<PAGE>
As filed with the Securities and Exchange Commission on February 1, 2000
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
_______________
McLeodUSA Incorporated
(Exact name of registrant as specified in its charter)
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Delaware 4813 42-1407240
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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_______________
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_______________
Clark E. McLeod
Chairman and Chief Executive Officer
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
(319) 364-0000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
_______________
Copies to:
Joseph G. Connolly, Jr. Richard A. Steinwurtzel
James G. McMillan Andrew P. Varney
Hogan & Hartson L.L.P. Fried, Frank, Harris, Shriver & Jacobson
555 13th Street, N.W. 1001 Pennsylvania Ave, NW Suite 800
Washington, D.C. 20004 Washington, DC 20004-2505
(202) 637-5600 (202) 639-7000
_______________
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act of 1933, please check
the following box and list the Securities Act of 1933 registration statement
number of the earlier effective registration statement for the same offering.
[_]_________________
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. [_]________________
_______________
CALCULATION OF REGISTRATION FEE
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====================================================================================================================================
Title of
each class Proposed maximum Proposed maximum
of securities Amount to offering price aggregate Amount of
to be registered be registered per share offering price registration fee
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Class A Common Stock,
$.01 par value 33,275,152(1) Not Applicable Not applicable $597,096(2)
====================================================================================================================================
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(1) Represents the maximum number of shares of Class A common stock, par value
$.01 per share, of McLeodUSA Incorporated that may be issued pursuant to
the transactions described herein, based on (a) 62,231,443 shares of
common stock, par value $.001 per share, of Splitrock Services, Inc., which
is the maximum number of shares of Splitrock common stock that may be
outstanding immediately prior to the consummation of the transactions
herein, assuming exercise of all outstanding options and warrants to
purchase shares of Splitrock common stock (whether or not currently
exercisable), and (b) the exchange ratio of 0.5347 shares of McLeodUSA
Class A common stock for each share of Splitrock common stock.
(2) Pursuant to Rule 457(f)(1) and 457(c) under the Securities Act of 1933, as
amended, the registration fee has been calculated based on a price of
$36.34375 per share of common stock of Splitrock (the average of the high
and low price per share of common stock of Splitrock as reported on the
Nasdaq Stock Market on January 28, 2000).
_______________
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
McLeodUSA 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 by voting by telephone or through the Internet as
instructed on the 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 [__].
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:
[Date, Time]
[Hotel/Conference Center]
[Street Address]
Cedar Rapids, Iowa
For Splitrock Stockholders:
[Date, Time]
[Hotel/Conference Center]
[Street Address]
[City, State]
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Clark E. McLeod Kwok L. Li
Chairman of the Board Chairman of the Board
McLeodUSA Incorporated Splitrock Services, Inc.
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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 [__________ __, 2000]
and it is first being mailed on or about [___________ __, 2000].
<PAGE>
[LOGO]
McLEODUSA INCORPORATED
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
Cedar Rapids, Iowa
[__________ __, 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 [__________ __, 2000] at
10:00 a.m., local time, at 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 Agreement and Plan of Merger
by and among McLeodUSA Incorporated, Southside Acquisition Corporation, a
wholly owned subsidiary of McLeodUSA Incorporated, and Splitrock Services,
Inc., dated as of January 6, 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 [_________ __, 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 33% 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
Clark E. McLeod
Chairman and
Chief Executive Officer
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]
SPLITROCK SERVICES, INC.
9012 New Trails Drive
The Woodlands, TX 77381
(281) 465-1200
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD AT 10:00 A.M. ON [__________ __, 2000]
We will hold a special meeting of stockholders of Splitrock Services, Inc.,
a Delaware corporation, at 10:00 a.m., local time on [__________ __, 2000] at
[____________________________________] for the following purposes:
1. to consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger by and among McLeodUSA Incorporated, Southside Acquisition
Corporation, a wholly-owned subsidiary of McLeodUSA Incorporated, and Splitrock
Services, Inc., dated as of January 6, 2000; and
2. to transact other business as may properly come before the special meeting.
The board of directors has fixed [__________ __, 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 from
[___________ __, 2000] until the 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 50.7% 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
Patrick J. McGettigan
Secretary
The Woodlands, Texas
[___________ __, 2000]
<PAGE>
TABLE OF CONTENTS
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Page
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SUMMARY................................................................ 1
The Companies..................................................... 1
Special Meeting of McLeodUSA Stockholders (page __)............... 2
Special Meeting of Splitrock Stockholders (page __)............... 2
The Merger (page __).............................................. 3
Board of Directors' Recommendations (page __)..................... 5
Opinions of Financial Advisors (page __).......................... 5
Differences in the Rights of Stockholders (page __)............... 6
RISK FACTORS........................................................... 15
FORWARD LOOKING STATEMENTS............................................. 24
THE MCLEODUSA SPECIAL MEETING.......................................... 25
THE SPLITROCK SPECIAL MEETING.......................................... 28
THE MERGER............................................................. 31
General.......................................................... 31
Background of the Merger......................................... 31
Recommendation of the Splitrock Board of
Directors and Reasons for the Merger......................... 35
Opinion of the Splitrock Financial Advisor....................... 38
Recommendation of the McLeodUSA Board of
Directors and Reasons for the Merger......................... 45
Opinion of the McLeodUSA Financial Advisor....................... 48
Interests of Splitrock Management in the Merger.................. 55
Accounting Treatment............................................. 57
Listing on The Nasdaq Stock Market............................... 58
Governmental and Regulatory Approvals............................ 58
Federal Income Tax Consequences.................................. 58
Restrictions on Resales by Affiliates............................ 60
Appraisal Rights of Dissenting Stockholders...................... 61
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS................. 62
General.......................................................... 62
Structure of the Merger.......................................... 62
Conversion of Splitrock Common Stock; Treatment of Options
and Warrants................................................. 62
Exchange of Certificates......................................... 64
Effective Time................................................... 65
Representations and Warranties................................... 65
Business of Splitrock Pending the Merger; Other Agreements....... 68
No Solicitation by Splitrock..................................... 72
Additional Agreements of McLeodUSA............................... 75
Director's and Officers' Insurance and Indemnification........... 75
Conditions to Consummation of the Merger......................... 76
Termination of the Merger Agreement.............................. 79
Expenses; Termination Fee........................................ 80
Waiver and Amendment of the Merger Agreement..................... 81
Voting Agreements................................................ 82
Stock Option Agreements.......................................... 83
Confidentiality, Nonsolicitation and Noncompetition
Agreements................................................... 86
Terms of Stockholders' Agreements................................ 88
Credit Agreement................................................. 89
Master Services Agreement........................................ 91
Letter of Intent Regarding Bandwidth Capacity.................... 91
INFORMATION ABOUT MCLEODUSA AND SOUTHSIDE ACQUISITION CORPORATION...... 92
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA...................... 95
PRO FORMA FINANCIAL DATA............................................... 99
INFORMATION ABOUT SPLITROCK............................................ 104
</TABLE>
<PAGE>
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SELECTED CONSOLIDATED FINANCIAL DATA OF SPLITROCK...................... 107
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND MORE THAN 5%
STOCKHOLDERS OF MCLEODUSA......................................... 109
STOCK OWNERSHIP OF MANAGEMENT, DIRECTORS AND MORE THAN 5%
STOCKHOLDERS OF SPLITROCK......................................... 112
MCLEODUSA CAPITAL STOCK AND COMPARISON OF STOCKHOLDER RIGHTS........... 114
PROPOSALS TO MCLEODUSA STOCKHOLDERS TO BE VOTED ON AT THE
MCLEODUSA SPECIAL MEETING......................................... 131
PROPOSAL TO SPLITROCK STOCKHOLDERS TO BE VOTED ON AT THE SPLITROCK
SPECIAL MEETING................................................... 135
LEGAL MATTERS.......................................................... 136
EXPERTS................................................................ 136
OTHER MATTERS.......................................................... 136
SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS............................. 137
WHERE YOU CAN FIND MORE INFORMATION.................................... 137
APPENDICES
Appendix A - Agreement and Plan
of Merger........................................................ A-1
Appendix B - Form of Voting Agreement between McLeodUSA
and various stockholders of Splitrock............................. B-1
Appendix C - Form of Voting Agreement between Splitrock
and various stockholders of McLeodUSA............................. C-1
Appendix D - Form of 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 Article 4.1 of
the McLeodUSA Certificate of Incorporation........................ G-1
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<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.
In addition, the companies agreed that Splitrock, with the consent of
McLeodUSA, may reorganize into a holding company structure so long as doing
so will not adversely affect the tax consequences to the stockholders of
either company.
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.
<PAGE>
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 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, 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.
* * * * *
<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, IA 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, TX 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, our 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.
Special Meeting of McLeodUSA
Stockholders (page __)
The special meeting will be held on [______ __, 2000] at 10:00 a.m., local time,
at [_________________], Cedar Rapids, IA 52406. 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
[_______ __, 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 __)
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 [__________] shares of
McLeodUSA Class A common stock outstanding as of [(record date) ______ __,
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 52,026,754 shares of McLeodUSA Class A common stock,
representing approximately 33% 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 __)
The special meeting will be held on [_______ __, 2000] at 10:00 a.m., local
time, at [________________]. At the 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 [_______ __,
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
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<PAGE>
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 __)
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
[__________] shares of Splitrock common stock outstanding as of [____________].
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 28,939,687 shares of Splitrock common stock, representing
approximately 50.7% 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 __)
The merger agreement provides that McLeodUSA will acquire Splitrock by merger,
with Splitrock becoming a wholly owned subsidiary of McLeodUSA. 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 __)
If the merger is 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 __)
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 __)
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 __)
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 __)
Several conditions must be satisfied before the merger will be completed. These
include:
. approval and adoption of the merger agreement by the Splitrock
stockholders
. 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
. receipt by Splitrock of an opinion of its tax counsel that for U.S.
federal income tax purposes, the merger is not taxable to Splitrock or
the Splitrock stockholders
-3-
<PAGE>
. 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 __)
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 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 merger's tax consequences to them.
Accounting Treatment (page __)
McLeodUSA and Splitrock expect to account for the merger using the purchase
method of accounting.
Governmental and Regulatory Approvals (page __)
Before the merger can occur, U.S. antitrust authorities must approve the merger
or the applicable premerger waiting period must expire. Splitrock and McLeodUSA
have filed all of the required applications or notices with these regulatory
authorities. While neither Splitrock nor McLeodUSA knows of any reason why we
would not be able to obtain the necessary approvals in a timely manner, we
cannot be certain when or if we will receive them.
Interests of the Splitrock Directors and Officers in the Merger (page __)
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 and 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; Expenses (page __)
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
. any court or governmental entity issues a final order or judgment
preventing completion of the merger
-4-
<PAGE>
. 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. McLeodUSA and Splitrock also 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 the
termination fee and the filing, printing and mailing expenses of this joint
proxy statement/prospectus, each company will pay its own fees and expenses
regardless of whether the merger is completed.
Holding Company Structure (page __)
In connection with the merger agreement, McLeodUSA and Splitrock agreed that
Splitrock, with the consent of McLeodUSA, may reorganize in a holding company
structure prior to the consummation of the merger. Immediately after the
holding company reorganization, Splitrock would become a wholly-owned
subsidiary of a holding company in which the former Splitrock common
stockholders of record owned all of the equity. The merger agreement
contemplates that McLeodUSA would consummate the Splitrock acquisition by
acquiring the holding company. McLeodUSA and Splitrock agreed, however, that
Splitrock will not reorganize if doing so will adversely affect the tax
consequences of the merger to either McLeodUSA or the Splitrock stockholders.
If Splitrock does reorganize, after the reorganization all of the rights and
obligations of Splitrock under the merger agreement will be deemed to have been
assigned to and assumed by the new holding company, and all references to
Splitrock in the merger agreement and in this joint proxy statement/prospectus
should be generally understood to refer to that new holding company.
If Splitrock does reorganize, we will amend the merger agreement and the
registration statement of which this joint proxy statement/prospectus is a part
to reflect the reorganization. The reorganization will not change the
consideration Splitrock stockholders receive in the merger.
Stock Option Agreements (page __)
In connection with the merger agreement, McLeodUSA and several stockholders of
Splitrock owning in the aggregate [____________] shares of Splitrock common
stock, representing approximately [__]% 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 (page __)
McLeodUSA (page __)
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 __)
The Splitrock board of directors recommends that you vote "FOR" the proposal to
approve and adopt the merger agreement.
Opinions of Financial Advisors (page __)
-5-
<PAGE>
McLeodUSA (page __)
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 __)
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 __)
When the merger is 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. Earnings per share for the year was a negative $1.61, compared
to a negative $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. Earnings per share for the quarter was a negative $0.43, compared to a
negative $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.
Splitrock Fourth Quarter and Fiscal Year Results for 1999
-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 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 the mergers with these companies had occurred 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.
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.
