be closed.
"Certificate of Merger" is defined in Section 1.02.
"Certificates" is defined in Section 2.02(b).
A-49
<PAGE>
"Closing" is defined in Section 2.06.
"Closing Date" is defined in Section 2.06.
"Code" is defined in the Preamble to this Merger Agreement.
"Company" is defined in the Preamble to this Merger Agreement.
"Company Affiliates" is defined in Section 3.23.
"Company Capital Stock" is defined in Section 3.04.
"Company Common Stock" is defined in Section 1A.06(b).
"Company Contracts" is defined in Section 3.30.
"Company Disclosure Schedule" is defined in Article III.
"Company Intellectual Property" is defined in Section 3.13.
"Company Licenses" is defined in Section 3.07(a).
"Company Material Adverse Effect" means any event, change or effect that,
individually or when taken together with all other such events, changes or
effects, is or is reasonably likely to be materially adverse to the business,
operations, condition (financial or otherwise), Assets or liabilities of the
Splitrock Entities and the Subsidiaries, taken as a whole, other than (i)
adverse effects caused by changes in the economy generally or in securities
markets generally or in the Company's industry (and those of its Subsidiaries)
in general and not specifically relating to such entity; (ii) the loss of
personnel or suppliers or the delay or cancellation of orders for the Company's
services or similar occurrences which are the direct and proximate result of
the announcement of this Merger Agreement and the transactions contemplated
hereby; (iii) events set forth in Section 10 of the Company Disclosure
Schedule; or (iv) litigation brought by or threatened against the Company or
any member of its Board of Directors based upon this Merger Agreement and the
transactions contemplated hereby.
"Company Post-Signing SEC Documents" is defined in Section 6.10.
"Company Preferred Stock" is defined in Section 3.04.
"Company SEC Documents" is defined in Section 3.08.
"Company Stock Options" is defined in Section 1A.06(c).
"Company Stock Plans" is defined in Section 1A.06(c).
"Company Stockholders' Meeting" is defined in Section 6.01(b).
"Company Stockholders Voting Agreements" is defined in the Preamble to this
Merger Agreement.
"Company Subsequent Alternate Transaction" is defined in Section 8.03(b).
"Company Tax Returns" means all Tax Returns required to be filed by the
Company or any of the Subsidiaries (without regard to extensions of time
permitted by law or otherwise).
"Company Termination Fee" is defined in Section 8.03(b).
"Company Warrants" is defined in Section 3.04.
"Company Warrant Agreement" is defined in Section 3.04.
"Company Warrant Agreement Amendment" is defined in Section 6.20.
"Competing Transaction" is defined in Section 5.05(c).
"Confidentiality Agreement" means the confidentiality agreement dated
December 22, 1999 between Acquiror and the Company.
A-50
<PAGE>
"Consent Solicitation" is defined in Section 6.19(a).
"Control" (including the terms "Controlled by" and "under common Control
with") means, as used with respect to any Person, possession, directly or
indirectly or as a trustee or executor, of power to direct or cause the
direction of management or policies of such Person (whether through ownership
of voting securities, as trustee or executor, by Agreement or otherwise).
"Damages" is defined in Section 6.17(a).
"Debentures" is defined in Section 6.19(a).
"Delaware Law" is defined in the Preamble to this Merger Agreement.
"Documents" means any paper or other material (including, without
limitation, computer storage media) on which is recorded (by letters, numbers
or other marks) information that may be evidentially used, including, without
limitation, legal opinions, mortgages, indentures, notes, instruments, leases,
Agreements, insurance policies, reports, studies, financial statements
(including, without limitation, the notes thereto), other written financial
information, schedules, certificates, charts, maps, plans, photographs,
letters, memoranda and all similar materials.
"Effective Time" is defined in Section 1.02.
"Encumbrance" means any mortgage, lien, pledge, encumbrance, security
interest, deed of trust, option, encroachment, reservation, order, decree,
judgment, condition, restriction, charge, Agreement, claim or equity of any
kind, other than: (i) Taxes not yet due or the validity of which is being
contested in good faith by appropriate proceedings, and as to which the Company
or Acquiror, as the case may be, shall, if appropriate under GAAP, have set
aside in its financial statements and on its books and records adequate
reserves; and (ii) deposits under workmen's compensation, unemployment
insurance, social security and other similar Laws, or to secure the performance
of bids, tenders or contracts (other than for the repayment of borrowed money)
or to secure indemnity, performance or other similar bonds for the performance
of bids, tenders or contracts (other than for the repayment of borrowed money)
or to secure statutory obligations or surety or appeal bonds, or to secure
indemnity, performance or other similar bonds in the Ordinary Course of
Business.
"End Date" is defined in Section 8.01(b).
"Environmental Laws" means any Laws (including, without limitation, the
Comprehensive Environmental Response, Compensation, and Liability Act),
including any plans or other legally binding criteria promulgated pursuant to
such Laws, now or hereafter in effect relating to Hazardous Materials
generation, production, use, storage, treatment, transportation or disposal, or
noise control, or the protection of human health or the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"ESOP" means an "employee stock ownership plan" as such term is defined in
Section 407(d)(6) of ERISA or Section 4975(e)(7) of the Code.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
all Laws promulgated pursuant thereto or in connection therewith.
"Exchange Agent" is defined in Section 2.02(a).
"Exchange Fund" is defined in Section 2.02(a).
"Exchange Ratio" is defined in Section 2.01(a).
"Financial Statements" is defined in Section 3.08.
"GAAP" means United States generally accepted accounting principles.
A-51
<PAGE>
"Governmental Entity" (including the term "Governmental") means any
governmental, quasi-governmental or regulatory authority, whether domestic or
foreign.
"group" is defined in Section 5.05(c).
"Hazardous Materials" means any wastes, substances, radiation or materials
(whether solids, liquids or gases) that are regulated by a Governmental Entity
or defined or listed by a Governmental Entity as hazardous, toxic, pollutants
or contaminants, including, without limitation, substances defined as
"hazardous wastes," "hazardous substances," "toxic substances," "radioactive
materials," or other similar designations in, or otherwise subject to
regulation under, any Environmental Laws. "Hazardous Materials" includes
polychlorinated biphenyls (PCBs), asbestos, lead-based paints, and petroleum
and petroleum products (including, without limitation, crude oil or any
fraction thereof).
"Holdco" is defined in the Preamble to this Merger Agreement.
"Holdco Certificate of Merger" is defined in Section 1A.02.
"Holdco Common Stock" is defined in Section 1A.06(b).
"Holdco Effective Time" is defined in Section 1A.02.
"Holdco Merger" is defined in the Preamble to this Merger Agreement.
"Holdco Stockholders" is defined in Section 2.01.
"Holdco Stock Options" is defined in Section 2.04.
"Holdco Surviving Corporation" is defined in Section 1A.01.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and all Laws promulgated pursuant thereto or in connection therewith.
"Indenture" means the indenture by and between the Company and Harris Trust
Company of New York (formerly Bank of Montreal Trust Company), as Trustee,
dated July 24, 1998, as amended.
"Indenture Trustee" is defined in Section 6.19(a).
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith, (c) all copyrightable works, all copyrights, all rights to database
information, and all applications, registrations, and renewals in connection
therewith, (d) all mask works and all applications, registrations, and renewals
in connection therewith, (e) all trade secrets and confidential business
information (including ideas, research and development, know-how, formulas,
compositions, manufacturing and production processes and techniques, technical
data, designs, drawings, specifications, customer and supplier lists, pricing
and cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation), (g) all rights,
including rights of privacy and publicity, to use the names, likenesses and
other personal characteristics of any individual, (h) all other proprietary
rights, and (i) all copies and tangible embodiments thereof (in whatever form
or medium) existing in any part of the world.
"IRS" means the United States Internal Revenue Service and its successors.
"Joint Proxy Statement" is defined in Section 6.01(a).
"Key Person" means those persons listed in Section 1 of Exhibit K.
"knowledge" (including the terms "knowing" and "knowingly") will be deemed
to be present with respect to the Company and the Subsidiaries when the matter
in question is actually known by or was brought to the
A-52
<PAGE>
attention of or, if due diligence had been exercised, would have been brought
to the attention of, any of Kwok Li, William R. Wilson, J. Robert Fugate,
David M. Boatner, Todd W. Wilkens or Patrick J. McGettigan, Jr.; "knowledge"
(including the terms "knowing" and "knowingly") will be deemed to be present
with respect to Acquiror and the Significant Subsidiaries when the matter in
question is actually known by or was brought to the attention of or, if due
diligence had been exercised, would have been brought to the attention of, any
of Clark McLeod, Stephen Gray, Blake Fisher, J. Lyle Patrick or Joseph
Ceryanec.
"Law" means all foreign, federal, state and local statutes, laws,
ordinances, regulations, rules, resolutions, orders, tariffs, determinations,
writs, injunctions, awards (including, without limitation, awards of any
arbitrator), judgments and decrees applicable to the specified Person and to
the businesses and Assets thereof (including, without limitation, Laws
relating to securities registration and regulation; the sale, leasing,
ownership or management of real property; employment practices, terms and
conditions, and wages and hours; building standards, land use and zoning;
safety, health and fire prevention; and environmental protection, including
Environmental Laws).
"License" means any franchise, grant, authorization, license, tariff,
permit, easement, variance, exemption, consent, certificate, approval or order
of any Governmental Entity.
"Managers" is defined in Section 6.14.
"Merger" is defined in the Preamble to this Merger Agreement.
"Mergers" is defined in the Preamble to this Merger Agreement.
"Merger Agreement" is defined in the Preamble to this Merger Agreement.
"Merger Sub" is defined in the Preamble to this Merger Agreement.
"Multiemployer Plan" means a "multiemployer plan" as such term is defined
in Section 3(37) of ERISA.
"NASD" means the National Association of Securities Dealers, Inc.
"Network Agreements" means the agreements described in Section 2 of Exhibit
K attached hereto
"Non-Competition Agreements" is defined in Section 6.07.
"Option Agreement" is defined in the Preamble to this Merger Agreement.
"Ordinary Course of Business" means ordinary course of business consistent
with past practices (and, in the case of the Company and its Subsidiaries,
with the business plan for fiscal year 2000, as previously provided to
Acquiror) and, in the reasonable judgment of a diligent businessman, prudent
business operations.
"Original Agreement" is defined in the Preamble to this Merger Agreement.
"Other Arrangement" means a material benefit program or practice providing
for bonuses, incentive compensation, vacation pay, severance pay, insurance,
restricted stock, stock options, employee discounts, company cars, tuition
reimbursement or any other perquisite or benefit (including, without
limitation, any fringe benefit under Section 132 of the Code) to employees,
officers or independent contractors of the Company or any of its Subsidiaries
or Acquiror or any of its Significant Subsidiaries, as the case may be, that
is not a Plan.
"Pension Plan" means an "employee pension benefit plan" as such term is
defined in Section 3(2) of ERISA.
"Person" means an individual, corporation, partnership, joint venture,
trust, unincorporated organization or other entity, or a Governmental Entity.
"Plan" means any written, material plan, program or arrangement that is or
was an "employee benefit plan" as such term is defined in Section 3(3) of
ERISA and (a) which was or is established or maintained by the Company or any
Subsidiary or Acquiror or any of its Significant Subsidiaries, as the case may
be; or (b) to which the Company or any Subsidiary or Acquiror or any of its
Significant Subsidiaries, as the case may be, contributed or was obligated to
contribute or to fund or provide benefits.
A-53
<PAGE>
"Principal Company Stockholders" means those stockholders of the Company
listed in Section 3 of Exhibit K.
"Post-Signing Returns" is defined in Section 5.03.
"Registration Statement" is defined in Section 6.01(a).
"Requisite Consent" shall mean the written consent of the holders of at
least a majority in principal amount of the Debentures then outstanding.
"SEC" means the United States Securities and Exchange Commission and its
successors.
"Securities Act" means the Securities Act of 1933, as amended, and all Laws
promulgated pursuant thereto or in connection therewith.
"Significant Subsidiary" means any subsidiary of Acquiror disclosed in its
most recent Annual Report on Form 10-K, and any other subsidiary that would
constitute a "Significant Subsidiary" of Acquiror within the meaning of Rule 1-
02 of Regulation S-X of the SEC.
"Splitrock Entities" is defined in the Preamble to this Merger Agreement.
"Splitrock Entity" shall mean the Company, Holdco or Merger Sub, as and to
the extent applicable.
"Stockholders' Agreement" means the agreements to be entered into by Kwok
Li, Linsang Partners, LLC and William R. Wilson as provided in the Company
Stockholder Voting Agreements with respect to such individuals.
"Subsidiary" means a corporation, partnership, joint venture or other entity
of which the Company owns, directly or indirectly, at least 50% of the
outstanding securities or other interests the holders of which are generally
entitled to vote for the election of the board of directors or other governing
body or otherwise exercise Control of such entity.
"Superior Proposal" is defined in Section 5.05(d).
"Surviving Corporation" is defined in Section 1.01.
"Systems" is defined in the definition of Year 2000 Compliant in this
Article X.
"Taxes" (including the terms "Tax" and "Taxing") means all federal, state,
local and foreign taxes (including, without limitation, income, profit,
franchise, sales, use, real property, personal property, ad valorem, excise,
employment, social security and wage withholding taxes) and installments of
estimated taxes, assessments, deficiencies, levies, imports, duties, license
fees, registration fees, withholdings, or other similar charges of every kind,
character or description imposed by any Governmental Entity, and any interest,
penalties or additions to tax imposed thereon or in connection therewith.
"Tax Returns" means all federal, state, local, foreign and other applicable
returns, declarations, reports and information statements with respect to Taxes
required to be filed with the IRS or any other Governmental Entity or Tax
authority or agency, including, without limitation, consolidated, combined and
unitary tax returns.
"Title I Plan" means a Plan that is subject to Title I of ERISA.
"Transition Period" is defined in Section 6.07(c).
"Unaudited Balance Sheets" is defined in Section 6.08.
"Unaudited Financial Statements" is defined in Section 6.08.
"Welfare Plan" means an "employee welfare benefit plan" as such term is
defined in Section 3(l) of ERISA.
"Year 2000 Compliant" means, with respect to any computer hardware,
software, databases, automated systems or other computer and telecommunications
equipment owned or used by a Person, or included or
A-54
<PAGE>
incorporated in such Person's products ("Systems"), that such Systems are
designed to be used prior to, during and after the calendar year 2000 A.D. and
will (i) operate normally, (ii) record, process, calculate, compare, sequence,
or use dates properly, (iii) accurately determine intervals between and time
elapsed among dates before, within and after such year, and (iv) otherwise
operate without error relating to date data, specifically including any error
relating to, or the product of, date data which represents or references
different centuries or more than one century. Without limiting the generality
of the foregoing, "Year 2000 Compliant" means that such Person's Systems: (i)
will not abnormally terminate, malfunction or stop processing upon encountering
date data either from before, within or after such year; (ii) will properly
identify leap years and process related date data; (iii) have been designed to
ensure Year 2000 Compliance, including, but not limited to, recognizing and
recording the proper century associated with date data and properly calculating
same century and multi-century formulas and date values; (iv) include user
interfaces that properly display, record and accept date data in single century
and multi-century cases; and (v) properly send date data to, receive date data
from, any other hardware, software and systems with which such Systems normally
operate and interact, including on-site backup, hot-site companion and disaster
recovery systems, as well as properly recording, retaining and manipulating
such date data; provided, however, that such other hardware, software and
Systems are themselves Year 2000 Compliant.
A-55
<PAGE>
IN WITNESS WHEREOF, Acquiror, Acquiror Sub, the Company, Holdco and Merger
Sub have caused this Merger Agreement to be executed and delivered as of the
date first written above.
McLeodUSA Incorporated
By: /s/ Blake O. Fisher, Jr.
Name: Blake O. Fisher, Jr.
Title: Group Vice President and
Chief Planning and
Development Officer
Southside Acquisition
Corporation
By: /s/ Blake O. Fisher, Jr.
Name: Blake O. Fisher, Jr.
Title: Vice President
Splitrock Services, Inc.
By: /s/ William R. Wilson
Name: William R. Wilson
Title: President
Splitrock Holdings, Inc.
By: /s/ William R. Wilson
Name: William R. Wilson
Title: President
Splitrock Merger Sub, Inc.
By: /s/ William R. Wilson
Name: William R. Wilson
Title: President
A-56
<PAGE>
APPENDIX B
AMENDED AND RESTATED VOTING AGREEMENT
This AMENDED AND RESTATED VOTING AGREEMENT ("Voting Agreement") is entered
into as of February 11, 2000 by and among McLeodUSA Incorporated, a Delaware
corporation ("Acquiror"), and the undersigned stockholder (the "Stockholder")
of Splitrock Services, Inc., a Delaware corporation (the "Company") and amends
and restates the Voting Agreement dated as of January 6, 2000 by and among
Acquiror and the Stockholder.
WHEREAS, pursuant to an Amended and Restated Agreement and Plan of Merger,
dated as of February 11, 2000 (the "Merger Agreement"), by and among Acquiror,
Southside Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of Acquiror ("Acquiror Sub"), the Company, Splitrock Holdings, Inc.,
a Delaware corporation and a wholly owned subsidiary of the Company ("Holdco"),
and Splitrock Merger Sub, Inc., a Delaware corporation and a wholly owned
subsidiary of Holdco, among other things, Acquiror Sub will be merged with and
into Holdco (the "Merger") and, as a result of the Merger, the separate
corporate existence of Acquiror Sub shall cease and Holdco shall continue as
the surviving corporation of the Merger; and
WHEREAS, in order to induce Acquiror and Acquiror Sub to enter into the
Merger Agreement, the Stockholder has agreed to execute and deliver to Acquiror
this Voting Agreement;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used and not defined herein shall have the
meanings specified in the Merger Agreement.
2. Voting; Grant of Proxy and Further Assurances. The Stockholder hereby
irrevocably agrees, for the period from the date hereof through the date on
which the Merger is consummated or the Merger Agreement is terminated in
accordance with the terms thereof, whichever is earlier (such period being
hereinafter referred to as the "Term"), to cast all votes attributable to that
number of shares of Company Common Stock as set forth on Annex A (or if at or
after the Holdco Effective Time, all shares of Holdco Common Stock) hereto
which are beneficially owned or hereafter acquired by the Stockholder and over
which the Stockholder has direct or indirect voting power (the "Shares") at any
annual or special meeting of stockholders of the Company (or if at or after the
Holdco Effective Time, at any annual or special meeting of stockholders of
Holdco), including any adjournments or postponements thereof, or written
consent of stockholders in lieu thereof (a "Meeting"), in favor of the approval
and adoption of the Merger Agreement and against any Competing Transaction. The
Stockholder further agrees to grant to the persons designated by the Company's
Board of Directors (or if at or after the Holdco Effective Time, the persons
designated by the Holdco Board of Directors), as such Board may be constituted
from time to time, as such Board's attorneys-in-fact or proxies with respect to
such Meeting, a specific written proxy (in such form as the Company (or Holdco)
is soliciting from other stockholders of the Company (or Holdco)) to vote (or,
if present in person at such Meeting, to vote) the Shares in favor of the
approval and adoption of the Merger Agreement and against any Competing
Transaction. The Stockholder agrees not to enter into any agreement or
understanding the effect of which would be inconsistent with or violative of
the provisions and agreements contained in this Voting Agreement, including in
this Section 2.