-8-
<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 89,107 222,549
Other................................ - - 2,380 4,632 5,575 5,575
-------- -------- -------- -------- --------- ---------
Total operating expenses............ 19,357 39,556 109,533 337,255 678,821 929,665
Operating loss........................ (11,343) (10,558) (28,210) (69,369) (74,675) (240,873)
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) (391,170)
Preferred stock dividends............. - - - - - (54,406)
-------- -------- -------- -------- --------- ---------
Loss applicable to
common stock........................ $(11,416) $(11,329) $(22,346) $(79,910) $(124,912) $(445,576)
======== ======== ======== ======== ========= =========
Loss per common share................. $ (.27) $ (.20) $ (.28) $ (.73) $ (.99) $ (2.66)
======== ======== ======== ======== ========= =========
Weighted average common shares
outstanding.......................... 42,928 56,008 81,012 109,948 125,614 167,302
======== ======== ======== ======== ========= =========
<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...................... 63,663 130,583 230,256
Other................................ 5,575
--------- --------- ---------
Total operating expenses............ 498,012 740,406 956,210
Operating loss........................ (59,370) (95,531) (233,695)
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) (331,946)
Preferred stock dividends............. - (4,125) (40,773)
--------- --------- ---------
Loss applicable to
common stock........................ $ (93,100) $(171,427) $(372,719)
========= ========= =========
Loss per common share................. $ (.74) $ (1.18) $ (2.08)
========= ========= =========
Weighted average common shares
outstanding.......................... 125,240 144,982 179,207
========= ========= =========
</TABLE>
-9-
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30, 1999
------------------------------------------------------- ---------------------------
As
1994 1995 1996 1997 1998 Actual Adjusted
------- ------- -------- ---------- ---------- ----------- -----------
(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 $1,911,699
Working capital (deficit)............ $ 1,659 $(1,208) $185,968 $ 378,617 $ 613,236 $1,479,782 $1,587,836
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 $6,417,026
Long-term debt....................... $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,801,185 $2,320,525
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 $2,996,655
</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, including
business acquisitions................ $ 3,393 $14,697 $173,782 $601,137 $339,660 $3,075,761
EBITDA(1).............................. $(10,571) $(8,723) $(17,345) $(31,462) $ 20,007 $ (12,749)
<CAPTION>
Nine Months Ended September 30,
-----------------------------------------
Pro Forma
1998 1999 1999
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures, including
business acquisitions................ $269,100 $ 1,071,500 $ 3,328,397
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.
-10-
<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) through Year Ended
December 31, December 31, Nine Months Ended September 30,
-----------------------------------
1997 1998 1998 1999
------------------------------------------------------------------
(unaudited) (unaudited)
<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) $ (.74) $ (1.59)
=========== =========== =========== =========
Weighted average common
shares outstanding..................... 24,110 44,389 43,636 48,805
</TABLE>
-11-
<PAGE>
Selected Financial Data of Splitrock
(In thousands, except per share data)
(continued)
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1997 1998 1999
---------------------------------------------
(unaudited)
<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
Total liabilities........................ 33,981 326,432 302,691
Stockholders' equity
(deficit)............................... 20,407 (30,291) (19,415)
</TABLE>
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997)
through Year Ended Nine months ended
December 31, December 31, September 30,
-----------------------------
1997 1998 1998 1999
-------------------------------------------------------------
(unaudited) (unaudited)
<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 September 30, 1999 represent escrowed funds
that, together with interest received on those funds, will be sufficient to
pay, when due, the next two semi-annual interest payments 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.
-12-
<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 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 for the nine months ended
September 30, 1999 include the adjusted operations of Splitrock for the nine
months ended September 30, 1999 and adjustments attributable to the acquisition
of Ovation by McLeodUSA, the issuance by McLeodUSA of 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, 1999. The McLeodUSA
"book value per share at period end" data give effect to the merger as if it had
occurred at the end of the period.
The Splitrock "equivalent" pro forma for the merger amounts are calculated
by multiplying the unaudited pro forma combined per share amounts by 0.5347,
which 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 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............... (2.66) (2.08)
Diluted earnings per share
Historical............................. (0.99) (1.18)
Pro forma for the merger............... (2.66) (2.08)
Book value per share at period end
Historical............................. 7.27 6.87
Pro forma for the merger............... 25.31 16.15
Splitrock common Stock
Loss attributable to shares of common stock
Basic earnings per share
Historical............................. $(1.30) $(1.59)
equivalent pro forma for the merger.... (1.42) (1.11)
Diluted earnings per share
Historical............................. (1.30) (1.59)
equivalent pro forma for the merger.... (1.42) (1.11)
Book value per share at period end
Historical............................. (1.22) (.34)
equivalent pro forma for the merger.... 13.53 8.64
</TABLE>
____________
-13-
<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 $ 8.675 -- --
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........................... 24.165 19.000 -- --
Third Quarter............................ 20.063 10.688 -- --
Fourth Quarter........................... 19.250 7.625 -- --
1999
First Quarter............................ $22.125 $ 15.188 $ -- $ --
Second Quarter........................... 30.958 21.844 -- --
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. [__], 2000).. $ $ 49.500 $ $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 [______ __, 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 $[_____] per share and the closing price reported for Splitrock common
stock was $[____] per share.
As of [_______ __, 2000], there were [___] holders of record of McLeodUSA
Class A common stock and there were approximately [___] holders of record of
Splitrock common stock.
Dividends. McLeodUSA has never declared or paid a cash dividend with respect to
its 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 its 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.
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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 in 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. 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 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 common stock in replacement of all
unexercised Splitrock stock options outstanding at the Effective Time
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 "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
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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.
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 50.7% 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
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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 every year since it began
operations. Since January 1, 1995, McLeodUSA net losses applicable to common
stock have been as follows:
Period Amount
------ ------
1995 $ 11.3 million
1996 $ 22.3 million
1997 $ 79.9 million
1998 $ 124.9 million
First 9 months of 1999 $ 171.4 million
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.
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
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<PAGE>
McLeodUSA and Splitrock business plan, capital requirements and growth
projections. 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
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
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<PAGE>
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 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.
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<PAGE>
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, 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
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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
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 upon completion of 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
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. 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 December 31, 1999, 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 36.4% 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.
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
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. 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.
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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.
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THE McLEODUSA SPECIAL MEETING
This joint proxy statement/prospectus is first being mailed or delivered by
McLeodUSA to its stockholders on or about [__________], 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 [___________,
2000] at 10:00 a.m., local time, at [_____________________________________]. 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 Agreement and Plan of Merger by and among
McLeodUSA Incorporated, Southside Acquisition Corporation, a wholly
owned subsidiary of McLeodUSA, and Splitrock Services, Inc., dated as
of January 6, 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
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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 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
[___________, 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.
[_____________] shares of McLeodUSA Class A common stock are entitled to vote at
the McLeodUSA special meeting. On the record date, there were [___] 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.
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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 52,026,754 shares of McLeodUSA Class A common stock
subject to these agreements represent approximately 33% 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."
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THE SPLITROCK SPECIAL MEETING
This joint proxy statement/prospectus is first being mailed or delivered by
Splitrock to its stockholders on or about [__________,] 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 held at _____________________, on
__________, 2000 at 10:00 a.m., local time. At the Splitrock special meeting,
Splitrock stockholders will be asked to consider and vote on a proposal to
approve and adopt the Agreement and Plan of Merger by and among McLeodUSA
Incorporated, Southside Acquisition Corporation, a wholly owned subsidiary of
McLeodUSA Incorporated, and Splitrock Services, Inc., dated as of January 6,
2000.
The approval of this proposal is required in order for Splitrock to
consummate 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
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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
[__________________, 2000] as the record date for the Splitrock special
meeting. Under the Delaware General Corporation Law and the bylaws of
Splitrock, 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. [_______________] shares of Splitrock common stock are entitled to
vote at the Splitrock special meeting. On the record date, there were [_____]
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 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 28,939,687 shares of
Splitrock common stock subject to these agreements represent approximately 50.7%
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."
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<PAGE>
Recommendation of the Splitrock Board of Directors
The Splitrock board of directors has determined that the merger agreement
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."
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THE MERGER
General
The boards of directors of McLeodUSA, Splitrock and Southside Acquisition
Corporation have each approved the merger agreement, which provides for the
merger of Southside Acquisition Corporation with and into Splitrock, with
Splitrock as the surviving corporation of the merger and a wholly owned
subsidiary of McLeodUSA. In 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."
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 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
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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.
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 Roy 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
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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 to use a floating price/fixed
exchange ratio price structure without a collar. Robert Fugate, the Splitrock
Chief Financial Officer, and representatives from PricewaterhouseCoopers and
Credit Suisse First Boston also went to the headquarters of McLeodUSA on this
date to conduct business, financial and accounting due diligence.
On December 29, 1999 and December 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 55% 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.
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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 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 stockholders' 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 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
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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.
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 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 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
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. 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. 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
. 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 a 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
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. 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 50.7% of the outstanding Splitrock
common stock which require them to vote their shares of Splitrock in
favor of the merger
. 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 __% of the
Splitrock outstanding common stock under specified circumstances
including their economic incentive to consider a superior proposal
. 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 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
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 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"
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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.
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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 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,
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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 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:
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. 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.
Competitive Local Exchange Carriers:
. CapRock Communications Corp.
. Focal Communications Corporation
. Allegiance Telecom, Inc.
. MGC Communications, Inc.
Fiber Builders:
. Qwest Communications International Inc.
. Williams Communications
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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.
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:
Acquiror Acquired Company
-------- ----------------
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.
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Competitive Local Exchange Carriers:
AT&T Corp. Teleport Communications Group Inc.
WorldCom, Inc. Brooks Fiber Properties, Inc.
WorldCom, Inc. MFS Communications Company, Inc.
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>
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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:
Implied Premium At
Period Implied Exchange Ratio Merger Exchange Ratio
------ ---------------------- ---------------------
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%
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.
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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 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
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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 Splitrock
will produce a combined total network of 26,000 miles. In addition, by
adding the 350 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
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. 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 50% of Splitrock shares are voted in favor of the
merger
. the existence of stock option agreements with several stockholders of
Splitrock, who own approximately ___% 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
. the fact that the merger 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
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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 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.
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<PAGE>
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
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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. 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:
High Implied Low Implied Average Implied
Exchange Ratio Exchange Ratio Exchange Ratio
-------------- -------------- ---------------
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
(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.
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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.
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:
Splitrock Multiple Range
------------------------
Operating Metric Low High
---------------- --- ----
Previous Quarter Revenues (annualized) 11.0x 13.0x
Estimated 1999 Revenue 12.0x 14.0x
Estimated 2000 Revenue 7.0x 9.0x
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.
Splitrock Growth-Adjusted
Multiple Range
--------------
Estimated Revenue Year Low High
---------------------- --- ----
1999 20.0x 28.0x
2000 15.0x 20.0x
2001 12.0x 15.0x
2002 10.0x 12.0x
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
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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:
Weighted Average Terminal EBITDA
---------------- ---------------
Cost of Capital Multiples
--------------- ---------
Wall Street Case 15.0% - 17.0% 9.0x - 11.0x
Management Case 15.0% - 17.0% 14.0x - 16.0x
Based on these rates, multiples and selected adjustments, these analyses
resulted in implied per share value ranges for Splitrock common stock as
follows:
Range of Implied Equity Value Per Share of
Splitrock Common Stock
----------------------
Wall Street Case $28.08 - $40.40
Management Case $28.67 - $36.37
(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:
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McLeodUSA Multiple
------------------
Range
-----
Operating Metric Low High
---------------- --- ----
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
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:
McLeodUSA Growth-
-----------------
Estimated Revenue Year Adjusted Multiple Range
---------------------- -----------------------
Low High
--- ----
1999 33.0x 37.0x
2000 23.0x 27.0x
2001 18.0x 22.0x
2002 16.0x 20.0x
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 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:
_______________________________________
/1/ Range is of value per access line.
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Weighted Average Terminal EBITDA
---------------- ---------------
Cost of Capital Multiples
--------------- ---------
Wall Street Case 13.0% - 14.0% 9.5x - 10.5x
Management Case 13.0% - 14.0% 9.5x - 10.5x
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:
Range of Implied Equity Value Per
---------------------------------
Share of McLeodUSA Class A Common Stock
---------------------------------------
Wall Street Case $53.29 - $64.36
Management Case $64.50 - $76.66
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.
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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 1,785,120 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 _____, 2000].
<TABLE>
<CAPTION>
Number of Unvested Splitrock
Options that
Accelerate as a Dollar Value of Unvested Options
Name of Officer or Director Result of the Merger/(1)/ that Accelerate as a Result of the Merger /(2)/
- -------------------------- ------------------------- ------------------------------------------------
<S> <C> <C>
James M. Nakfoor 45,040 --
Marshall C. Turner 45,040 --
Roy A. Wilkens 33,780 --
David M. Boatner 268,700 --
J. Robert Fugate 200,737 --
Patrick J. McGettigan, Jr. 157,105 --
Jorge Rosado 250,000 --
Todd W. Wilkens 224,660 --
</TABLE>
(1) This represents the number of Splitrock options estimated to be unvested as
of[March ______, 2000].
(2) The estimated value of unvested options shown in this table assumes a
hypothetical price of Splitrock common stock of $__________ per share.
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 collocations. 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.
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
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terminated by Splitrock without cause, as defined in the agreements, the
executives are 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, David M. Boatner, J. Robert Fugate, Jorge Rosado and
Todd Wilkens, each of whom may be subject to excise tax under Section 280G of
the Internal Revenue Code of 1986, as amended (the "Code"), 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."
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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 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
Splitrock Common Stock McLeodUSA 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 [_________]
Roy A. Wilkens [________] [_________]
</TABLE>
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.
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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 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 [___________ __], 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.
McLeodUSA believes that any material regulatory approvals will be obtained in
the normal course: however, we cannot assure you that all approvals will be
obtained by the effective time of the merger.