3. Restrictions on Transfer; Non-Interference. The Stockholder hereby agrees
during the Term not to (a) directly or indirectly sell, transfer, pledge,
encumber, assign or otherwise dispose of, or enter into any contract, option or
other arrangement or understanding with respect to the sale, transfer, pledge,
encumbrance, assignment or other disposition of, any of the Shares except to
the extent (i) such transfer is approved in advance in writing by Acquiror and
(ii) the transferee of the Shares prior to and as a condition to such transfer,
B-1
<PAGE>
executes and delivers to Acquiror an agreement in substantially the form of
this Voting Agreement; (b) grant any proxies, deposit any Shares into a voting
trust or enter into a voting agreement with respect to any Shares; or (c) take
any action which would have the effect of preventing or inhibiting the
Stockholder from performing the Stockholder's obligations under this Voting
Agreement.
4. Authorization; Binding Obligation. The Stockholder hereby represents and
warrants to Acquiror that (a) the Stockholder (if an individual) has the legal
capacity and all other necessary power and authority to enter into this Voting
Agreement and to consummate the transactions contemplated hereby, (b) the
Stockholder (if an entity) has taken all corporate, partnership or other
action, as the case may be, necessary to enter into this Voting Agreement and
to consummate the transactions contemplated hereby, (c) the Stockholder owns of
record and beneficially good and valid title to all of the Shares, free and
clear of any and all Encumbrances, and (d) this Voting Agreement has been duly
executed and delivered by the Stockholder and constitutes a legal, valid and
binding obligation of the Stockholder, enforceable in accordance with its
terms, except as such enforceability may be subject to the effects of any
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium or similar Laws affecting creditors' rights generally and subject to
the effects of general equitable principles (whether considered in a proceeding
in equity or at law).
5. No Conflict. The Stockholder hereby represents and warrants to Acquiror
that the execution and delivery of this Voting Agreement by the Stockholder
does not, and the performance of the Stockholder's obligations under this
Voting Agreement will not, (a) conflict with or violate the articles of
incorporation or other similar organizational documents of the Stockholder (if
the Stockholder is an entity), (b) conflict with or violate any law, statute,
ordinance, rule, regulation, order, judgment or decree applicable to the
Stockholder or by which the Stockholder or any of the Stockholder's properties
is bound or affected, or (c) result in any breach of or constitute a default
(or an event which with or without notice or lapse of time or both would become
a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of an Encumbrance on
any of the property or assets of the Stockholder, including, without
limitation, the Shares, pursuant to any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which the Stockholder is a party or by which the Stockholder or
any of the Stockholder's properties or assets is bound or affected, except with
respect to (b) and (c) above, as would not materially adversely affect the
ability of such Stockholder to perform its obligations under this Voting
Agreement.
6. Understanding of this Voting Agreement. The Stockholder has carefully
read this Voting Agreement and has discussed its requirements, to the extent
the Stockholder believes necessary, with counsel to the Stockholder (which may
be counsel to the Company). The Stockholder further understands that the
parties to the Merger Agreement will be proceeding in reliance upon this Voting
Agreement.
7. Headings. The headings of the Sections of this Voting Agreement are
inserted for convenience of reference only and do not form a part or affect the
meaning hereof.
8. Counterparts. This Voting Agreement may be executed in counterparts, each
of which when so executed and delivered shall be an original, but all of such
counterparts shall together constitute one and the same instrument.
9. Entire Agreement; Assignment. This Voting Agreement (a) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties hereto with respect to the subject matter
hereof and (b) shall not be assigned by operation of law or otherwise.
10. Governing Law. This Voting Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to any
principles of Delaware conflicts of law.
11. Specific Performance. The parties hereto agree that if any of the
provisions of this Voting Agreement are not performed in accordance with their
specific terms or are otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
B-2
<PAGE>
12. Parties in Interest. This Voting Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Voting
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Voting Agreement.
13. Amendment; Waivers. This Voting Agreement shall not be amended, altered
or modified except by an instrument in writing duly executed by each of the
parties hereto. No delay or failure on the part of either party hereto in
exercising any right, power or privilege under this Voting Agreement shall
impair any such right, power or privilege or be construed as a waiver of any
default or any acquiescence thereto. No single or partial exercise of any such
right, power or privilege shall preclude the further exercise of such right,
power or privilege, or the exercise of any other right, power or privilege. No
waiver shall be valid against any party hereto, unless made in writing and
signed by the party against whom enforcement of such waiver is sought, and then
only to the extent expressly specified therein.
14. Conflict of Terms. In the event any provision of this Voting Agreement
is in direct conflict with, or inconsistent with, any provision of the Merger
Agreement, the provision of the Merger Agreement shall control.
15. Additional Actions and Documents. Each of the parties hereto hereby
agrees to take or cause to be taken such further actions, to execute, deliver
and file or cause to be executed, delivered and filed such further documents
and instruments, and to obtain such consents as may be necessary or as may be
reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Voting Agreement.
16. Stockholder Capacity. The Stockholder signs solely in its capacity as
the beneficial owner of the Shares, and nothing herein shall limit or affect
any actions taken or omitted to be taken by the Stockholder in its capacity as
an officer or director of the Company to the extent specifically permitted by
Section 5.05(e) of the Merger Agreement.
17. Other Agreements. On or prior to the Closing, the Stockholder agrees to
enter into a Stockholder Agreement on the terms set forth in the Term Sheet
attached hereto as Annex B and a Confidentiality, Nonsolicitation and
Noncompetition Agreement in the form attached hereto as Annex C.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
B-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Voting Agreement, or have caused this Voting Agreement to be duly executed and
delivered in their names and on their behalf, as of the date first written
above.
McLeodUSA Incorporated
By: _________________________________
Name:
Title:
Stockholder
By: _________________________________
Name:
Title:
B-4
<PAGE>
APPENDIX C
AMENDED AND RESTATED VOTING AGREEMENT
This AMENDED AND RESTATED VOTING AGREEMENT ("Voting Agreement") is entered
into as of February 11, 2000 by and among Splitrock Services, Inc., a Delaware
corporation (the "Company"), Splitrock Holdings, Inc., a Delaware corporation
and a wholly owned subsidiary of the Company ("Holdco") and the undersigned
stockholder (the "Stockholder") of McLeodUSA Incorporated, a Delaware
corporation ("Acquiror") and amends and restates the Voting Agreement dated as
of January 6, 2000 by and among the Company and the Stockholder.
WHEREAS, pursuant to an Amended and Restated Agreement and Plan of Merger,
dated as of February 11, 2000 (the "Merger Agreement"), by and among Acquiror,
Southside Acquisition Corporation, a Delaware corporation and a wholly owned
subsidiary of Acquiror ("Acquiror Sub"), the Company, Holdco and Splitrock
Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of
Holdco, among other things, Acquiror Sub will be merged with and into Holdco
(the "Merger") and, as a result of the Merger, the separate corporate existence
of Acquiror Sub shall cease and Holdco shall continue as the surviving
corporation of the Merger; and
WHEREAS, in order to induce the Company and Holdco to enter into the Merger
Agreement, the Stockholder has agreed to execute and deliver to the Company and
Holdco this Voting Agreement;
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Capitalized terms used and not defined herein shall have the
meanings specified in the Merger Agreement.
2. Voting; Grant of Proxy and Further Assurances. The Stockholder hereby
irrevocably agrees, for the period from the date hereof through the date on
which the Merger is consummated or the Merger Agreement is terminated in
accordance with the terms thereof, whichever is earlier (such period being
hereinafter referred to as the "Term"), to cast all votes attributable to
Acquiror Common Stock now or hereafter beneficially owned by the Stockholder
over which the Stockholder has direct or indirect voting power (the "Shares")
at any annual or special meeting of stockholders of Acquiror, including any
adjournments or postponements thereof, or written consent of stockholders in
lieu thereof (a "Meeting"), in favor of (i) the approval and adoption of the
proposed amendment to the articles of incorporation of Acquiror to increase the
number of authorized shares of Acquiror Common Stock from 250,000,000 to
1,000,000,000 (the "Charter Amendment") and (ii) the approval of the issuance
of shares of Acquiror Common Stock pursuant to the Merger Agreement (the
"Acquiror Common Stock Issuance"). The Stockholder further agrees to grant to
the persons designated by Acquiror's Board of Directors, as such Board may be
constituted from time to time, as such Board's attorneys-in-fact or proxies
with respect to such Meeting, a specific written proxy (in such form as
Acquiror is soliciting from other stockholders of Acquiror) to vote (or, if
present in person at such Meeting, to vote) all Acquiror Common Stock which the
Stockholder is entitled to vote in favor of the approval and adoption of the
Charter Amendment and in favor of the Acquiror Common Stock Issuance. The
Stockholder agrees not to enter into any agreement or understanding the effect
of which would be inconsistent with or violative of the provisions and
agreements contained in this Voting Agreement, including in this Section 2.