Federal Income Tax Consequences
The following discussion is a summary of the material United States federal
income tax consequences of the merger to a stockholder of Splitrock holding
shares of Splitrock common stock as a capital asset at the effective time of 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 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
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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 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 merger. Splitrock stockholders are urged
to consult their tax advisors regarding the tax consequences of the merger to
them, including the effects of United States federal, state, local, foreign and
other tax laws.
Tax Opinions. The obligations of McLeodUSA and Splitrock to consummate the
merger are conditioned upon the receipt of legal opinions from their respective
counsels concerning the federal income tax treatment of the merger. 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 Merger. The following discussion of United States
federal income tax consequences of the merger assumes that, if completed, the
merger will qualify as a reorganization 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."
Accordingly, if the merger is completed:
. Splitrock 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 McLeodUSA Class A common
stock in exchange for the stockholder's Splitrock common stock,
except to the extent of any cash received in lieu of fractional shares
. 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 in the merger in respect of Splitrock common
stock will initially be (a) equal to the stockholder's aggregate tax
basis in the Splitrock common stock immediately prior to 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 merger will include the holding
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period of the Splitrock common stock for which it was exchanged,
assuming the stockholder's Splitrock common stock was held as a
capital asset and
. Splitrock stockholders must retain records and file a statement
setting forth facts about 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 merger are and will be
subject to assumptions, limitations and qualifications and are based on current
law and, among other things, representations of Splitrock and McLeodUSA,
including representations made by the respective managements of Splitrock and
McLeodUSA. Splitrock stockholders should refer to the full text of Fried, Frank,
Harris, Shriver & Jacobson's tax opinion, a copy of which has been filed as an
exhibit to the registration statement of which this joint proxy
statement/prospectus forms a part, for a complete description of the assumptions
made and matters considered in connection with this tax opinion. 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 merger could be adversely affected.
This discussion is only a general summary of the material federal income
tax consequences of the merger. The tax consequences of 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 merger to them.
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,
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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 of any part of the
holders' 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.
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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 provides that Southside Acquisition Corporation, a
wholly owned subsidiary of McLeodUSA, will be merged with and into Splitrock at
the effective time of the merger. Following the merger, Splitrock will become a
wholly owned subsidiary of McLeodUSA. Both the McLeodUSA board of directors and
the Splitrock board of directors have approved the merger agreement and the
merger. At the effective time of the merger, each 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 and cash in lieu of fractional shares, all as
more fully described below.
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. Splitrock will continue its corporate existence under the laws of the
State of Delaware under the name "Splitrock Services, Inc." 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 Services, Inc."
The bylaws of Southside Acquisition Corporation will become the bylaws of the
surviving corporation of the merger.
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, the Exchange Ratio, and 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.
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If, prior to the effective time of the merger, the outstanding shares of
McLeodUSA Class A 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 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,
referred to here as the Splitrock Stock Plans, that is outstanding and
unexercised immediately prior to the effective time of the merger will become or
be replaced by an option to purchase McLeodUSA Class A common stock. In each
case, 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. McLeodUSA will not assume the
Splitrock Stock Plans. Otherwise, the duration and 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 and
complete 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 the 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
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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.
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 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
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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 second quarter of 2000.
Representations and Warranties
The merger agreement contains various representations of Splitrock,
McLeodUSA and Southside Acquisition Corporation.
Representations and Warranties of Splitrock. The merger agreement contains
representations and warranties of Splitrock as to, among other things:
. the corporate organization and existence of Splitrock and its
subsidiaries, 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
. 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 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
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. 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 the merger as a reorganization under Section
368(a) of the Internal Revenue Code
. the vote required to approve the merger
. 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 merger 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
. the absence of any appraisal or dissenters' rights on the part of
stockholders of Splitrock in connection with the merger
. 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
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. 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 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
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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.
. 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 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
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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
. 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
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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 merger provided for in the merger
agreement
. 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
. (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 of Splitrock
or any of its subsidiaries, 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
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. 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
. if necessary, promptly after the date of the merger agreement, to
commence a consent solicitation with respect to all holders of the
outstanding Splitrock 11 3/4% Senior Notes due 2008 and to use
reasonable efforts to amend the related Indenture, dated as of July
24, 1998 (the "Indenture"), between Splitrock and Bank of Montreal
Trust Company, as trustee (the "Indenture Trustee"), or obtain
appropriate waivers from the noteholders under the Indenture in order
that the transactions contemplated by the merger agreement will not
violate the Indenture
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 from qualifying as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code
. to comply with, and to cause their respective directors, officers,
employees and other representative to comply with, all of their
respective obligations under the
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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
. that Splitrock will be permitted, with the consent of McLeodUSA, to
reorganize in a holding company structure described in the merger
agreement, provided that (1) 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 and (2) Fried, Frank, Harris, Shriver & Jacobson is able to
opine that the implementation of the holding company structure will
not adversely affect the tax consequences of the merger to the
stockholders of Splitrock
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
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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
. 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
. 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")
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(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.
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
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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
. 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 the surviving corporation of the
merger to comply with the provisions of the Indenture relating to a
change of control offer with respect to the holders of the outstanding
Splitrock 11 3/4% Senior Notes due 2008
Director's 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.
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
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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 and the merger
. 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 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
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:
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. the representations and warranties of Splitrock 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 Splitrock has suffered a material
adverse effect, and McLeodUSA will have received a certificate of the
chief executive officer and chief financial officer of Splitrock to
that effect
. Splitrock will have performed or complied in all respects with all
agreements required to be performed or complied with by it under the
merger agreement at or prior to the effective time of the merger, and
McLeodUSA will have received a certificate of the chief executive
officer and chief financial officer of Splitrock 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 challenging either the merger or the conversion of Splitrock
common stock into McLeodUSA Class A common stock in the merger
. McLeodUSA will have received "cold comfort" letters of
PricewaterhouseCoopers LLP dated the date on which the registration
statement became effective and the effective time of 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 a certificate of the chief executive officer and chief
financial officer of Splitrock to that effect
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. 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
. 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, McLeodUSA will have received a copy of the opinion
of Fried, Frank, Harris, Shriver & Jacobson to the Indenture Trustee
delivered in connection with that amendment
. to the extent necessary so that the transactions contemplated by the
merger agreement will not violate the Indenture, Splitrock will have
received the consent of the holders of the outstanding Splitrock 11
3/4% Senior Notes due 2008 necessary to amend the Indenture in a form
reasonably satisfactory to McLeodUSA and the Indenture Trustee will
have signed and delivered the amendment of the Indenture to McLeodUSA
Conditions to the Obligation of Splitrock to Effect the Merger. The
obligation of Splitrock 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 challenging either the merger or the conversion of Splitrock
common stock into McLeodUSA Class A common stock in the merger
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. Splitrock will have received the opinion of Fried, Frank, Harris,
Shriver & Jacobson to the effect that the merger will qualify as a
reorganization within the meaning of Section 368(a) of the Internal
Revenue Code
. Splitrock will have received "cold comfort" letters of Arthur Andersen
LLP dated the date on which the registration statement became
effective and the effective time of the merger
. 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
. 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 and the merger in any manner adverse to McLeodUSA
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. 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.
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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
and merger
(3) the Splitrock board of directors has amended, withdrawn or qualified
its recommendation in favor of approval of the merger agreement and the
merger 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
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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.
Holding Company Structure
In connection with the merger agreement, McLeodUSA and Splitrock agreed that
Splitrock, with the consent of McLeodUSA, may reorganize in a holding company
strusture prior to the consummation of the merger.
Immediately after the holding company reorganization, Splitrock would become a
wholly-owned subsidiary of a holding company in which the former Splitrock
common stockholders of record owned all of the equity. The merger agreement
contemplates that McLeodUSA would consummate the Splitrock acquisition by
acquiring the holding company. McLeodUSA and Splitrock agreed, however, that
Splitrock will not reorganize if doing so will adversely affect the tax
consequences of the merger to either McLeodUSA or the Splitrock stockholders.
If Splitrock does reorganize, after the reorganization all of the rights and
obligations of Splitrock under the merger agreement will be deemed to have been
assigned to and assumed by the new holding company, and all references to
Splitrock in the merger agreement and in this joint proxy statement/prospectus
should be generally understood to refer to that new holding company.
If Splitrock does reorganize, McLeodUSA and Splitrock will amend the merger
agreement and the registration statement of which this joint proxy
statement/prospectus is a part to reflect the reorganization. The reorganization
will not change the consideration Splitrock stockholders receive in the merger.
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:
. 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 approval of the merger 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 approval of the merger 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.
By entering into these voting agreements, the holders of approximately
50.7% 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.
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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 33%
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.
Stock Option Agreements
Several directors, executive officers and stockholders of Splitrock have
entered into stock option agreements with McLeodUSA. The agreements grant
McLeodUSA an irrevocable option to purchase the shares of Splitrock common stock
that are owned beneficially or of record by the stockholder. In connection with
the option agreement entered into by Linsang Partners, LLC, McLeodUSA agreed to
exclude 2,000,000 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:
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. 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 and
the merger
. the Splitrock board of directors amends, withdraws or qualifies its
recommendation in favor of approval of the merger agreement and the
merger 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 shares 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
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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
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
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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
(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 and the merger 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 and the merger, 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:
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. 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
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
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. 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 2,000,000 shares of Splitrock common
stock owned by Linsang Partners as of the date of the merger agreement
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
. 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
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. 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
stockholders' 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 stockholders' 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 stockholders' agreement
. the stockholders' 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:
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. $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
. $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
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. 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 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
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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 to March 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.
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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
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. concurrently building its own communications network
. migrating customers to its own communications network to provide
enhanced services and reduce operating costs
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
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<PAGE>
. 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. McLeodUSA may meet any additional capital needs by issuing
additional debt or equity securities or borrowing funds from one or more
lenders.
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."
-95-
<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 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 the mergers with these companies had occurred 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.
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.
-96-
<PAGE>
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)
-97-
<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 89,107 222,549
Other............................... -- -- 2,380 4,632 5,575 5,575
-------- -------- -------- --------- --------- ---------
Total operating expenses............ 19,357 39,556 109,533 337,255 678,821 929,665
Operating loss.......................... (11,343) (10,558) (28,210) (69,369) (74,675) (240,873)
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) (391,170)
Preferred stock dividends............... -- -- -- -- -- (54,406)
-------- -------- -------- --------- ---------- ---------
Loss applicable to
common stock.......................... $(11,416) $(11,329) $(22,346) $ (79,910) $ (124,912) $(445,576)
======== ======== ======== ========= ========== =========
Loss per common share................... $ (.27) $ (.20) $ (.28) $ (.73) $ (.99) $ (2.66)
======== ======== ======== ========= ========== =========
Weighted average common shares
outstanding............................ 42,928 56,008 81,012 109,948 125,614 167,302
======== ======== ======== ========= ========= =========
<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........................ 63,663 130,583 230,256
Other............................... 5,575 -- --
-------- --------- ---------
Total operating expenses............ 498,012 740,406 956,210
Operating loss.......................... (59,370) (95,531) (233,695)
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) (331,946)
Preferred stock dividends............... -- (4,125) (40,773)
-------- --------- ---------
Loss applicable to
common stock.......................... $(93,100) $(171,427) $(372,719)
======== ========= =========
Loss per common share................... $ (.74) $ (1.18) $ (2.08)
======== ========= =========
Weighted average common shares
outstanding............................ 125,240 144,982 179,207
======== ========= =========
</TABLE>
-98-
<PAGE>
Selected Consolidated Financial Data of McLeodUSA
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30, 1999
--------------------------------------------------------- --------------------------
As
1994 1995 1996 1997 1998 Actual Adjusted
-------- --------- --------- --------- --------- ----------- -----------
(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 $1,911,699
Working capital (deficit)..... $ 1,659 $(1,208) $185,968 $ 378,617 $ 613,236 $1,479,782 $1,587,836
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 $6,417,026
Long-term debt................ $ 3,500 $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,801,185 $2,320,525
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 $2,996,655
</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, including
business acquisitions................. $ 3,393 $14,697 $173,782 $601,137 $339,660 $3,075,761
EBITDA(1).............................. $(10,571) $(8,723) $(17,345) $(31,462) $ 20,007 $ (12,749)
<CAPTION>
Nine Months Ended September 30,
----------------------------------------
Pro Forma
1998 1999 1999
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures, including
business acquisitions................. $ 269,100 $ 1,071,500 $ 3,328,397
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.
-99-
<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 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 reflects the
acquisition of Ovation Communications, Inc. and the merger using the purchase
method of accounting, and assumes that the Notes Offerings, the acquisition of
the Ovation Communications, Inc., the Preferred Stock Issuances and the merger
were all consummated as of 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 accompanying copy of 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. 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. 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 pro forma adjustments include the elimination
of the Splitrock historical equity components, including common stock, treasury
stock, other capital and retained deficit. The following pro forma schedules
assume that the Splitrock 11-3/4% senior notes due 2008, which are callable by
the holders upon a change of control, will remain outstanding at the completion
of this merger.
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.
-100-
<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 equivalents............ $ 885,170 $ 91,544 $ -- $ 976,714
Other current assets................. 866,418 68,567 -- 934,985
---------- --------- ---------- ----------
Total Current Assets................ 1,751,588 160,111 -- 1,911,699
Property and Equipment, net.......... 1,094,965 88,736 -- 1,183,701
Intangible assets.................... 1,215,403 18,477 1,960,632 3,194,512
Other assets......................... 111,162 15,952 -- 127,114
---------- --------- ---------- ----------
Total Assets........................ $4,173,118 $ 283,276 $1,960,632 $6,417,026
========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities.................. $ 271,806 $ 42,057 $ 10,000 $ 323,863
Long-term debt, less current
maturities......................... 1,801,185 258,340 -- 2,059,525
Other long-term liabilities.......... 34,689 2,294 -- 36,983
---------- --------- ---------- ----------
Total Liabilities.................. 2,107,680 302,691 10,000 2,420,371
---------- --------- ---------- ----------
Redeemable convertible preferred
stock.................................... 1,000,000 -- -- 1,000,000
---------- --------- ---------- ----------
Stockholders' Equity:
Preferred stock.................... 12 -- -- 12
Common stock....................... 1,550 57 248 1,855
Additional paid-in capital......... 1,472,590 123,958 1,806,954 3,403,502
Common stock warrants.............. -- 2,247 (2,247) --
Retained earnings (deficit)........ (424,826) (145,331) 145,331 (424,826)
Accumulated other
comprehensive income............ 16,112 (346) 346 16,112
---------- --------- ---------- ----------
Total Stockholders'
Equity..................... 1,065,438 (19,415) 1,950,632 2,996,655
---------- --------- ---------- ----------
Total Liabilities and
Stockholders' Equity....... $4,173,118 $ 283,276 $1,960,632 $6,417,026
========== ========= ========== ==========
</TABLE>
-101-
<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
---------------------------------------------------------------------------
Adjustments Pro Forma Adjustments
for the Notes for the Notes for Ovation
McLeodUSA Offerings Offerings Ovation Acquisition
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue......................................... $ 604,146 $ -- $ 604,146 $21,035 $ --
--------- -------------- --------- ------- -----------
Operating expenses:
Cost of service ........................... 323,208 -- 323,208 6,319 --
Selling, general and administrative ....... 260,931 -- 260,931 13,489 --
Depreciation and amortization ............. 89,107 -- 89,107 5,383 16,177
Other....................................... 5,575 -- 5,575 -- --
--------- -------------- --------- ------- -----------
Total operating expenses.................... 678,821 -- 678,821 25,191 16,177
--------- -------------- --------- ------- -----------
Operating income (loss)..................... (74,675) -- (74,675) (4,156) (16,177)
Interest income (expense), net.............. (52,234) (71,606) (123,840) (1,608) --
Other non-operating income (expense)........ 1,997 -- 1,997 --
Income taxes................................ -- -- -- --
--------- -------------- --------- -------
Net income (loss)........................... (124,912) (71,606) (196,518) (5,764) (16,177)
Preferred stock dividends................... -- -- -- -- --
--------- -------------- --------- ------- -----------
Earnings applicable to common stock......... $(124,912) 71,606) $(196,518) $(5,764) 16,177)
========= ============== ========= ======= ===========
Loss per common equivalent share............ $ (0.99) $(1.56)
========= =========
Weighted average common and common
equivalent shares outstanding............... 125,614 125,614
========= =========
Other Financial Data:
EBITDA(1)....................................... $ 20,007 $ -- $ 20,007 $ 1,227 $ --
<CAPTION>
-----------------------------------------------------------------------------------
Pro Forma for
Pro Forma for Adjustments Prefered
Ovation for Preferred Stock Splitrock Adjustments
Acquisition Stock Issuances Issuances as Adjusted for Splitrock Total
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue $ 625,181 $ -- $ 625,181 $ 63,611 $ $ 688,792
--------- --------- --------- -------- -------- ---------
Operating expenses:
Cost of service........................ 329,527 -- 329,527 91,204 420,731
Selling, general and administrative.... 274,420 -- 274,420 6,390 280,810
Depreciation and amortization.......... 110,667 -- 110,667 13,850 98,032 222,549
Other.................................. 5,575 -- 5,575 -- 5,575
--------- --------- --------- -------- ---------
Total operating expenses............... 720,189 -- 720,189 111,444 98,032 929,665
--------- --------- --------- -------- -------- ---------
Operating income (loss)................ (95,008) (95,008) (47,833) (98,032) (240,873)
Interest income (expense), net......... (125,448) -- (125,448) (26,846) (152,294)
Other non-operating income (expense)... 1,997 1,997 -- 1,997
Income taxes........................... -- -- -- --
--------- --------- -------- -------- ---------
Net income (loss)...................... (218,459) -- (218,459) (74,679) (98,032) (391,170)
Preferred stock dividends.............. -- (54,406) (54,406) -- (54,406)
--------- --------- --------- -------- ---------
Earnings applicable to common stock.... $(218,459) (54,406) $(272,885) $(74,679) $(98,032) $(445,576)
========= ========= ========= ======== ======== =========
Loss per common equivalent share....... $(1.60) $ (1.99) $ (2.66)
========= ========= =========
Weighted average common and common
equivalent shares outstanding.......... 136,808 136,808 176,302
========= ========= =========
Other Financial Data:
EBITDA(1) ................................ $ 21,234 $ 21,234 $(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.
-102-
<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
the Notes for the Notes Ovation for Ovation
Operations Statement Data: McLeodUSA Offerings Offerings (Jan-Mar 99) Acquisition
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue $ 644,875 $ -- $ 644,875 $19,696 $ --
--------- -------------- --------- ------- --------------
Operating expenses:
Cost of service........................ 327,438 -- 327,438 7,338 --
Selling, general and administrative.... 282,385 -- 282,385 10,880 --
Depreciation and amortization.......... 130,583 -- 130,583 2,829 4,044
Other.................................. -- -- -- -- --
--------- -------------- --------- ------- --------------
Total operating expenses............... 740,406 -- 740,406 21,047 4,044
--------- -------------- --------- ------- --------------
Operating income (loss)................ (95,531) -- (95,531) (1,351) (4,044)
Interest income (expense), net......... (79,326) (5,962) (85,288) (2,383) --
Other non-operating income (expense)... 7,555 -- 7,555 --
Income taxes........................... -- -- -- --
--------- -------------- --------- -------
Net income (loss)...................... (167,302) (5,962) (173,264) (3,734) (4,044)
Preferred stock dividends.............. (4,125) -- (4,125) -- --
--------- -------------- --------- ------- --------------
Earnings applicable to common stock.... $(171,427) $ (5,962) $(177,389) $(3,734) $ (4,044)
========= ============== ========= ======= ==============
Loss per common equivalent share....... $ (1.18) $ (1.22)
========= =========
Weighted average common and common
equivalent shares outstanding.......... 144,982 144,982
========= =========
Other Financial Data:
EBITDA(1) ................................ $ 35,052 $ -- $ 35,052 $ 1,478 $ --
<CAPTION>
----------------------------------------------------------------------------------
Pro Forma for Adjustments for Pro Forma for
Ovation Preferred Preferred Adjustments
Acquisition Stock Issuances Stock Issuances Splitrock for Splitrock Total
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Operations Statement Data:
Revenue $ 664,571 $ -- $ 664,571 $ 57,944 $ $ 722,515
--------- ------------ --------- -------- -------- ---------
Operating expenses:
Cost of service....................... 334,776 -- 334,776 85,505 -- 420,281
Selling, general and administrative... 293,265 -- 293,265 12,408 -- 305,673
Depreciation and amortization......... 137,456 -- 137,456 19,276 73,524 230,256
Other................................. -- -- -- -- -- --
--------- ------------ --------- -------- -------- ---------
Total operating expenses.............. 765,497 -- 765,497 117,189 73,524 956,210
--------- ------------ --------- -------- -------- ---------
Operating income (loss)............... (100,926) -- (100,926) (59,245) (73,524) (233,695)
Interest income (expense), net........ (87,671) -- (87,671) (18,135) -- (105,806)
Other non-operating income (expense).. 7,555 -- 7,555 -- -- 7,555
Income taxes.......................... -- -- -- -- -- --
--------- ------------ --------- -------- -------- ---------
Net income (loss)..................... (181,042) -- (181,042) (77,380) (73,524) (331,946)
Preferred stock dividends............. (4,125) (36,648) (40,773) -- (40,773)
--------- ------------ --------- -------- ---------
Earnings applicable to common stock... $(185,167) (36,648) $(221,815) $(77,380) $(73,524) $(372,719)
========= ============ ========= ======== ======== =========
Loss per common equivalent share...... $ (1.25) $ (1.49) $ (2.08)
========= ========= =========
Weighted average common and common
equivalent shares outstanding......... 148,713 148,713 179,207
========= ========= =========
Other Financial Data:
EBITDA(1)................................. $ 36,530 $ -- $ 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.
-103-
<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 diluted............................... 44,389 44,389
=========== ===========
</TABLE>
-104-
<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 and three
months ended September 30, 1999, Prodigy accounted for 99%, 88% and 81% 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
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<PAGE>
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 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-Edge(TM)," 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
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<PAGE>
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-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."
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<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) through Year Ended
December 31, December 31, Nine Months Ended September 30,
-----------------------------------
1997 1998 1998 1999
------------------------------------------------------------------
(unaudited) (unaudited)
<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) $ (.74) $ (1.59)
=========== =========== =========== =========
Weighted average common
shares outstanding..................... 24,110 44,389 43,636 48,805
</TABLE>
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<PAGE>
Selected Financial Data of Splitrock
(In thousands, except per share data)
(continued)
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1997 1998 1999
-------------------------------------------------
(unaudited)
<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
Total liabilities........................ 33,981 326,432 302,691
Stockholders' equity
(deficit)............................... 20,407 (30,291) (19,415)
</TABLE>
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997)
through Year Ended Nine months ended
December 31, December 31, September 30,
-----------------------------
1997 1998 1998 1999
-------------------------------------------------------------
(unaudited) (unaudited)
<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 September 30, 1999 represent escrowed funds
that, together with interest received on those funds, will be sufficient to
pay, when due, the next two semi-annual interest payments 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.
-109-
<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 December 31, 1999
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
Option Shares and
Name of Beneficial Owner Shares Option Shares Percent
----------------------------------------------------------------- ------ ------------- -------
<S> <C> <C> <C>
Clark E. McLeod(1)(2)............................................... 571,500 19,285,874 12.2%
Alliant Energy Corporation(1)(3).................................... 2,601,376 19,217,192 12.0%
Fidelity Management & Research Company(4)........................... 0 10,186,920 6.5%
Putnam Investments, Inc.(5)......................................... 0 20,645,859 13.1%
Richard A. Lumpkin(1)(6)............................................ 65,000 8,149,872 5.2%
Mary E. McLeod(1)(7)................................................ 0 9,518,717 6.0%
Stephen C. Gray(8).................................................. 727,004 1,236,518 *
Blake O. Fisher, Jr................................................. 391,624 496,766 *
Thomas M. Collins................................................... 168,750 453,298 *
Paul D. Rhines...................................................... 93,750 238,668 *
Lee Liu............................................................. 28,750 53,150 *
Robert J. Currey.................................................... 75,000 75,000 *
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 ( 20 persons)........... 2,554,228 30,783,628 19.4%
</TABLE>
________________
* Less than one percent.
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<PAGE>
(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
BankOne, Texas, N.A., 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 54,480,656 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
571,500 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 34.4%. See
"McLeodUSA Capital Stock and Comparison of Stockholder Rights--
Stockholders' Agreements."
(2) Includes 8,558,717 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
16,240,914 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 record
holder of 284,902 shares of Class A common stock. 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 September 30, 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 4,484,362 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
[2,978,256] 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.
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<PAGE>
(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 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.
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<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 February 1, 2000 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 of McLeodUSA Class A
Splitrock Common Common Stock
Name of Beneficial Owner Stock Before the Merger Percent After the Merger Percent
- ----------------------------------------- ----------------------- ------------ ---------------------- ---------
<S> <C> <C> <C> <C>
Kwok Li(1)........................... 6,135,695 10.8% 3,280,756 [__]
Linsang Partners, LLC(1)............. 15,425,848 27.0 8,248,200 [__]
Carso Global Telecom S.A.
de C.V. (2).......................... 14,075,000 24.7 7,525,902 [__]
William R. Wilson.................... 9,439,600 16.6 5,047,354 [__]
Roy A. Wilkens(3).................... 365,950 1.0 213,735 [__]
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 1.0 322,156 [__]
Jorge Rosado......................... 1,000 * 134,209 [__]
Directors and executive officers as
a group (10 persons)................ 16,523,693 29.0% 9,490,259 [__]
</TABLE>
________________
* Less than one percent.
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<PAGE>
(1) The shares beneficially owned by Mr. Li include 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 Wilkens, an executive officer of Splitrock,
and 152,010 shares owned by other family members of 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.
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<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, [_________] 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,
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<PAGE>
the holders of McLeodUSA Class B common stock and holders of any class or series
of stock entitled to participate with the McLeodUSA 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
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2,000,000 shares of McLeodUSA preferred stock, in one or more series, and to fix
the relative rights and preferences of the shares, including voting powers,
dividend rights, liquidation preferences, redemption rights and conversion
privileges. As of the date of this 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
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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 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
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delivery of shares of McLeodUSA Class A common stock or a combination thereof,
subject to applicable law.
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 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
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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 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
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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 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) 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
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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.
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.
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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
. 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
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. 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.
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."
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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
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
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. 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
. 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.
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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) [57,030,590] shares were issued and outstanding, (b) no shares were
held in the treasury of Splitrock, (c) 4,247,598 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 [_________] 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.
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.
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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 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
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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 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.
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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.
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."