3. Non-Interference. The Stockholder hereby agrees during the Term not to
(a) grant any proxies, deposit any Shares into a voting trust or enter into a
voting agreement with respect to any Shares (other than such agreements entered
into prior to the date first set forth above); or (b) take any action which
would have the effect of preventing or inhibiting the Stockholder from
performing the Stockholder's obligations under this Voting Agreement.
Notwithstanding any provision of this Voting Agreement, nothing herein shall
restrict or otherwise limit the Stockholder, directly or indirectly, from
selling, transferring, pledging, encumbering, assigning or otherwise disposing
of, or entering into any contract, option or other arrangement or understanding
with respect to the sale, transfer, pledge, encumbrance, assignment or other
disposition of, any of the Shares.
C-1
<PAGE>
4. Authorization; Binding Obligation. The Stockholder hereby represents and
warrants to the Company and Holdco that (a) the Stockholder (if an individual)
has the legal capacity and all other necessary power and authority to enter
into this Voting Agreement and to consummate the transactions contemplated
hereby, (b) the Stockholder (if an entity) has taken all corporate, partnership
or other action, as the case may be, necessary to enter into this Voting
Agreement and to consummate the transactions contemplated hereby, (c) the
Stockholder owns of record and beneficially good and valid title to all of the
shares of Acquiror Common Stock shown on Annex A attached hereto, free and
clear of any and all Encumbrances, except as otherwise disclosed on Annex A,
and (d) this Voting Agreement has been duly executed and delivered by the
Stockholder and constitutes a legal, valid and binding obligation of the
Stockholder, enforceable in accordance with its terms, except as such
enforceability may be subject to the effects of any applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or similar Laws
affecting creditors' rights generally and subject to the effects of general
equitable principles (whether considered in a proceeding in equity or at law).
5. No Conflict. The Stockholder hereby represents and warrants to the
Company and Holdco that the execution and delivery of this Voting Agreement by
the Stockholder does not, and the performance of the Stockholder's obligations
under this Voting Agreement will not, (a) conflict with or violate the articles
of incorporation or other similar organizational documents of the Stockholder
(if the Stockholder is an entity), (b) conflict with or violate any law,
statute, ordinance, rule, regulation, order, judgment or decree applicable to
the Stockholder or by which the Stockholder or any of the Stockholder's
properties is bound or affected, or (c) result in any breach of or constitute a
default (or an event which with or without notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of an
Encumbrance on any of the property or assets of the Stockholder, including,
without limitation, the Shares, pursuant to any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which the Stockholder is a party or by which the
Stockholder or any of the Stockholder's properties or assets is bound or
affected, except with respect to (b) and (c) above, as would not materially
adversely affect the ability of such Stockholder to perform his or its
obligations under this Voting Agreement.
6. Understanding of this Voting Agreement. The Stockholder has carefully
read this Voting Agreement and has discussed its requirements, to the extent
the Stockholder believes necessary, with counsel to the Stockholder (which may
be counsel to Acquiror). The Stockholder further understands that the parties
to the Merger Agreement will be proceeding in reliance upon this Voting
Agreement.
7. Headings. The headings of the Sections of this Voting Agreement are
inserted for convenience of reference only and do not form a part or affect the
meaning hereof.
8. Counterparts. This Voting Agreement may be executed in counterparts, each
of which when so executed and delivered shall be an original, but all of such
counterparts shall together constitute one and the same instrument.
9. Entire Agreement; Assignment. This Voting Agreement (a) constitutes the
entire agreement and supersedes all prior agreements and understandings, both
written and oral, among the parties hereto with respect to the subject matter
hereof and (b) shall not be assigned by operation of law or otherwise.
10. Governing Law. This Voting Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without regard to any
principles of Delaware conflicts of law.
11. Specific Performance. The parties hereto agree that if any of the
provisions of this Voting Agreement are not performed in accordance with their
specific terms or are otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
12. Parties in Interest. This Voting Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this Voting
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Voting Agreement.
C-2
<PAGE>
13. Amendment; Waivers. This Voting Agreement shall not be amended, altered
or modified except by an instrument in writing duly executed by each of the
parties hereto. No delay or failure on the part of any party hereto in
exercising any right, power or privilege under this Voting Agreement shall
impair any such right, power or privilege or be construed as a waiver of any
default or any acquiescence thereto. No single or partial exercise of any such
right, power or privilege shall preclude the further exercise of such right,
power or privilege, or the exercise of any other right, power or privilege. No
waiver shall be valid against any party hereto, unless made in writing and
signed by the party against whom enforcement of such waiver is sought, and then
only to the extent expressly specified therein.
14. Conflict of Terms. In the event any provision of this Voting Agreement
is in direct conflict with, or inconsistent with, any provision of the Merger
Agreement, the provision of the Merger Agreement shall control.
15. Additional Actions and Documents. Each of the parties hereto hereby
agrees to take or cause to be taken such further actions, to execute, deliver
and file or cause to be executed, delivered and filed such further documents
and instruments, and to obtain such consents as may be necessary or as may be
reasonably requested in order to fully effectuate the purposes, terms and
conditions of this Voting Agreement.
16. Stockholder Capacity. The Stockholder signs solely in its capacity as
the beneficial owner of the Shares, and nothing herein shall limit or affect
any actions taken or omitted to be taken by the Stockholder in its capacity as
an officer or director of Acquiror.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
C-3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this
Voting Agreement, or have caused this Voting Agreement to be duly executed and
delivered in their names and on their behalf, as of the date first written
above.
The Company
By: _________________________________
Name:
Title:
Holdco
By: _________________________________
Name:
Title:
Stockholder
By: _________________________________
Name:
Address:
C-4
<PAGE>
APPENDIX D
AMENDED AND RESTATED STOCK OPTION AGREEMENT
THIS AMENDED AND RESTATED STOCK OPTION AGREEMENT (this "Option Agreement"),
dated as of February 11, 2000, by and between McLeodUSA Incorporated, a
Delaware corporation ("Acquiror"), and (the "Stockholder"), a
significant stockholder of Splitrock Services, Inc., a Delaware corporation
(the "Company") amends and restates the Option Agreement dated as of January 6,
2000 by and between Acquiror and the Stockholder.
WITNESSETH:
WHEREAS, concurrently with the execution and delivery of this Option
Agreement, Acquiror, the Company, Southside Acquisition Corporation, a Delaware
corporation and a wholly owned subsidiary of Acquiror ("Acquiror Sub"),
Splitrock Holdings, Inc., a Delaware corporation and a wholly owned subsidiary
of the Company ("Holdco") and Splitrock Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of Holdco, are entering into an
Amended and Restated Agreement and Plan of Merger, dated as of the date hereof
(the "Merger Agreement"), which provides that, among other things, upon the
terms and subject to the conditions thereof, Acquiror Sub will be merged with
and into Holdco (the "Merger"), with Holdco continuing as the surviving
corporation; and
WHEREAS, as a condition to the willingness of Acquiror to enter into the
Merger Agreement, Acquiror has required that the Stockholder agree, and in
order to induce Acquiror to enter into the Merger Agreement the Stockholder has
agreed, to grant Acquiror an irrevocable option to purchase up to that number
of shares of common stock, par value $.001 per share, of the Company ("Company
Common Stock") as set forth on Annex A hereto which are owned (beneficially or
of record) or hereafter acquired by the Stockholder (or if at or after the
Holdco Effective Time, that number of shares of Holdco Common Stock which are
owned (beneficially or of record) or hereafter acquired by the Stockholder)
(the "Shares").
NOW, THEREFORE, to induce Acquiror to enter into the Merger Agreement and in
consideration of the representations, warranties, covenants and agreements set
forth herein and in the Merger Agreement, the parties hereto, intending to be
legally bound, hereby agree as follows. Capitalized terms used herein but not
defined herein shall have the meanings set forth in the Merger Agreement.
1. Grant of Option. The Stockholder hereby grants Acquiror an irrevocable
option (the "Option") to purchase the Shares on the terms and subject to the
conditions set forth below.
2. Exercise of Option.
(a)Exercise. At any time or from time to time prior to the termination of
the Option granted hereunder in accordance with the terms of this Option
Agreement, Acquiror (or a wholly owned subsidiary of Acquiror designated by
Acquiror) may exercise the Option, in whole or in part, if on or after the date
hereof:
(i) any corporation, partnership, individual, trust, unincorporated
association, or other entity or person (as defined in Section 13(d)(3) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other
than Acquiror or any of its affiliates (as defined in the Exchange Act) (a
"Third Party"), shall have:
(A) commenced or announced an intention to commence a bona fide
tender offer or exchange offer for any shares of the Company Common
Stock (or if at or after the Holdco Effective Time, shares of Holdco
Common Stock), the consummation of which would result in beneficial
ownership (as defined under Rule 13d-3 of the Exchange Act) by such
Third Party (together with all such Third Party's affiliates and
associates (as such term is defined in the Exchange Act)) of 15% or more
of the then voting equity of the Company (or if at or after the Holdco
Effective Time, Holdco) (either on a primary or a fully diluted basis);
D-1
<PAGE>
(B) filed a Notification and Report Form under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
reflecting an intent to acquire the Company (or if at or after the
Holdco Effective Time, Holdco) or any assets or securities of the
Company (or if at or after the Holdco Effective Time, Holdco); or
(C) solicited proxies in a solicitation subject to the proxy rules
under the Exchange Act, executed any written consent or become a
participant in any solicitation (as such terms are defined in Regulation
14A under the Exchange Act), in each case with respect to the Company
Common Stock (or if at or after the Holdco Effective Time, Holdco Common
Stock); or
(ii) the events described in Section 8.01(b)(iv), (c)(i), (c)(ii),
(c)(iii) or (e) of the Merger Agreement or any other event that would
require the Company (or Holdco) to pay Acquiror the Company Termination Fee
set forth in Section 8.03 of the Merger Agreement occurs (but without the
necessity of Acquiror having terminated the Merger Agreement) or, if the
Stockholder entered into a Company Stockholder Voting Agreement with
Acquiror, upon a material breach of such Company Stockholder Voting
Agreement.
Each of the events described in clauses (i) and (ii) hereof shall be
referred to herein as a "Trigger Event." The Stockholder shall notify
Acquiror promptly in writing of the occurrence of any Trigger Event;
however, such notice shall not be a condition to the right of Acquiror to
exercise the Option.
(b) Exercise Procedure. In the event Acquiror wishes to exercise the
Option, Acquiror shall deliver to the Stockholder a written notice (an
"Exercise Notice") specifying the total number of the Shares it wishes to
purchase. Provided that the conditions set forth in Section 3 hereof to the
Stockholder's obligation to sell the Shares to Acquiror hereunder have been
satisfied or waived, Acquiror shall, upon delivery of the Exercise Notice and
tender of the applicable aggregate Exercise Price (as defined below),
immediately be deemed to be the holder of record of the Shares purchasable upon
such exercise, notwithstanding that the stock transfer books of the Company (or
Holdco) shall then be closed or that certificates representing such Shares
shall not theretofore have been delivered to Acquiror. Each closing of a
purchase of the Shares (a "Closing") shall occur at a place, on a date and at a
time designated by Acquiror in an Exercise Notice delivered at least two (2)
business days prior to the date of the Closing.
(c) Termination of the Option. The Option shall terminate upon the
earliest of: (i) the Effective Time of the Merger; (ii) the termination of the
Merger Agreement pursuant to Section 8.01(a), (b)(i), (b)(ii), (b)(iii),
(c)(iv) or (d) thereof; and (iii) nine (9) months following the termination of
the Merger Agreement pursuant to Section 8.01(b)(iv), (c)(i), (c)(ii), (c)(iii)
or (e) thereof. Notwithstanding the foregoing, if the Option cannot be
exercised by reason of any applicable judgment, decree, order, law or
regulation, the Option shall remain exercisable and shall not terminate until
the earlier of (x) the date on which such impediment shall become final and not
subject to appeal, and (y) 5:00 p.m. New York City Time, on the tenth (10th)
business day after such impediment shall have been removed. Notwithstanding the
termination of the Option, Acquiror shall be entitled to purchase the Shares
with respect to which Acquiror had exercised the Option prior to such
termination.
(d) Exercise price. The purchase price per share of Company Common Stock
(or if at or after the Holdco Effective Time, Holdco Common Stock) purchased
pursuant to the Option (the "Exercise Price") shall be (i) an amount in cash
equal to the product of (x) the Exchange Ratio multiplied by (y) the average
closing price of Acquiror Common Stock (as defined below) for the five (5)
trading days preceding the date the Option is exercised (the "Cash Exercise
Price") or (ii) a number of shares of Class A common stock, par value $.01 per
share, of Acquiror ("Acquiror Common Stock") equal to the Exchange Ratio (the
"Stock Exercise Price"); provided, however, that the aggregate Cash Exercise
Price paid to the Stockholder when aggregated with all other cash purchases of
Company Common Stock (or if at or after the Holdco Effective Time, Holdco
Common Stock) including cash in lieu of fractional shares by Acquiror shall be
limited to that amount of cash that would permit any subsequent acquisition of
the Company (or Holdco) by Acquiror that occurs to qualify as a tax free
reorganization under the provisions of Section 368(a) of the Code.
D-2
<PAGE>
(e) Additional Consideration. Notwithstanding the terms of this Section 2
or any other provision in this Option Agreement, in the event that (i) Acquiror
exercises in whole or in part the Option granted in this Option Agreement and
(ii) the Company (or Holdco) thereafter consummates a Company Subsequent
Alternate Transaction (as defined in Sec. 8.03(b) of the Merger Agreement)
within twelve months of the exercise of the Option, Acquiror shall pay the
Stockholder an amount of additional consideration equal to 50% of the
difference between the applicable aggregate Exercise Price previously paid by
Acquiror to the Stockholder and the aggregate amount received by Acquiror in
the Company Subsequent Alternate Transaction for any or all of the Shares. The
form of such additional consideration shall be in the sole discretion of
Acquiror and may be cash, additional shares of Acquiror Common Stock or the
form of consideration received by Acquiror in the Company Subsequent Alternate
Transaction; provided, however, that Acquiror shall not be permitted to pay
such additional consideration in the form of Acquiror Common Stock unless there
shall not have occurred an Acquiror Material Adverse Effect.
(f) Pro Rata Exercise. In the event Acquiror determines to exercise the
Option in whole or in part, Acquiror hereby covenants and agrees that it will
purchase the aggregate number of shares of Company Common Stock (or if at or
after the Holdco Effective Time, Holdco Common Stock) being sought pro rata
from the stockholders who have entered into Option Agreements in connection
with the execution and delivery of the Merger Agreement.
3. Conditions to Closing. The obligation of the Stockholder to sell the
Shares to Acquiror hereunder is subject to the conditions that (a) all waiting
periods, if any, under the HSR Act applicable to the sale of the Shares by
Stockholder and the acquisition of such Shares by Acquiror hereunder shall have
expired or have been terminated; (b) all consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any federal,
state or local administrative agency or commission or other federal, state or
local governmental authority or instrumentality, if any, required in connection
with the sale of the Shares by the Stockholder and the acquisition of such
Shares by Acquiror hereunder shall have been obtained or made, as the case may
be; and (c) no preliminary or permanent injunction or other order by any court
of competent jurisdiction prohibiting or otherwise restraining such sale shall
be in effect.
4. Closing. At any Closing,
(a) the Stockholder shall deliver to Acquiror a certificate or
certificates evidencing the Shares being purchased, duly endorsed in blank, or
with appropriate stock powers, duly executed in blank, in proper form for
transfer, with the signature of the Stockholder thereon guaranteed, and with
all applicable taxes paid or provided for;
(b) Acquiror shall deliver to the Stockholder (i) by wire transfer of
immediately available funds to the account or accounts specified in writing by
the Stockholder the aggregate Cash Exercise Price for the Shares so designated
and being purchased for cash, and (ii) one or more certificates representing
shares of Acquiror Common Stock equal to the aggregate Stock Exercise Price for
the Shares so designated and being purchased by delivery of Acquiror Common
Stock; and
(c) at which Acquiror is exercising the Option in part, Acquiror shall
present and surrender this Option Agreement to the Stockholder, and the
Stockholder shall deliver to Acquiror an executed new agreement with the same
terms as this Option Agreement evidencing the right to purchase the balance of
the Shares purchasable hereunder.
5. Restrictions on Transfer; Non-Interference. Except as contemplated by
this Option Agreement and the Merger Agreement and the transactions
contemplated thereby, the Stockholder hereby agrees not to, prior to the
termination of this Option Agreement, (a) directly or indirectly sell,
transfer, pledge, encumber, assign or otherwise dispose of, or enter into any
contract, option or other arrangement or understanding with respect to the
sale, transfer, pledge, encumbrance, assignment or other disposition of, any of
the Shares, or (b) take any other action which would have the effect of
preventing or inhibiting the Stockholder from performing the Stockholder's
obligations under this Option Agreement, except to the extent (i) any such
D-3
<PAGE>
transfer as referred to in (a) above is approved in advance in writing by
Acquiror and (ii) the transferee of the Shares, prior to and as a condition to
such transfer, executes and delivers to Acquiror an agreement in substantially
the form of this Option Agreement.
6. Representations and Warranties of the Stockholder. The Stockholder
represents, warrants, and covenants to Acquiror that:
(a) the Stockholder, if an entity, is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to execute and deliver
this Option Agreement, to grant the Option and to consummate the transactions
contemplated hereby;
(b) the Stockholder, if an individual, has the legal capacity and all
other power and authority necessary to execute and deliver this Option
Agreement, to grant the Option and to consummate the transactions contemplated
hereby;
(c) if the Stockholder is an entity, the execution and delivery of this
Option Agreement by the Stockholder and the consummation by the Stockholder of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Stockholder and no other corporate
proceedings on the part of the Stockholder are necessary to authorize this
Option Agreement or any of the transactions contemplated hereby;
(d) the execution and delivery of this Option Agreement by the
Stockholder do not, and the performance of this Option Agreement by the
Stockholder will not, (i) conflict with or violate the organizational documents
of the Stockholder, if the Stockholder is an entity, (ii) conflict with or
violate any law, rule, regulation, order, judgment or decree applicable to the
Stockholder or by which the Stockholder or any of the Stockholder's properties
is bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of the Stockholder, including, without limitation, the
Shares, pursuant to any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which
the Stockholder is a party or by which the Stockholder or any of the
Stockholder's properties is bound or affected, except with respect to (ii) and
(iii) above, as would not materially adversely affect the ability of the
Stockholder to perform his or its obligations under the Option Agreement;
(e) the execution and delivery of this Option Agreement by the
Stockholder do not, and the performance of this Option Agreement by the
Stockholder will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any governmental or regulatory
authority, domestic or foreign, except for applicable requirements, if any, of
the Exchange Act, the Securities Act of 1933, as amended (the "Securities
Act"), state securities laws and the HSR Act;
(f) this Option Agreement has been duly executed and delivered by the
Stockholder and constitutes a valid and binding obligation of the Stockholder,
and, assuming this Option Agreement constitutes a valid and binding obligation
of Acquiror, is enforceable against the Stockholder in accordance with its
terms, except as enforceability may be limited by bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other laws affecting the
rights and remedies of creditors generally and general principles of equity
(whether considered in a proceeding in equity or at law);
(g) the Stockholder (i) is the record and beneficial owner of the Shares,
free and clear of any pledge, lien, security interest, charge, claim, equity,
option, proxy, voting restriction, right of first refusal or other limitation
on disposition or encumbrance of any kind ("Encumbrances"), other than pursuant
to this Option and the Company Stockholder Voting Agreement, and (ii) has full
right, power and authority to sell, transfer and deliver the Shares pursuant to
this Option Agreement; and
(h) upon delivery of the Shares and payment of the aggregate Exercise
Price therefor as contemplated herein, Acquiror will receive good and valid
title to the Shares, free and clear of any Encumbrances.