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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 Article 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 Existing Authorized Capital
--------------------------- ---------------------------
<S> <C>
1,000,000,000 Class A common stock 250,000,000 Class A common stock
22,000,000 Class B common stock 22,000,000 Class B common stock
2,000,000 Preferred Stock 2,000,000 Preferred Stock
------------- -------------------- ----------- --------------------
1,024,000,000 Total 274,000,000 Total
</TABLE>
Stockholders of McLeodUSA are asked to consider and vote on the proposed
amendment to Article 4.1 of the McLeodUSA certificate of incorporation,
substantially in the form included 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
52,026,754 shares of McLeodUSA Class A common stock subject to these agreements
represent approximately 33% of the outstanding shares entitled to vote at the
McLeodUSA special meeting.
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In addition to the McLeodUSA Class A common stock issued and outstanding,
McLeodUSA also has reserved for issuance the following number of shares of
McLeodUSA Class A common stock:
<TABLE>
<CAPTION>
Number of Shares Reserved for
---------------- ------------
<C> <S>
35,070,056 Outstanding options to purchase McLeodUSA Class A common stock
2,947,360 Issuance pursuant to employee benefit plans
Conversion of outstanding shares of McLeodUSA Series A, Series B and Series C
37,390,583 preferred stock
Outstanding options to purchase shares of McLeodUSA Class B common stock
2,601,376 convertible to Class A common stock
Issuance in connection with the acquisition of the assets of Millenium
15,424 Telemanagement Group LLC in June 1999
Issuance in connection with the acquisition of Dakota Telecommunications
268,816 Group, Inc. in March 1999
----------
78,293,615 Total
</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 [235,000,000] shares
of the [250,000,000] authorized. Thus, McLeodUSA currently has available for
future issuance less than [15,000,000] 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 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
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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.
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 may 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.
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<PAGE>
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
_______________________________________
Proposal 2.
Approval of the Issuance of Shares of McLeodUSA Class A Common Stock in the
Merger.
On January 6, 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 52,026,754 shares of McLeodUSA Class A common stock subject
to these agreements represent approximately 33% of the outstanding shares
entitled to vote at the McLeodUSA special meeting.
THE McLEODUSA BOARD OF DIRECTORS RECOMMENDS
A VOTE "FOR" PROPOSAL NO. 2
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<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 STOCKHOLDHERS OF SPLITROCK VOTE
"FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
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<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. 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 or not to vote in accordance with the
recommendation of the management of Splitrock and McLeodUSA, as the case may be.
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<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. Nothing in this paragraph shall be deemed
to require McLeodUSA to include in its proxy statement and proxy relating to the
2000 McLeodUSA annual meeting of stockholders any stockholder proposal which may
be omitted from the proxy materials according to applicable regulations of the
SEC in effect at the time the proposal is received.
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, contain
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.
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<PAGE>
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:
<TABLE>
<S> <C> <C>
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
</TABLE>
You may obtain information on the operation of the SEC's Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, 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 (Filing 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 and January __, 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).
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<PAGE>
Splitrock SEC Filings (Filing 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, 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 Reports 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.
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 [Insert date that is five business days prior to the McLeodUSA
special meeting] 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 [Insert date that is five business days prior to the Splitrock
special meeting] 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.
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<PAGE>
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.
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<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
MCLEODUSA INCORPORATED,
SOUTHSIDE ACQUISITION CORPORATION,
and
SPLITROCK SERVICES, INC.
Dated as of January 6, 2000
<PAGE>
TABLE OF CONTENTS
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Page
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ARTICLE I THE MERGER................................................................... 2
SECTION 1.01. The Merger............................................................ 2
SECTION 1.02. Effective Time........................................................ 2
SECTION 1.03. Effect of the Merger.................................................. 2
SECTION 1.04. Certificate of Incorporation; Bylaws.................................. 3
SECTION 1.05. Directors and Officers................................................ 3
ARTICLE II CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES AND OTHER INSTRUMENTS.... 3
SECTION 2.01. Conversion of Securities.............................................. 3
SECTION 2.02. Exchange of Certificates or Instruments............................... 5
SECTION 2.03. Stock Transfer Books.................................................. 7
SECTION 2.04. Stock Options......................................................... 8
SECTION 2.05. Company Warrants...................................................... 9
SECTION 2.06. Closing............................................................... 10
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................. 10
SECTION 3.01. Organization and Standing............................................. 10
SECTION 3.02. Subsidiaries.......................................................... 10
SECTION 3.03. Certificate of Incorporation and Bylaws............................... 11
SECTION 3.04. Capitalization........................................................ 12
SECTION 3.05. Authority; Binding Obligation......................................... 13
SECTION 3.06. No Conflict; Required Filings and Consents............................ 13
SECTION 3.07. Licenses; Compliance.................................................. 15
SECTION 3.08. SEC Documents......................................................... 16
SECTION 3.09. Reorganization........................................................ 16
SECTION 3.10. Vote Required......................................................... 16
SECTION 3.11. Brokers............................................................... 17
SECTION 3.12. Disclosure............................................................ 17
SECTION 3.13. Intellectual Property................................................. 18
SECTION 3.14. Absence of Undisclosed Liabilities.................................... 18
SECTION 3.15. Absence of Certain Changes or Events.................................. 18
SECTION 3.16. Litigation; Disputes.................................................. 19
SECTION 3.17. Pension and Benefit Plans............................................. 19
SECTION 3.18. Taxes and Tax Matters................................................. 20
SECTION 3.19. Opinion of Financial Advisor.......................................... 21
SECTION 3.20. Board Recommendation.................................................. 21
SECTION 3.21. Intentionally Deleted................................................. 21
SECTION 3.22. Copies of Documents................................................... 21
SECTION 3.23. Affiliate Agreements.................................................. 22
SECTION 3.24. State Takeover Statutes; Certain Charter Provisions................... 22
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SECTION 3.25. Dissenters' Rights.................................................... 22
SECTION 3.26. Foreign Corrupt Practices and International Trade Sanctions........... 22
SECTION 3.27. Year 2000............................................................. 23
SECTION 3.28. Insurance............................................................. 23
SECTION 3.29. Environmental Matters................................................. 23
SECTION 3.30. Certain Contracts..................................................... 24
SECTION 3.31. Ownership of Securities............................................... 25
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF ACQUIROR AND ACQUIROR SUB................. 25
SECTION 4.01. Organization and Standing; Subsidiaries............................... 25
SECTION 4.02. Certificate of Incorporation and Bylaws............................... 26
SECTION 4.03. Capitalization........................................................ 26
SECTION 4.04. Authority; Binding Obligation......................................... 27
SECTION 4.05. No Conflict; Required Filings and Consents............................ 28
SECTION 4.06. Licenses; Compliance.................................................. 29
SECTION 4.07. SEC Documents......................................................... 30
SECTION 4.08. Reorganization........................................................ 30
SECTION 4.09. Vote Required......................................................... 30
SECTION 4.10. Brokers............................................................... 31
SECTION 4.11. Disclosure............................................................ 31
SECTION 4.12. Capitalization of Acquiror Sub; No Prior Activities of Acquiror Sub... 32
SECTION 4.13. Litigation............................................................ 32
SECTION 4.14. Board Recommendations................................................. 32
SECTION 4.15. Year 2000............................................................. 32
SECTION 4.16. Certain Contracts..................................................... 33
SECTION 4.17. Acquiror Common Stock................................................. 33
SECTION 4.18. Pension and Benefit Plans............................................. 33
SECTION 4.19. Absence of Certain Changes or Events.................................. 34
SECTION 4.20. Absence of Undisclosed Liabilities.................................... 35
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS.................................... 36
SECTION 5.01. Conduct of Business of the Company.................................... 36
SECTION 5.02. Other Actions......................................................... 39
SECTION 5.03. Certain Tax Matters................................................... 39
SECTION 5.04. Access and Information................................................ 39
SECTION 5.05. No Solicitation....................................................... 40
ARTICLE VI ADDITIONAL AGREEMENTS....................................................... 42
SECTION 6.01. Registration Statement; Joint Proxy Statement......................... 42
SECTION 6.02. Meetings of Stockholders.............................................. 45
SECTION 6.03. Appropriate Action; Consents; Filings................................. 46
SECTION 6.04. Letters of Accountants................................................ 47
SECTION 6.05. Update Disclosure; Breaches........................................... 47
SECTION 6.06. Public Announcements.................................................. 48
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<TABLE>
<S> <C>
SECTION 6.07. Employee Matters...................................................... 48
SECTION 6.08. Unaudited Financial Information....................................... 49
SECTION 6.09. Intentionally Deleted................................................. 50
SECTION 6.10. Post-Signing SEC Documents............................................ 50
SECTION 6.11. Affiliates............................................................ 50
SECTION 6.12. Tax Returns........................................................... 50
SECTION 6.13. Reorganization........................................................ 51
SECTION 6.14. Directors' and Officers' Insurance; Indemnification................... 51
SECTION 6.15. Obligations of Acquiror Sub........................................... 52
SECTION 6.16. Acquiror Option Shares................................................ 52
SECTION 6.17. Intentionally Deleted................................................. 53
SECTION 6.18. Intentionally Deleted................................................. 53
SECTION 6.19. Debentures............................................................ 53
ARTICLE VII CONDITIONS PRECEDENT....................................................... 54
SECTION 7.01. Conditions to Obligations of Each Party Under This Merger Agreement... 54
SECTION 7.02. Additional Conditions to Obligations of Acquiror and Acquiror Sub..... 55
SECTION 7.03. Additional Conditions to Obligations of the Company................... 57
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER......................................... 59
SECTION 8.01. Termination........................................................... 59
SECTION 8.02. Effect of Termination................................................. 60
SECTION 8.03. Expenses.............................................................. 60
SECTION 8.04. Amendment............................................................. 61
SECTION 8.05. Extension; Waiver..................................................... 62
ARTICLE IX GENERAL PROVISIONS.......................................................... 62
SECTION 9.01. Non-Survival of Representations and Warranties........................ 62
SECTION 9.02. Notices............................................................... 62
SECTION 9.03. Headings.............................................................. 63
SECTION 9.04. Severability.......................................................... 63
SECTION 9.05. Entire Agreement...................................................... 63
SECTION 9.06. Assignment............................................................ 64
SECTION 9.07. Parties in Interest................................................... 64
SECTION 9.08. Mutual Drafting....................................................... 64
SECTION 9.09. Specific Performance.................................................. 64
SECTION 9.10. Governing Law......................................................... 65
SECTION 9.11. Counterparts.......................................................... 65
SECTION 9.12. Confidentiality....................................................... 65
SECTION 9.13. Holding Company Reorganization........................................ 65
SECTION 9.14. Option Exercise....................................................... 66
ARTICLE X DEFINITIONS.................................................................. 66
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<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of January 6, 2000 (this "Merger
------
Agreement"), among McLeodUSA Incorporated, a Delaware corporation ("Acquiror"),
- --------- --------
Southside Acquisition Corporation, a Delaware corporation ("Acquiror Sub") and
------------
wholly owned subsidiary of Acquiror, and Splitrock Services, Inc., a Delaware
corporation (the "Company");
-------
WHEREAS, Acquiror Sub, upon the terms and subject to the conditions of this
Merger Agreement and in accordance with the General Corporation Law of the State
of Delaware ("Delaware Law"), will merge with and into the Company (the
------------
"Merger");
------
WHEREAS, the Board of Directors of the Company has (i) determined that the
Merger is fair to the holders of Company Capital Stock (as defined in Section
3.04) and is in the best interests of such stockholders and (ii) approved and
adopted this Merger Agreement and the transactions contemplated hereby and
recommended approval and adoption of this Merger Agreement by the stockholders
of the Company (the "Company Stockholders");
--------------------
WHEREAS, the Board of Directors of Acquiror has determined that the Merger
is in the best interests of Acquiror and its stockholders and the Boards of
Directors of Acquiror and Acquiror Sub have approved and adopted this Merger
Agreement and the transactions contemplated hereby;
WHEREAS, for federal income tax purposes, it is intended that the Merger
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 to enter into this Merger
Agreement, concurrently herewith (i) Acquiror is entering into the Network
Agreements (as defined in Article X) with the Company; and (ii) certain
stockholders, directors and executive officers of Acquiror listed on Exhibit A1
----------
are entering into 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; and
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 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 the Merger and (ii) each of
the Principal Company Stockholders (as
<PAGE>
defined in Article X) is entering into a 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 2.01(a))
beneficially owned by such Principal Company Stockholder;
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 agree as
follows.
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 the Company.
As a result of the Merger, the separate corporate existence of Acquiror Sub
shall cease and the Company 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, certificate of merger or other appropriate
Documents (as defined in Article X) (in any such case, the "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 "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 the Company shall vest in
the Surviving Corporation, and all debts, liabilities and duties of Acquiror Sub
and
-2-
<PAGE>
the Company shall become the debts, liabilities and duties of the Surviving
Corporation.
SECTION 1.04. Certificate of Incorporation; Bylaws.
(a) Unless otherwise mutually determined by Acquiror and the Company prior
to the Effective Time, at the Effective Time the certificate of incorporation of
the Company 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 shall become 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 be amended to read as follows:
"The name of this corporation is Splitrock Services, Inc. (the "Corporation")."
(b) Unless otherwise determined by Acquiror prior to the Effective Time,
at the Effective Time the bylaws of the Company shall be amended in their
entirety to conform to the bylaws of Acquiror Sub in effect immediately prior to
the Effective Time, and shall become 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.