D-4
<PAGE>
7. Investment Representations of the Stockholder. The Stockholder
represents, warrants, and covenants to Acquiror as follows:
(a) the Stockholder understands that any issuance of Acquiror Common
Stock to the Stockholder pursuant to this Option Agreement (the "Restricted
Securities") is intended to be exempt from registration under the Securities
Act by virtue of Section 4(2) of the Securities Act or Regulation D promulgated
thereunder, and that no registration statement relating to the issuance of the
Restricted Securities has been or will be filed with the SEC or any state
securities commission;
(b) the Stockholder intends to acquire the Restricted Securities solely
for its own account, for investment purposes only and not with a view to the
resale or distribution other than pursuant to an effective resale registration
statement;
(c) the Stockholder agrees not to sell (other than pursuant to an
effective resale registration statement), transfer, exchange, pledge or
otherwise dispose of, or make any offer or agreement relating to the Restricted
Securities and/or any option, right or other interest with respect to the
Restricted Securities that the Stockholder may acquire, unless: (i) counsel
representing the Stockholder, which counsel is reasonably satisfactory to
Acquiror and Acquiror's legal counsel, shall have advised Acquiror in a written
opinion letter satisfactory to Acquiror and Acquiror's legal counsel, and upon
which Acquiror and Acquiror's legal counsel may rely, that no registration
under the Securities Act would be required in connection with the proposed
sale, transfer, exchange, pledge or other disposition, and (ii) all transferees
(and other subsequent transferees) who receive the Restricted Securities agree
to be bound by the investment and other restrictions to which the Stockholder
was subject;
(d) the Stockholder is an "accredited investor" as defined in Rule 501 of
Regulation D under the Securities Act, has the capacity to protect such
Stockholder's interests in connection with this Option Agreement, and has such
knowledge and experience in financial, tax and business matters to be capable
of evaluating the merits and risks of an investment in the Restricted
Securities and in protecting the Stockholder's interests in connection with the
investment and, in the Stockholder's judgment, has obtained sufficient
information from Acquiror to evaluate the merits and risks of an investment in
the Restricted Securities;
(e) the Stockholder acknowledges that (i) it has conducted its own
investigation and review of the business and affairs of Acquiror, (ii) it has
not relied on any representations or warranties of Acquiror concerning the
business and affairs of Acquiror or an investment in the Restricted Securities,
(iii) it has had the opportunity to ask questions of and receive information
and answers from Acquiror concerning the terms and conditions of this Option
Agreement, the Restricted Securities and other matters pertaining to an
investment in the Restricted Securities, and (iv) it has been given the
opportunity to verify the information provided to it in order for the
Stockholder to evaluate the merits and risks of an investment in the Restricted
Securities, and all such questions have been answered and all such information
has been provided to the full satisfaction of the Stockholder;
(f) the Stockholder further acknowledges, represents, agrees and is aware
that the representations, warranties, agreements, undertakings and
acknowledgments made by the Stockholder in this Option Agreement are made with
the intent that they be relied upon by Acquiror in determining the suitability
of the Stockholder as an investor in the Restricted Securities; and
(g) the Stockholder undertakes to notify Acquiror immediately of any
change in any representation, warranty or other information relating to the
Stockholder set forth herein.
8. Representations and Warranties of Acquiror. Acquiror represents, warrants
and covenants to the Stockholder that:
(a) Acquiror is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has the corporate
power and authority to execute and deliver this Option Agreement and to
consummate the transactions contemplated hereby;
D-5
<PAGE>
(b) the execution and delivery of this Option Agreement by Acquiror and
the consummation by Acquiror of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Acquiror and
no other corporate proceedings on the part of Acquiror are necessary to
authorize this Option Agreement or any of the transactions contemplated hereby;
(c) this Option Agreement has been duly executed and delivered by
Acquiror and constitutes a valid and binding obligation of Acquiror, and,
assuming this Option Agreement constitutes a valid and binding obligation of
the Stockholder, is enforceable against Acquiror in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other laws affecting the rights and
remedies of creditors generally and general principles of equity (whether
considered in a proceeding in equity or at law);
(d) the execution and delivery of this Option Agreement by Acquiror does
not, and the performance of this Option Agreement by Acquiror will not, (i)
conflict with or violate the organizational documents of Acquiror, (ii)
conflict with or violate any law, rule, regulation, order, judgment or decree
applicable to Acquiror or by which Acquiror or any of its properties is bound
or affected, or (iii) result in any breach of or constitute a default (or an
event that with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or encumbrance on any of
the property or assets of Acquiror pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Acquiror is a party or by which it or any of
its properties is bound or affected, except with respect to (ii) and (iii)
above, as would not materially adversely affect the business, operations or
financial condition of Acquiror;
(e) the execution and delivery of this Option Agreement by Acquiror do
not, and the performance of this Option Agreement by Acquiror will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, domestic or foreign,
except for applicable requirements, if any, of the Exchange Act, the Securities
Act, the Delaware General Corporation Law, the National Association of
Securities Dealers, Inc., state securities laws and the HSR Act; and
(f) if, as a result of the exercise of the Option granted under this
Option Agreement, the Company is required to make a Change of Control Offer (as
defined in the Indenture relating to the Company's 11 % Senior Notes Due 2008),
then (i) Acquiror shall cooperate with the Company to obtain waivers from
senior noteholders or pursue other alternatives to eliminate the Change of
Control Offer requirement and (ii) if such waivers are not received or such
other alternatives do not eliminate the need to make a Change of Control Offer,
then Acquiror will purchase any senior notes the Company would otherwise be
obligated to purchase pursuant to such Change of Control Offer.
9. Investment Representations of Acquiror. Acquiror represents, warrants,
and covenants to the Stockholder, the Company and Holdco as follows (except as
contemplated by this Option Agreement and the Merger Agreement and the
transactions contemplated thereby):
(a) Acquiror does not now have, and as of any Closing will not have, any
present plan or intention to sell, transfer, exchange, pledge or otherwise
dispose of, or to effect any other transaction which would result in a
reduction in the risk of ownership of, the Shares;
(b) Acquiror understands that any sale of the Shares hereunder is
intended to be exempt from registration, and that no registration statement
relating to the sale of the Shares in connection with this Option Agreement has
been or will be filed with the SEC or any state securities commission;
(c) Acquiror intends to acquire the Shares solely for its own account,
for investment purposes only and not with a view to the resale or distribution
thereof;
(d) Acquiror agrees not to sell, transfer, exchange, pledge or otherwise
dispose of, or make any offer or agreement relating to the Shares and/or any
option, right or other interest with respect to the Shares that Acquiror may
acquire, unless: (i) counsel representing Acquiror, which counsel is reasonably
satisfactory to the Company and the Company's legal counsel, shall have advised
the Company in a written opinion letter
D-6
<PAGE>
satisfactory to the Company and the Company's legal counsel, and upon which the
Company and the Company's legal counsel may rely, that no registration under
the Securities Act would be required in connection with the proposed sale,
transfer, exchange, pledge or other disposition, and (ii) all transferees (and
other subsequent transferees) who receive the Shares agree to be bound by the
investment and other restrictions to which the Stockholder was subject;
(e) Acquiror is an "accredited investor" as defined in Rule 501 of
Regulation D under the Securities Act, has the capacity to protect such
Acquiror's interests in connection with this Option Agreement, and has such
knowledge and experience in financial, tax and business matters to be capable
of evaluating the merits and risks of an investment in the Shares and in
protecting Acquiror's interests in connection with the investment and, in
Acquiror's judgment, has obtained sufficient information from the Company to
evaluate the merits and risks of an investment in the Shares;
(f) Acquiror acknowledges that (i) it has conducted its own investigation
and review of the business and affairs of the Company, (ii) it has not relied
on any representations or warranties of the Company concerning the business and
affairs of the Company or an investment in the Shares, (iii) it has had the
opportunity to ask questions of and receive information and answers from the
Company concerning the terms and conditions of this Option Agreement, the
Shares and other matters pertaining to an investment in the Shares, and (iv) it
has been given the opportunity to verify the information provided to it in
order for Acquiror to evaluate the merits and risks of an investment in the
Shares, and all such questions have been answered and all such information has
been provided to the full satisfaction of Acquiror;
(g) Acquiror further acknowledges, represents, agrees and is aware that
the representations, warranties, agreements, undertakings and acknowledgments
made by Acquiror in this Option Agreement are made with the intent that they be
relied upon by the Stockholder, the Company and Holdco in determining the
suitability of Acquiror as an investor in the Shares; and
(h) Acquiror undertakes to notify the Company immediately of any change
in any representation, warranty or other information relating to Acquiror set
forth herein.
10. Adjustment Upon Changes in Capitalization. In the event of any change in
the Company Common Stock, Holdco Common Stock or Acquiror Common Stock after
the date hereof by reason of stock dividends, stock splits, mergers (other than
the Merger), recapitalizations, combinations, exchange of shares or the like,
the type and number of shares or securities subject to the Option, and the
purchase price per share provided in Section 2(d) hereof, shall be adjusted
appropriately, and proper provision shall be made in the agreements governing
such transaction so that Acquiror shall receive, upon exercise of the Option,
the number and class of shares or other securities or property that Acquiror
would have received in respect of the Company Common Stock or Holdco Common
Stock if the Option had been exercised immediately prior to such event or the
record date therefor, as applicable.
11. Agreement to Register Acquiror Common Stock.
(a) Subject to Section 11(b) below, within ninety (90) days following the
exercise of the Option in exchange for the Stock Exercise Price, Acquiror shall
prepare and file a registration statement on Form S-3 (the "Resale Registration
Statement") under the Securities Act covering the resale of a maximum of 25% of
Acquiror Common Stock issued to the Stockholder upon exercise of the Option
(the "Registrable Shares"). Acquiror shall thereafter use its reasonable best
efforts to have such Resale Registration Statement declared effective by the
Securities and Exchange Commission ("SEC") as soon after the filing as
practicable and to keep that Resale Registration Statement effective and
current, including through the filing of any amendments and supplements that
may be required under provisions of applicable law, for one year after its
original effectiveness. Acquiror may include other shares of Acquiror Common
Stock on the Resale Registration Statement. At Acquiror's option, Acquiror may
satisfy its obligations under this Section 11 on another form of registration
statement under the Securities Act or by including the Registrable Shares in a
registration statement filed by Acquiror to register shares of Acquiror Common
Stock in either a primary or secondary offering. Acquiror agrees to notify the
Stockholder (i) when the Resale Registration Statement (or any post-effective
D-7
<PAGE>
amendment thereto) has become effective, (ii) if the SEC has issued any stop
order with respect to the Resale Registration Statement or initiated any
proceedings for that purpose, and (iii) if Acquiror has received any written
notification with respect to the suspension of qualification of any Acquiror
Common Stock for sale in any jurisdiction or on any securities exchange or
market or with respect to the initiation or threat of any proceeding for such
purpose. Acquiror further agrees to furnish the Stockholder such numbers of
copies of a prospectus, in conformity with the requirements of applicable law,
and such other documents as the Stockholder may reasonably request in order to
facilitate the disposition of the Acquiror Common Stock owned by such holder.
(b) Notwithstanding the requirements of Section 11(a) above, the
obligations of Acquiror to file the Resale Registration Statement may be tolled
by Acquiror for up to ninety (90) days if Acquiror is engaged in, or has fixed
plans to engage in, a registered public offering of Acquiror Stock or is
engaged in any other activity which, in the good faith determination of the
Board of Directors of Acquiror, would be materially adversely affected by the
filing of the Resale Registration Statement during the period otherwise
required by Section 11(a) to the material detriment of Acquiror.
(c) Acquiror will give notice to the Stockholder of the happening of any
event as a result of which the prospectus included in the Resale Registration
Statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the circumstances then
existing. The Stockholder shall cease using such prospectus immediately upon
receipt of notice from Acquiror to that effect. If so requested by Acquiror,
the Stockholder shall return promptly to Acquiror any copies of any prospectus
in its possession that contains an untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing.
At the request of the Stockholder, Acquiror shall prepare and furnish to the
Stockholder a reasonable number of copies of a supplement to or an amendment of
such prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such securities, such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in
light of the circumstances then existing.
(d) (i) Acquiror shall bear all costs incurred in preparing and filing
the Resale Registration Statement including, without limitation, all applicable
legal, accounting, printing, blue sky and SEC filing fees; provided, however,
that Acquiror shall not be responsible for any underwriting commissions or
discounts, brokerage fees or legal fees or disbursements incurred by any person
or entity (other than Acquiror) that sells any shares of Acquiror Common Stock
under the Resale Registration Statement. Acquiror shall also bear all costs of
keeping the Resale Registration Statement current during the applicable period
described in Section 11(a).
(ii) Acquiror will indemnify and hold harmless the Stockholder
against any losses, claims, damages or liabilities to which the Stockholder
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities arise out of or are based upon an
untrue statement or alleged untrue statement of any material fact contained
in the Resale Registration Statement, any final prospectus contained
therein, or any amendment or supplement thereof, or arise out of or are
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that Acquiror will not be liable
in any such case if and to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission so made in conformity with
information furnished by the Stockholder in writing specifically for use in
the Resale Registration Statement or prospectus.
(iii) The Stockholder shall furnish to Acquiror in writing such
information with respect to the Stockholder as Acquiror may reasonably
request or as may be required by law for use in connection with the Resale
Registration Statement and the final prospectus contained therein, and the
Stockholder will indemnify and hold harmless Acquiror against any losses,
claims, damages or liabilities to which Acquiror may become subject under
the Securities Act or otherwise, insofar as such losses, claims, damages or
D-8
<PAGE>
liabilities arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Resale Registration
Statement, any final prospectus contained therein, or any amendment or
supplement thereof, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading to the
same extent as the foregoing indemnity from Acquiror to the Stockholder,
but only with respect to (i) any such information with respect to the
Stockholder furnished in writing to Acquiror expressly for use therein or
(ii) a breach of any obligations of the Stockholder under this Section 11;
provided, however, that the total amount to be indemnified by the
Stockholder under this Section 11 shall be limited to the net proceeds
received by the Stockholder in the offering to which the Resale
Registration Statement or prospectus relates.
(e) The rights described in this Section 11 shall not be transferable
without the express written consent of Acquiror.
12. Binding Effect; No Assignment. This Option Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns. Except as expressly provided for in this
Option Agreement, neither this Option Agreement nor the rights or the
obligations of either party hereto are assignable, except by operation of law,
or with the written consent of the other party. Nothing contained in this
Option Agreement, express or implied, is intended to confer upon any person
other than the parties hereto and their respective permitted assigns any rights
or remedies of any nature whatsoever by reason of this Option Agreement.
13. Specific Performance. The parties recognize and agree that if for any
reason any of the provisions of this Option Agreement are not performed in
accordance with their specific terms or are otherwise breached, immediate and
irreparable harm or injury would be caused for which money damages would not be
an adequate remedy. Accordingly, each party agrees that, in addition to other
remedies, the other party shall be entitled to an injunction restraining any
violation or threatened violation of the provisions of this Option Agreement.
In the event that any action should be brought in equity to enforce the
provisions of this Option Agreement, neither party will allege, and each party
hereby waives the defense, that there is adequate remedy at law.
14. Entire Agreement. This Option Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes
all other prior agreements and understandings, both written and oral, among the
parties or any of them with respect to the subject matter hereof.
15. Further Assurance. Each party will execute and deliver all such further
documents and instruments and take all such further action as may be necessary
in order to consummate the transactions contemplated hereby.
16. Validity. The invalidity or unenforceability of any provision of this
Option Agreement shall not affect the validity or enforceability of the other
provisions of this Option Agreement, which shall remain in full force and
effect. In the event any court or other competent authority holds any provision
of this Option Agreement to be null, void or unenforceable, the parties hereto
shall negotiate in good faith the execution and delivery of an amendment to
this Option Agreement in order, as nearly as possible, to effectuate, to the
extent permitted by law, the intent of the parties hereto with respect to such
provision. Each party agrees that, should any court or other competent
authority hold any provision of this Option Agreement or part hereof to be
null, void or unenforceable, or order any party to take any action inconsistent
herewith, or not take any action required herein, the other party shall not be
entitled to specific performance of such provision or part hereof or to any
other remedy, including but not limited to money damages, for breach hereof or
of any other provision of this Option Agreement or part hereof as the result of
such holding or order.
17. Notices. Any notice or communication required or permitted hereunder
shall be in writing and either delivered personally, telegraphed or telecopied
with confirmation or sent by certified or registered mail,
D-9
<PAGE>
postage prepaid, and shall be deemed to be given, dated and received when so
delivered personally, telegraphed or telecopied or, if mailed, five business
days after the date of mailing to the following address, or to such other
address or addresses as such person may subsequently designate by notice given
hereunder.
(a) If to Acquiror, to:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW
P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
Telecopier No.: (319) 790-7901
Attention: Randall Rings
Vice President, General Counsel and Secretary
With a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004
Telecopier No.: (202) 637-5910
Attention: Joseph G. Connolly, Jr.
(b)If to the Stockholder, to the address set forth below its or his
signature on this Option Agreement
With a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
Telecopier No.: (212) 735-2000
Attention: Ralph Arditi
and
Fried, Frank, Harris, Shriver & Jacobson
1001 Pennsylvania Avenue
Washington, DC 20004
Telecopier No.: (202) 639-7003
Attention: Richard A. Steinwurtzel, Esq.
18. Governing Law. This Option Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware, without giving effect to
the principles of conflicts of law thereof.
19. Descriptive Headings. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Option Agreement.
20. Counterparts. This Option Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which, taken
together, shall constitute one and the same instrument.
21. Expenses. Except as otherwise expressly provided herein or in the
Merger Agreement, all costs and expenses incurred in connection with the
transactions contemplated by this Option Agreement shall be paid by the party
incurring such expenses.
D-10
<PAGE>
22. Amendments; Waiver. This Option Agreement may be amended by the parties
hereto and the terms and conditions hereof may be waived only by an instrument
in writing signed on behalf of each of the parties hereto, or, in the case of a
waiver, by an instrument signed on behalf of the party waiving compliance.