The directors of Acquiror Sub immediately prior to the Effective Time shall
be the initial directors of the Surviving Corporation, 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, 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, the Company or
the Company Stockholders:
-3-
<PAGE>
(a) Company Common Stock. Each share of common stock, $.001 par
--------------------
value per share, of the Company ("Company Common Stock") issued and outstanding
--------------------
immediately prior to the Effective Time (other than any shares of Company 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 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 Company 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 Company Common Stock. All such
---------------------------------------------------
shares of Company Common Stock referred to in Section 2.01(a) (other than any
shares of Company 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 Company 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 Company 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 Company 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 Company Common
------------------------------
Stock held in the treasury of the Company and any shares of Company Common Stock
owned by Acquiror or by any direct or indirect wholly owned subsidiary of
Acquiror or of the Company 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
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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 Company 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 Company 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 of Company Common Stock which immediately prior to the Effective
Time represented outstanding shares of Company Common Stock (the "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 Company Common Stock which is not registered in the transfer records of the
Company, 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
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<PAGE>
Company 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 Company Common Stock. All shares of Acquiror
-----------------------------------------
Common Stock issued upon conversion of the shares of Company 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 Company 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 Company 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
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<PAGE>
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).
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
----------------------------
remains undistributed to the holders of Company Common Stock for one year after
the Effective Time shall be delivered to Acquiror, upon demand. Any holders of
Company 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, the Company, the
------------
Surviving Corporation 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 or Instruments. In the event
-----------------------------------------------------
any certificate evidencing shares of Company Common Stock 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 or instrument 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 with respect to the
certificate or instrument 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 the Company shall be
closed and there shall be no further registration of transfers of shares of
Company Common Stock thereafter on the records of the Company. From and after
the Effective Time, the holders of certificates representing shares of Company
Common Stock outstanding immediately prior to the Effective Time shall cease to
have any
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rights with respect to such shares of Company Common Stock except as otherwise
provided herein or by Law. On or after the Effective Time, any Certificates
presented to the Exchange Agent or Acquiror for any reason shall be converted
into the shares of Acquiror Common Stock issuable in exchange therefor, any
dividends or other distributions to which the holders thereof are entitled
pursuant to Section 2.02(c) and any cash in lieu of fractional shares of
Acquiror Common Stock to which the holders thereof are entitled pursuant to
Section 2.02(e).
SECTION 2.04. Stock Options.
(a) Prior to the Effective Time, the Company 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 Company Common Stock (collectively, the
"Company Stock Options") under the Company's 1997 Incentive Share Plan or 1999
---------------------
Stock Incentive Plan (together, the "Company Stock Plans"), so that at the
-------------------
Effective Time each Company 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
- ------
Company Common Stock subject to such Company Stock Options (assuming full
vesting) 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 Company Stock Option for the shares of Company Common
Stock subject to such Company 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 Company 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 Company Stock Option was
granted. As to each substituted Company Stock Option, at the Effective Time
Acquiror shall issue to each holder of a Company Stock Option a document
evidencing the foregoing substitution by Acquiror. Nothing in this Section 2.04
shall affect the accelerated and complete vesting with respect to the Company
Stock Options in accordance with the terms of such Company Stock Options at the
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 Company 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 Date, Acquiror shall use its
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<PAGE>
reasonable best efforts to cause the Acquiror Common Stock subject to Acquiror
Options to be registered under the Securities Act (as defined in Article X)
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 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 Company Common Stock
and Company 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 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 and Acquiror shall take such
action as may be necessary or appropriate for Acquiror to assume the Company
Warrants (as defined in Section 3.04) 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 Company 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 Company 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 the
Company's obligations with respect to the related Company Warrant; and (ii)
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) 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
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<PAGE>
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 Merger (the "Closing") will take place as soon as practicable (but, in
-------
any event, within five (5) business days) after satisfaction of the latest to
occur or, if permissible, waiver of the conditions set forth in Article VII
hereof (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 COMPANY
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 Company hereby represents
---------------------------
and warrants (which representation and warranty shall be deemed to include the
disclosures with respect thereto so specified in the Company Disclosure
Schedule) to, and covenants and agrees 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).
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<PAGE>
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 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
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<PAGE>
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) 4,247,598 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 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 third preceding sentence above, 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 (as defined in Article X) to which the Company 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
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<PAGE>
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
having the right to vote on any matters on which Company Stockholders may vote
are issued or outstanding except for any securities issued after the date hereof
in accordance with Section 5.01.
SECTION 3.05. Authority; Binding Obligation.
The execution and delivery by the Company of this Merger Agreement, the
execution and delivery by the Company and the Subsidiaries of all other
Documents contemplated hereby, and the consummation by the Company 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 Company 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 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 (assuming neither Acquiror
nor Acquisition 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
Company and constitutes a legal, valid and binding obligation of the Company,
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 Company 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 Company 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 the
Company 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 the holders of a majority of the outstanding shares of Company
Common Stock in
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accordance with Delaware Law and the Company'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 Certificate of Merger as required by
Delaware Law, conflict with or violate any Law applicable to the Company 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 the Company or any Subsidiary is a party or by which the
Company 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, the Company or any Subsidiary or any of the Assets now owned or
hereafter acquired by the Company 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 Merger by the End Date (as defined in Section 8.01(b)(i)).
(b) Except as set forth in Section 3.06(b) of the Company Disclosure
Schedule, the execution, delivery and performance by the Company 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 Company 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 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)
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 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, the Company,
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
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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 Company and the Subsidiaries where (i) such Agreements are
material to the operation of the Company 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 and would not prevent the
consummation of the Merger 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 (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.
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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 Merger from qualifying as a reorganization
within the meaning of Section 368(a) of the Code.
SECTION 3.10. Vote Required.
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
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capital stock of the Company necessary to approve the 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 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 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 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
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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.
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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, 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, 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
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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.
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<PAGE>
(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.
(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
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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 has 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 Company
Stockholders from a financial point of view, and the Company will promptly,
after the date of this Merger Agreement, deliver a copy of such opinion to
Acquiror.
SECTION 3.20. Board Recommendation.
At a meeting duly called and held in compliance with Delaware Law, the
Board of Directors of the Company has adopted a resolution approving, adopting
and declaring the advisability of this Merger Agreement and the transactions
contemplated hereby and recommending approval and adoption of this Merger
Agreement and the transactions contemplated hereby by the Company Stockholders.
SECTION 3.21. Intentionally Deleted.
SECTION 3.22. Copies of Documents.
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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 Company Stockholders 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 Board of Directors of the Company has, to the extent such statutes are
applicable, taken all action (including appropriate approvals of the Board of
Directors of the Company) necessary to exempt the Company, the Subsidiaries and
affiliates, the Merger, 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 Merger, this Merger Agreement, the Option
Agreements or the transactions contemplated hereby or thereby.
SECTION 3.25. Dissenters' Rights.
The shares of Company Common Stock are listed on The Nasdaq Stock Market's
National Market System and no Company Stockholder 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 Merger
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
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contributions, payments, gifts or entertainment, or made any unlawful
expenditures relating to political activity to government 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,
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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
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
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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.
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 Acquiror's 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 Acquiror's 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
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<PAGE>
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 a
Stock Option Agreement dated November 25, 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) 268,816 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 Millennium Group Telem
anagement LLC on June 7, 1999; (b) 22,000,000 shares of Class B common stock,
par value $.01 per share ("Acquiror Class B Common Stock"), of which, as of the
-----------------------------
date hereof: (i) no shares are issued
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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
Acquiror's Significant Subsidiaries (as defined in Article X) 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 Acquiror's 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 its 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 Acquiror's 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, Acquiror's 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 its 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
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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
Acquiror's Significant Subsidiaries; (ii) subject to (A) obtaining 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, 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 Articles of Merger as required by Delaware Law, conflict with
or violate any Law applicable to Acquiror, Acquiror Sub or any of Acquiror's
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 Acquiror's Significant Subsidiaries is a
party or by which Acquiror, Acquiror Sub or any of Acquiror's 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 Acquiror's Significant Subsidiaries or any of
the Assets of Acquiror, Acquiror Sub or any of Acquiror's 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
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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 Articles 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 Acquiror's Significant Subsidiaries, except with
respect to any Agreement not material to the operation of Acquiror, Acquiror Sub
and Acquiror's Significant Subsidiaries.
SECTION 4.06. Licenses; Compliance.
(a) Each of Acquiror and each Significant Subsidiary (as defined in
Article X) 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.
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<PAGE>
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 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
Acquiror's Significant Subsidiaries has taken any action or failed to take any
action or is aware of any circumstance that would prevent or impede 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
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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 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.
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<PAGE>
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 Subsidiary,
threatened against, affecting or involving Acquiror or any 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, 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 by unanimous vote 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.
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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 Subsidiaries is a party or may be bound
have been filed as exhibits to Acquiror's SEC Documents.
(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 Company
Stockholders pursuant to the Merger, or upon the exercise of Acquiror Warrants
or Acquiror Options granted in exchange for Company Warrants or Company Stock
Options by reason of the Merger, 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
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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 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, 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 a Company
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
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(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 Financial Statements
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 Financial Statements, since December 31, 1998, neither Acquiror
nor any Significant Subsidiaries has incurred any material liabilities or
obligations (whether absolute or contingent, matured or unmatured) other than in
the Ordinary Course of Business.
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ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
SECTION 5.01. Conduct of Business of the Company.
The Company hereby covenants and agrees that, from the date of this Merger
Agreement until the Effective Time, the Company, 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 the Company
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
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
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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);
(c) (i) redeem, purchase or otherwise acquire any shares of capital
stock of the Company or any Subsidiary or any securities or obligations
convertible into or exchangeable for any shares of capital stock of the Company
or any Subsidiary, or any options, warrants or conversion or other rights to
acquire any shares of capital stock of the Company 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 Holding Company Merger
described in Section 9.13); 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;
(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);
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(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 amendments
required under Section 251(g) of Delaware Law in connection with the Holding
Company Merger described in Section 9.13);
(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 of the Company or any Subsidiary, 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
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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 the Company or any 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 the Company or any 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 Company 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 from qualifying as a reorganization within the
meaning of Section 368(a) of the Code.
SECTION 5.03. Certain Tax Matters.
From the date hereof until the Effective Time, the Company 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
Company 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 the Company or any
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, the Company 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
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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.
(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
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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
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 Company Stockholders of the Merger
Agreement or the Merger; (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,
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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
Company from withdrawing its recommendation in favor of this Merger Agreement
and the Merger 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 the Merger 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.
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(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 Company Stockholders,
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 Company Stockholders with respect to
the Merger and 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 Company Stockholders 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 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 for inclusion in the Joint Proxy Statement to be sent to the Company
Stockholders in connection with the meeting of the Company Stockholders to
consider the Merger (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 Company Stockholders and the stockholders of Acquiror, at
the time of the
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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 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 Company Stockholders 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
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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 Company
Stockholders proxies or consents to approve the Merger and this Merger Agreement
and shall take all other actions reasonably necessary or advisable to secure the
vote or consent of the Company Stockholders 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 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.
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(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 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 Merger, and (iii) making all necessary
filings, and thereafter making any other required submissions, with respect to
this Merger Agreement 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
--------
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
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 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.
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(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 Acquiror shall promptly notify each other in writing of any pending
or, to the knowledge of the Company 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 Merger or the conversion of the Company Common Stock into
Acquiror Common Stock pursuant to the Merger or (ii) seeking to restrain or
prohibit the consummation of the Merger 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 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. Letters of Accountants.
(a) The Company shall use its reasonable best efforts to cause to be
delivered to Acquiror "cold comfort" letters of PricewaterhouseCoopers LLC dated
the date on which the Registration Statement shall become effective and the
Effective Time, respectively, and addressed to Acquiror, reasonably customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement
and transactions such as those contemplated by this Merger Agreement.
(b) Acquiror shall use its reasonable best efforts to cause to be
delivered to the Company "cold comfort" letters of Arthur Andersen LLP dated the
date on which the Registration Statement shall become effective and the
Effective Time, respectively, and addressed to the Company, reasonably customary
in scope and substance for letters delivered by independent public accounts in
connection with registration statements similar to the Registration Statement
and transactions such as those contemplated by this Merger Agreement.
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
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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 the Company, Acquiror or
Acquiror Sub, as the case may be, 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,
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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 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 4.18 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 Company 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
Merger 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 the Acquiror shall
consult with the other on the design and implementation of such arrangements.
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(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.
(c) For the period ending no sooner than December 31, 2000 (the
"Transition Period"), Acquiror shall cause the 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, Acquiror shall,
or shall cause the 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
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"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
at or prior to the Effective Time for purposes of compliance with Securities Act
Rule 145, provided that the 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 Merger shall 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.
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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 Company 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 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
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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,
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
--------
neither the Company nor 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
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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 Stock Options and
Acquiror Warrants, remain outstanding.
SECTION 6.17. Intentionally Deleted.
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 Bank of Montreal Trust Company, as trustee (the "Indenture Trustee") or
-----------------
obtain appropriate waivers 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) Following the Effective Time, Acquiror agrees that it will cause the
Surviving Corporation 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.
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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 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 Company Common Stock and upon exercise of
Acquiror Stock Options 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, and this Merger Agreement and
the Merger shall have been duly approved and adopted by the requisite vote of
the stockholders of the Company at the Company Stockholders' Meeting, in each
case in accordance with applicable Law and the certificates of incorporation and
bylaws of Acquiror and the Company, respectively, and the Acquiror Charter
Amendment shall be in full force and effect.