23. Parties in Interest. This Option Agreement shall be binding upon, inure
solely to the benefit of and be enforceable by each party hereto and its
respective successors and assigns, and, with the exception of the obligations
of Acquiror to the Company set forth in Section 8(f) with regard to a Change of
Control Offer, nothing in this Option Agreement, express or implied, is
intended to or shall confer upon any Person other than the parties hereto any
right, benefit or remedy of any nature whatsoever under or by reason of this
Option Agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
D-11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed, or caused to be
executed by their duly authorized officers, this Option Agreement as of the
date first above written.
McLeodUSA Incorporated
By: _________________________________
Name:
Title:
Stockholder
By: _________________________________
Name:
Address:
D-12
<PAGE>
APPENDIX E
[Salomon Smith Barney Logo Appears Here]
January 6, 2000
Board of Directors
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW
Cedar Rapids, IA 52406-3177
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to McLeodUSA Incorporated ("Parent") of the consideration to be paid by
Parent in connection with the proposed business combination involving Parent
and Splitrock Services, Inc. (the "Company") pursuant to an Agreement and Plan
of Merger dated as of January 6, 2000 (the "Merger Agreement"), by and among
Parent, Southside Acquisition Corporation, a wholly owned subsidiary of Parent
("Sub") and the Company. As more fully described in the Merger Agreement, (i)
Sub will be merged with and into the Company (the "Merger") and (ii) each
issued and outstanding share of the common stock, $.001 par value per share, of
the Company (other than shares held by Parent, Sub or the Company) will be
converted into the right to receive 0.5347 shares (the "Exchange Ratio") of
Class A common stock, $.01 par value per share, of Parent ("Parent Common
Stock").
In arriving at our opinion, we held discussions with certain officers,
employees and other representatives and advisors of Parent and certain
officers, employees and other representatives and advisors of the Company
concerning the businesses, operations and prospects of Parent and the Company,
respectively. We examined certain publicly available business and financial
information relating to Parent and the Company as well as certain financial
forecasts and other information for Parent and the Company which were provided
to or otherwise discussed with us by the managements of Parent and the Company,
respectively. In addition to the foregoing, we conducted such other analyses
and examinations and considered such other information and financial, economic
and market criteria as we deemed appropriate in arriving at our opinion.
In rendering our opinion, we have assumed and relied upon the accuracy and
completeness of all financial and other information publicly available or
furnished to or otherwise reviewed by or discussed with us, and we have not
assumed any responsibility for independent verification of such information.
With respect to financial forecasts provided to or otherwise reviewed by or
discussed with us, we have been advised by the respective managements of Parent
and the Company that such forecasts were reasonably prepared on bases
reflecting their best currently available estimates and judgments as to the
future financial performance of Parent and the Company, respectively, and we
express no opinion with respect to such forecasts or the assumptions on which
they are based. We have also assumed that the Merger will be consummated in
accordance with the terms of the Merger Agreement and the other agreements
entered into in conjunction therewith.
Our opinion, as set forth herein, relates to the relative values of Parent
and the Company. We are not expressing any opinion as to what the value of
Parent Common Stock actually will be when issued pursuant to the Merger or the
price at which Parent Common Stock will trade subsequent to the Merger, which
may vary depending upon, among other factors, changes in interest rates,
dividend rates, market conditions, general economic conditions and other
factors that generally influence the price of securities. We have not made or
been provided with or assumed any responsibility for making or obtaining an
independent evaluation or appraisal of the assets or liabilities (contingent or
otherwise) of Parent or the Company nor have we made or assumed any
responsibility for making any physical inspection of the properties or assets
of Parent or the Company. Our opinion is necessarily, based upon information
available to us, and financial, stock market and
E-1
<PAGE>
other conditions and circumstances existing and disclosed to us, as of the date
hereof. Our opinion does not address Parent's underlying business decision to
effect the Merger. Our opinion is directed only to the fairness, from a
financial point of view, of the Exchange Ratio to Parent and does not
constitute a recommendation concerning how holders of any class or series of
Parent capital stock should vote with respect to the transactions contemplated
by the Merger Agreement.
Salomon Smith Barney Inc. has acted as financial advisor to the Board of
Directors of Parent in connection with the Merger and will receive a fee for
such services, a portion of which is contingent upon the consummation of the
Merger. We have in the past provided investment banking services to Parent, for
which services we have received customary compensation. In the ordinary course
of our business, we and our affiliates may actively trade or hold the
securities of Parent and the Company for our own account or for the account of
our customers and, accordingly, may at any time hold a long or short position
in such securities. In addition, we and our affiliates (including Citigroup
Inc. and its affiliates) may maintain other business relationships with Parent
or the Company and their respective affiliates in the ordinary course of their
businesses.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Exchange Ratio is fair to Parent from a financial point of
view.
Very truly yours,
/s/ Salomon Smith Barney Inc.
_____________________________________
SALOMON SMITH BARNEY INC.
E-2
<PAGE>
APPENDIX F
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON]
January 6, 2000
Board of Directors
Splitrock Services, Inc.
9012 New Trails Drive
The Woodlands, Texas 77381
Members of the Board:
You have asked us to advise you with respect to the fairness
to the stockholders of Splitrock Services, Inc. (the
"Company") from a financial point of view of the Exchange
Ratio provided for in the Agreement and Plan of Merger, dated
as of January 6, 2000 (the "Merger Agreement"), among the
Company, McLeodUSA Incorporated (the "Acquiror") and Southside
Acquisition Corporation (the "Sub"). The Merger Agreement
provides for the merger (the "Merger") of the Sub with the
Company pursuant to which the Company will become a wholly
owned subsidiary of the Acquiror, and each outstanding share
of common stock, par value $.001 per share, of the Company
(the "Company Common Stock") will be converted into 0.5347
(the "Exchange Ratio") of a share of Class A common stock, par
value $.0l per share, of the Acquiror.
In arriving at our opinion, we have reviewed certain publicly
available business and financial information relating to the
Company and the Acquiror, as well as the Merger Agreement and
certain related agreements. We have also reviewed certain
other information, including financial forecasts, provided to
us by the Company and the Acquiror, and have met with the
Company's and the Acquiror's management to discuss the
business and prospects of the Company and the Acquiror.
We have also considered certain financial and stock market
data of the Company and the Acquiror, and we have compared
that data with similar data for other publicly held companies
in businesses similar to those of the Company and the Acquiror
and we have considered the financial terms of certain other
business combinations and other transactions which have
recently been effected. We also considered such other
information, financial studies, analyses and investigations
and financial, economic and market criteria which we deemed
relevant.
In connection with our review, we have not assumed any
responsibility for independent verification of any of the
foregoing information and have relied on its being complete
and accurate in all material respects. With respect to the
financial forecasts, we have
F-1
<PAGE>
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON]
Board of Directors
Splitrock Services, Inc.
January 6, 2000
Page 2
assumed that they have been reasonably prepared on bases
reflecting the best currently available estimates and
judgments of the Company's and the Acquiror's management as to
the future financial performance of the Company and the
Acquiror. You also have informed us, and we have assumed, that
the Merger will be treated as a tax-free reorganization for
federal income tax purposes. In addition, we have not been
requested to make, and have not made, an independent
evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of the Company or the Acquiror, nor
have we been furnished with any such evaluations or
appraisals. Our opinion is necessarily based upon financial,
economic, market and other conditions as they exist and can be
evaluated on the date hereof. We are not expressing any
opinion as to the actual value of the Acquiror Common Stock
when issued to the Company's stockholders pursuant to the
Merger or the prices at which such Acquiror Common Stock will
trade subsequent to the Merger. We were not requested to, and
did not, solicit third party indications of interest in
acquiring all or any part of the Company.
We have acted as financial advisor to the Company in
connection with the Merger and will receive a fee for our
services, a significant portion of which is contingent upon
the consummation of the Merger.
In the past, we have performed certain investment banking
services for the Company and the Acquiror and have received
customary fees for such services.
In the ordinary course of our business, we and our affiliates
may actively trade the debt and equity securities of the
Company and the Acquiror for our and such affiliates' own
accounts and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such
securities.
It is understood that this letter is for the information of
the Board of Directors only in connection with its
consideration of the Merger, does not constitute a
recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger and is not to be quoted or
referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other
document used in connection with the offering or sale of
securities, nor shall this letter be used for any other
purposes, without our prior written consent.
F-2
<PAGE>
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON]
Board of Directors
Splitrock Services, Inc.
January 6, 2000
Page 3
Based upon and subject to the foregoing, it is our opinion
that, as of the date hereof, the Exchange Ratio is fair to the
stockholders of the Company from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
F-3
<PAGE>
APPENDIX G
McLEODUSA INCORPORATED
AMENDMENT TO AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
RESOLVED, that the Amended and Restated Certificate of Incorporation of
McLeodUSA Incorporated (the "Certificate of Incorporation") is hereby amended
as follows:
1. Section 4.1 of the Certificate of Incorporation is hereby amended and
restated as follows:
"4.1. Authorized Shares
The total number of shares of stock that the Corporation shall be
authorized to issue is 1,024,000,000 shares, divided into three classes as
follows: (i) 1,000,000,000 shares of Class A common stock having a par
value of $.01 per share ("Class A Common Stock"); (ii) 22,000,000 shares of
Class B common stock having a par value of $.01 per share ("Class B Common
Stock"); and (iii) 2,000,000 shares of serial preferred stock, having a par
value of $.01 per share ("Preferred Stock")."
G-1
<PAGE>
[LOGO OF McLEODUSA]
[LOGO OF SPLITROCK]