(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
Merger; 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.
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(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 or any Subsidiary prior to consummation of the
transactions contemplated in this Merger Agreement (other than the filing of 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 Company 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 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 the
Company to that effect.
(b) Intentionally Deleted.
---------------------
(c) Agreements and Covenants. The Company 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 it on or prior to the
Effective Time. Acquiror shall have received a certificate of the chief
executive officer and chief financial officer of the Company to that effect.
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(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 Merger 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 Merger or the conversion of Company Common Stock
into Acquiror Common Stock pursuant to the Merger, or (ii) seeking to restrain
or prohibit the consummation of the Merger.
(f) Accountant Letters. Acquiror shall have received from the Company
------------------
"cold comfort" letters of PricewaterhouseCoopers LLP dated the date on which the
Registration Statement shall become effective and the Effective Time,
respectively, and addressed to Acquiror, reasonably customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement and
transactions such as those contemplated by this Merger Agreement.
(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 the
Company 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
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Disclosure Schedule and any other Person who may be deemed to have become an
affiliate of the Company (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. In rendering such opinion, Hogan &
Hartson L.L.P. shall require delivery of and rely upon the representation
letters delivered by Acquiror, Acquiror Sub and the Company substantially in the
forms of Exhibit H and Exhibit I hereto.
--------- ---------
(l) Stockholders' Agreement. Each of the Principal Company
-----------------------
Stockholders shall have executed and delivered to Acquiror a Stockholders'
Agreement (as defined in Article X).
(m) Indenture Opinion. If the Company has elected to amend the
-----------------
Indenture as contemplated by Section 6.19 hereof, Acquiror shall have received a
copy of the opinion from counsel to the Company, Fried, Frank, Harris, Shriver &
Jacobson, to the Indenture Trustee delivered in connection with such amendment.
(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.
SECTION 7.03. Additional Conditions to Obligations of the Company.
The obligations of the Company 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 true and correct in all material respects
(except that where any statement in a representation or warranty expressly
includes a standard of
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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 Merger or the conversion of Company Common Stock
into Acquiror Common Stock pursuant to the Merger, or (ii) seeking to restrain
or prohibit the consummation of the Merger.
(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 Merger 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, Acquiror Sub and
the Company substantially in the forms of Exhibit H and Exhibit I hereto.
--------- ---------
(e) Accountant's Letter. The Company shall have received from
-------------------
Acquiror "cold comfort" letters of Arthur Andersen LLP dated the date on which
the Registration Statement shall become effective and the Effective Time,
respectively, addressed to the Company, reasonably customary in scope and
substance for letters delivered by independent public accountants in connection
with registration statements similar to the Registration Statement and
transactions such as those contemplated by this Merger Agreement.
(f) Listing. The Acquiror Common Stock to be issued in the Merger and
-------
upon exercise of the Acquiror Stock Options and Acquiror Warrants granted in
exchange for Company Stock Options and Company Warrants by reason of the Merger
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
- -------- -------
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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.
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 and the Merger by the Company Stockholders 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;
(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 and the Merger;
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(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 and the Merger in a manner adverse to
Acquiror or (B) recommended any Superior Proposal for the Company to the Company
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 the Company
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.
SECTION 8.03. Expenses.
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(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 the
-------- -------
Merger 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.
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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.
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) 298-7901
Attention: Randall Rings
Vice President, General Counsel and Secretary
With a copy (which shall not constitute notice) to:
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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 Company:
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
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.
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<PAGE>
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 (as defined in
Article X) 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.
Subject to Section 9.13, 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 Company Stockholders
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) the Company hereby acknowledges that the Company Common Stock and
the Company and the Subsidiaries are unique, and that the harm to Acquiror
resulting from breaches by the Company of its 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
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<PAGE>
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.
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. Holding Company Reorganization.
(a) Notwithstanding anything in this Agreement to the contrary, the
Company shall be permitted, with the consent of Acquiror, to reorganize in a
holding company structure by (i) causing a Delaware corporation (the "Holding
Company") to be incorporated as a wholly owned subsidiary of the Company, (ii)
causing another Delaware corporation (the "Merger Sub") to be incorporated as a
wholly owned subsidiary of the Holding Company, and (iii) causing Merger Sub to
be merged with and into the Company, with the Company as the surviving
corporation, in accordance with Section 251(g) of Delaware Law (the "Holding
Company Merger"); provided that 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 and that Fried,
Frank, Harris, Shriver & Jacobson is able to opine that the Holding Company
Merger will not adversely affect the tax consequences of the Merger to the
stockholders of the Company.
(b) In connection with the Holding Company Merger, all of the rights and
obligations of the Company under this Agreement shall be deemed to have been
assigned to and assumed by the Holding Company, and all references to the
Company herein shall be deemed, on and after the effective time of the Holding
Company Merger, to refer to the Holding Company.
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<PAGE>
(c) If the Company reorganizes in a holding company structure as described
in Section 9.13(a) above, (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, Acquiror Sub and the Company, attached as Exhibit
-------
H and Exhibit I, 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.
SECTION 9.14. Option Exercise.
(a) Acquiror will not exercise any Option granted under an Option
Agreement, in whole or in part for cash, and then proceed with 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, Acquiror Sub and the Company, attached as Exhibit H and Exhibit I
--------- ---------
respectively, 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.
-----------------------------
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<PAGE>
"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.
"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.
-------------------
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<PAGE>
"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, 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).
------------
"Claims" is defined in section 6.18.
------
"Closing" is defined in Section 2.06.
-------
"Closing Date" is defined in Section 2.06.
------------
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<PAGE>
"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 2.01(a).
--------------------
"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
Company 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 2.04(a).
---------------------
"Company Stock Plans" is defined in Section 2.04(a).
-------------------
"Company Stockholders" is defined in the Preamble to this Merger Agreement.
--------------------
"Company Stockholders' Meeting" is defined in Section 6.01(b).
-----------------------------
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<PAGE>
"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.
-------------------------
"Competing Transaction" is defined in Section 5.05(c).
---------------------
"Confidentiality Agreement" means the confidentiality agreement dated
-------------------------
December 22, 1999 between Acquiror and the Company.
"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,
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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
shall, if appropriate under GAAP, have set aside in the 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.
----
"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).
-----
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<PAGE>
"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).
"Holding Company" is defined in Section 9.13(a).
---------------
"Holding Company Merger" is defined in Section 9.13(a).
----------------------
"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 the Bank of
---------
Montreal Trust Company, as Trustee, dated July 24, 1998.
"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.
---
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<PAGE>
"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 attention of or, if due
diligence had been exercised, would have been brought to the attention of, any
of Kwok L. 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, Steven 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.
------
"Merger Agreement" is defined in the Preamble to this Merger Agreement.
----------------
"Merger Sub" is defined in Section 9.13(a).
----------
"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.
--------------------------
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"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 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.
"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.
"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.
--------------------
"Real Property" means the real property currently or formerly owned,
-------------
operated, or used by the Company or any of the Subsidiaries.
"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.
-74-
<PAGE>
"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.
"Stockholders' Agreement" means the agreements to be entered into by Kwok
-----------------------
L. 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.
------------------------------
-75-
<PAGE>
"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 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.
-76-
<PAGE>
IN WITNESS WHEREOF, Acquiror, Acquiror Sub and the Company 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:
Title:
SOUTHSIDE ACQUISITION CORPORATION
By: /s/ BLAKE O. FISHER, JR.
______________________________
Name:
Title:
SPLITROCK SERVICES, INC.
By: /s/ WILLIAM R. WILSON
______________________________
Name:
Title:
-77-
<PAGE>
APPENDIX B
COMPANY STOCKHOLDER VOTING AGREEMENT
This VOTING AGREEMENT ("Voting Agreement") is entered into as of
January 6, 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").
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of
January 6, 2000 (the "Merger Agreement"), by and among Acquiror, Southside
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Acquiror ("Acquiror Sub"), and the Company, Acquiror Sub will be merged with and
into the Company (the "Merger") and, as a result of the Merger, the separate
corporate existence of Acquiror Sub shall cease and the Company 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 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, 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
approval of the Merger and against any Competing Transaction. The Stockholder
further agrees to grant to the persons designated by the Company'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 the Company is soliciting from other stockholders of the
Company) 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 approval of
the Merger and against any Competing Transaction. The Stockholder agrees not to
enter into any
<PAGE>
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, 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,
-2-
<PAGE>
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.
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
-3-
<PAGE>
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. 1/
-
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
______________________
1/ This paragraph will only be included in the Company Stockholder Voting
- -
Agreements to be executed by Kwok Li, Linsang Partners, LLC and William R.
Wilson.
-4-
<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: _______________________
_______________________
_______________________
-5-
<PAGE>
ANNEX A
-------
<PAGE>
ANNEX B
-------
<PAGE>
ANNEX C
-------
<PAGE>
APPENDIX C
ACQUIROR STOCKHOLDER VOTING AGREEMENT
This VOTING AGREEMENT ("Voting Agreement") is entered into as of
January 6, 2000 by and among Splitrock Services, Inc., a Delaware corporation
(the "Company"), and the undersigned stockholder (the "Stockholder") of
McLeodUSA Incorporated, a Delaware corporation ("Acquiror").
WHEREAS, pursuant to an Agreement and Plan of Merger, dated as of
January 6, 2000 (the "Merger Agreement"), by and among Acquiror, Southside
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Acquiror ("Acquiror Sub"), and the Company, Acquiror Sub will be merged with and
into the Company (the "Merger") and, as a result of the Merger, the separate
corporate existence of Acquiror Sub shall cease and the Company shall continue
as the surviving corporation of the Merger; and
WHEREAS, in order to induce the Company to enter into the Merger
Agreement, the Stockholder has agreed to execute and deliver to the Company 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").
<PAGE>
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.
4. Authorization; Binding Obligation. The Stockholder hereby
---------------------------------
represents and warrants to the Company 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 that the execution and delivery of this Voting Agreement by the
Stockholder does not, and the performance of the Stockholder's obligations under
-2-
<PAGE>
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,
-3-
<PAGE>
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.
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 Acquiror.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
-4-
<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:
STOCKHOLDER
By:
-------------------------------
Name:
----------------------
Address:
----------------------
----------------------
----------------------
-5-
<PAGE>
ANNEX A
-6-
<PAGE>
APPENDIX D
STOCK OPTION AGREEMENT
([Name of Stockholder])
STOCK OPTION AGREEMENT (this "Option Agreement"), dated as of January 6,
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").
WITNESSETH:
WHEREAS, concurrently with the execution and delivery of this Option
Agreement, Acquiror, the Company, and Southside Acquisition Corporation, a
Delaware corporation ("Acquiror Sub"), are entering into an 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 the Company (the "Merger"), with the
Company 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 (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:
<PAGE>
(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, 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 (either on a primary or
a fully diluted basis);
(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 any assets or
securities of the Company; 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
(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 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
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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 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 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
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Exercise Price paid to the Stockholder when aggregated with all other cash
purchases of Company 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 by Acquiror that occurs to qualify as a
tax free reorganization under the provisions of Section 368(a) of the Code.
(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 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
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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,
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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 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
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<PAGE>
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 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
5
<PAGE>
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.
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
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<PAGE>
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 Shares, (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;
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<PAGE>
(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;
(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
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<PAGE>
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 3/4% 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 and the Company 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 satisfactory to the Company
and the
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<PAGE>
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 and the Company 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 or Acquiror Common Stock 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
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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 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
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.
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(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
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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.
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(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
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
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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.
13
<PAGE>
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, 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
14
<PAGE>
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:
Telecopier No.:
Attention:
and
Telecopier No.:
Attention:
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.
15
<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]
16
<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
______________________________________________
Name: ____________________________________
Address: ____________________________________
____________________________________
____________________________________
17
<PAGE>
ANNEX A to OPTION AGREEMENT
---------------------------
([Name of Stockholder])
. Number of shares of Company Common Stock beneficially owned (excluding
shares subject to outstanding Company Stock Options and Company Warrants):
. Number of shares of Company Common Stock subject to Company Stock Options:
. Number of shares of Company Common Stock subject to Company Warrants:
<PAGE>
[Salomon Smith Barney Logo] APPENDIX E
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
<PAGE>
[Salomon Smith Barney Logo]
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 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.
<PAGE>
[Salomon Smith Barney Logo]
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.
<PAGE>
APPENDIX F
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 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.
<PAGE>
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.
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
<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 [proposed additions are underlined and proposed deletions appear as
caret "(caret)" symbols]:
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")."
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Amended and Restated Certificate of Incorporation of McLeodUSA (the
"McLeodUSA Certificate") contains provisions that provide that no director of
McLeodUSA shall be liable for breach of fiduciary duty as a director except for
(1) any breach of the director's duty of loyalty to McLeodUSA or its
stockholders; (2) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law; (3) liability under
Section 174 of the DGCL; or (4) any transaction from which the director derived
an improper personal benefit. The McLeodUSA Certificate contains provisions that
further provide for the indemnification of directors and officers to the fullest
extent permitted by the DGCL. Under the Bylaws of McLeodUSA, McLeodUSA is
required to advance expenses incurred by an officer or director in defending any
such action if the director or officer undertakes to repay such amount if it is
determined that the director or officer is not entitled to indemnification. In
addition, McLeodUSA has entered into indemnity agreements with each of its
directors pursuant to which McLeodUSA has agreed to indemnify the directors as
permitted by the DGCL. McLeodUSA has obtained directors' and officers' liability
insurance against certain liabilities, including liabilities under the
Securities Act.
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit
-------
Number Exhibit Description
------ -------------------
2.1 Agreement and Plan of Merger by and among McLeodUSA, Southside
Acquisition Corporation and Splitrock Services, Inc., dated as of
January 6, 2000 (included as Appendix A to the joint proxy
statement/prospectus included in this Registration Statement and
filed as Exhibit 2.1 to the Current Report on Form 8-K, File No.
0-20763, filed with the SEC on January 19, 2000, and incorporated
herein by reference).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(filed as Exhibit 3.1 to Registration Statement on Form S-1, File
No. 333-3112 (the "Initial Form S-1") and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (filed as Exhibit 3.2
to Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by
reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod, Inc. (filed as Exhibit 3.3 to
Registration Statement on Form S-4, File No. 333-27647 (the
"July 1997 Form S-4"), and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office
of McLeodUSA (filed as Exhibit 3.4 to Annual Report on Form 10-K,
File No. 0-20763, filed with the SEC on March 9, 1998 (the "1997
Form 10-K") and incorporated herein by reference).
3.5 Certificate of Designations of the 6.75% Series A preferred
stock, par value $.01 per share, of McLeodUSA (filed as Exhibit
3.1 to the Current Report on Form 8-K, File No. 0-20763, filed
with the SEC on August 9, 1999 and incorporated herein by
reference).
*3.6 Certificate of Designations of the Series B preferred stock, par
value $.01 per share, of McLeodUSA.
*3.7 Certificate of Designations of the Series C preferred stock, par
value $.01 per share, of McLeodUSA.
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (filed
as Exhibit 4.1 to the Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United
States Trust Company of New York, as Trustee, relating to the 10-
1/2% Senior Discount Notes Due 2007 of McLeod, Inc. (filed as
Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-20763,
filed with the SEC on March 31, 1997 (the "1996 Form 10-K") and
incorporated herein by reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997 (filed as Exhibit 4.3 to the
1996 Form 10-K and incorporated herein by reference).
<PAGE>
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1,
2007 of McLeod, Inc. (filed as Exhibit 4.4 to the 1996 Form 10-K
and incorporated herein by reference).
4.5 Investor Agreement dated as of April 1, 1996 among McLeod, Inc.,
IES Investments Inc., Midwest Capital Group Inc., MWR Investments
Inc., Clark and Mary McLeod, and certain other stockholders
(filed as Exhibit 4.8 to the Initial Form S-1 and incorporated
herein by reference).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23,
1996 by and among McLeod, Inc., IES Investments Inc., Midwest
Capital Group Inc., MWR Investments Inc., Clark E. McLeod and
Mary E. McLeod (filed as Exhibit 4.3 to the November 1996 Form S-
1 and incorporated herein by reference).
4.7 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of
McLeodUSA (filed as Exhibit 4.8 to the July 1997 Form S-4 and
incorporated herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 9-
1/4% Senior Notes Due 2007 of McLeodUSA (filed as Exhibit 4.9 to
the July 1997 Form S-4 and incorporated herein by reference).
4.9 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA
(filed as Exhibit 4.10 to the July 1997 Form S-4 and incorporated
herein by reference).
4.10 Stockholders' Agreement dated June 14, 1997 among McLeodUSA, IES
Investments Inc., Midwest Capital Group, Inc., MWR Investments
Inc., Clark E. McLeod, Mary E. McLeod and Richard A. Lumpkin on
behalf of each of the shareholders of Consolidated Communications
Inc. listed in Schedule 1 thereto (filed as Exhibit 4.12 to the
July 1997 Form S-4 and incorporated herein by reference).
4.11 Amendment No. 1 to Stockholders' Agreement dated as of September
19, 1997 by and among McLeodUSA, IES Investments Inc., Midwest
Capital Group, Inc., MWR Investments Inc., Clark E. McLeod, Mary
E. McLeod and Richard A. Lumpkin on behalf of each of the
shareholders of Consolidated Communications Inc. listed in
Schedule I thereto (filed as Exhibit 4.1 to the Quarterly Report
on Form 10-Q, File No. 0-20763, filed with the SEC on November
14, 1997 and incorporated herein by reference).
4.12 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA (filed
as Exhibit 4.14 to the 1997 Form 10-K and incorporated herein by
reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 8-
3/8% Senior Notes Due 2008 of McLeodUSA (filed as Exhibit 4.15 to
Registration Statement on Form S-4, File No. 333-52793 (the "May
1998 Form S-4"), and incorporated herein by reference).
4.14 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.13).
<PAGE>
4.15 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E. McLeod,
and Richard A. Lumpkin and each of the former shareholders of
Consolidated Communications Inc. ("CCI") and certain permitted
transferees of the former CCI shareholders (filed as Exhibit 99.1
to the Current Report on Form 8-K, File No. 0-20763, filed with
the SEC on November 19, 1998 and incorporated herein by
reference).
4.16 Indenture dated as of October 30, 1998 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating to
the 9 1/2% Senior Notes Due 2008 of McLeodUSA (filed as Exhibit
4.19 to Registration Statement on Form S-4, File No. 333-69621
(the "December 1998 Form S-4"), and incorporated herein by
reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.16).
4.18 Stockholders' Agreement dated as of January 7, 1999, by and among
McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E. McLeod,
Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership (filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the SEC on January 14, 1999 and incorporated herein by
reference).
4.19 Indenture dated as of February 22, 1999 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating to
the 8 1/8% Senior Notes Due 2009 of McLeodUSA (filed as Exhibit
4.22 to Annual Report on Form 10-K, File No. 0-20763, filed with
the SEC on March 24, 1999 (the "1998 Form 10-K") and incorporated
herein by reference).
4.20 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA
(contained in the Indenture filed as Exhibit 4.19).
4.21 Form of 6.75% Series A preferred stock certificate (filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the SEC on August 9, 1999 and incorporated herein by
reference).
*4.22 Form of Series B preferred stock certificate.
*4.23 Form of Series C preferred stock certificate.
**5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered.
**8.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson regarding tax
matters.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP.
<PAGE>
23.3 Consent of Fried, Frank, Harris, Shriver and Jacobson (included
in Exhibit 8.1).
*23.4 Consent of Ernst & Young L.L.P.
*23.5 Consent of PricewaterhouseCoopers LLP.
*23.6 Consent of Salomon Smith Barney Inc.
*23.7 Consent of Credit Suisse First Boston Corporation.
24.1 Power of attorney (included on signature page).
**99.1 Form of Proxy for Special Meeting of Stockholders of McLeodUSA.
**99.2 Form of Proxy for Special Meeting of Stockholders of Splitrock
Services, Inc.
*99.3 Form of Voting Agreement between McLeodUSA and various
stockholders of Splitrock Services, Inc. (included as Appendix B
to the joint proxy statement/prospectus included in this
Registration Statement).
*99.4 Form of Voting Agreement between Splitrock Services, Inc. and
various stockholders of McLeodUSA (included as Appendix C to the
joint proxy statement/prospectus included in this Registration
Statement).
*99.5 Form of Stock Option Agreement among McLeodUSA and various
stockholders of Splitrock Services, Inc. (included as Appendix D
to the joint proxy statement/prospectus included in this
Registration Statement).
________________
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules.
The following financial statement schedule was filed with the McLeodUSA
Annual Report on Form 10-K for the year ended December 31, 1998 (File No. 0-
20763), filed with the SEC on March 24, 1999, and is incorporated herein by
reference:
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are inapplicable
or the information required to be set forth therein is contained, or
incorporated by reference, in the Consolidated Financial Statements of McLeodUSA
or notes thereto.
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
<PAGE>
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the joint proxy
statement/prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
this Registration Statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
this Registration Statement when it became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Securities Act");
(ii) to reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent post-
effective amendment hereof) which, individually or in the aggregate,
represents a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in this Registration Statement when it becomes
effective; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
The undersigned registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to remove from registration by
means of a post-effective amendment any of the securities being registered which
remain unsold at the termination of the offering.
<PAGE>
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Securities Exchange Act) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through the use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by Form S-4 with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
Form S-4.
The undersigned registrant hereby undertakes that every prospectus (i) that
is filed pursuant to the immediately preceding paragraph, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the Registration Statement and will not be used until
such amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of Securities Act, McLeodUSA has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Cedar Rapids, Iowa, on this 31st day of January,
2000.
McLEODUSA INCORPORATED
By: /s/ Clark E. McLeod
--------------------
Clark E. McLeod
Chairman and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Clark E. McLeod, Stephen C. Gray and Blake O. Fisher,
Jr., jointly and severally, each in his own capacity, his true and lawful
attorneys-in-fact, with full power of substitution, for him and his name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents with full power and authority to do so and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons, in the capacities
indicated below, on this 31st day of January, 2000.
Signature Title
- --------- ------
/s/ Clark E. McLeod Chairman, Chief Executive Officer and Director
- --------------------------- (Principal Executive Officer)
Clark E. McLeod
/s/ Richard A. Lumpkin
- --------------------------- Vice Chairman and Director
Richard A. Lumpkin
/s/ Stephen C. Gray
- --------------------------- President, Chief Operating Officer and Director
Stephen C. Gray
/s/ Blake O. Fisher, Jr.
- --------------------------- Group Vice President, Regional President
Blake O. Fisher, Jr. and Director
<PAGE>
/s/ J. Lyle Patrick
- ------------------------- Group Vice President--Finance and Accounting and
J. Lyle Patrick Chief Financial and Accounting Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Anne K. Bingaman
- ------------------------ Director
Anne K. Bingaman
/s/ Erskine Bowles
- ------------------------ Director
Erskine Bowles
/s/ Thomas M. Collins
- ------------------------ Director
Thomas M. Collins
/s/ Robert J. Currey
- ------------------------ Director
Robert J. Currey
/s/ Theodore R. Forstmann
- -------------------------- Director
Theodore R. Forstmann
/s/ Lee Liu
- ------------------------ Director
Lee Liu
/s/ Paul D. Rhines
- ------------------------ Director
Paul D. Rhines
/s/ Peter H.O. Claudy
- ------------------------ Director
Peter H.O. Claudy
/s/ Roy A. Wilkens
- ------------------------ Director
Roy A. Wilkens
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
2.1 Agreement and Plan of Merger by and among McLeodUSA, Southside
Acquisition Corporation and Splitrock Services, Inc., dated as of
January 6, 2000 (included as Appendix A to the joint proxy
statement/prospectus included in this Registration Statement and
filed as Exhibit 2.1 to the Current Report on Form 8-K, File No. 0-
20763, filed with the SEC on January 19, 2000, and incorporated
herein by reference).
3.1 Amended and Restated Certificate of Incorporation of McLeod, Inc.
(filed as Exhibit 3.1 to Registration Statement on Form S-1, File
No. 333-3112 (the "Initial Form S-1") and incorporated herein by
reference).
3.2 Amended and Restated Bylaws of McLeod, Inc. (filed as Exhibit 3.2
to Registration Statement on Form S-1, File No. 333-13885 (the
"November 1996 Form S-1"), and incorporated herein by reference).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of McLeod, Inc. (filed as Exhibit 3.3 to Registration
Statement on Form S-4, File No. 333-27647 (the "July 1997 Form S-
4"), and incorporated herein by reference).
3.4 Certificate of Change of Registered Agent and Registered Office of
McLeodUSA (filed as Exhibit 3.4 to Annual Report on Form 10-K, File
No. 0-20763, filed with the SEC on March 9, 1998 (the "1997 Form
10-K") and incorporated herein by reference).
3.5 Certificate of Designations of the 6.75% Series A preferred stock,
par value $.01 per share, of McLeodUSA (filed as Exhibit 3.1 to the
Current Report on Form 8-K, File No. 0-20763, filed with the SEC on
August 9, 1999 and incorporated herein by reference).
*3.6 Certificate of Designations of the Series B preferred stock, par
value $.01 per share, of McLeodUSA.
*3.7 Certificate of Designations of the Series C preferred stock, par
value $.01 per share, of McLeodUSA.
4.1 Form of Class A Common Stock Certificate of McLeod, Inc. (filed as
Exhibit 4.1 to the Initial Form S-1 and incorporated herein by
reference).
4.2 Indenture dated March 4, 1997 between McLeod, Inc. and United
States Trust Company of New York, as Trustee, relating to the 10-
1/2% Senior Discount Notes Due 2007 of McLeod, Inc. (filed as
Exhibit 4.2 to Annual Report on Form 10-K, File No. 0-20763, filed
with the SEC on March 31, 1997 (the "1996 Form 10-K") and
incorporated herein by reference).
4.3 Initial Global 10-1/2% Senior Discount Note Due March 1, 2007 of
McLeod, Inc., dated March 4, 1997 (filed as Exhibit 4.3 to the 1996
Form 10-K and incorporated herein by reference).
4.4 Form of Certificated 10-1/2% Senior Discount Note Due March 1, 2007
of McLeod, Inc. (filed as Exhibit 4.4 to the 1996 Form 10-K and
incorporated herein by reference).
</TABLE>
<PAGE>
4.5 Investor Agreement dated as of April 1, 1996 among McLeod, Inc.,
IES Investments Inc., Midwest Capital Group Inc., MWR Investments
Inc., Clark and Mary McLeod, and certain other stockholders (filed
as Exhibit 4.8 to the Initial Form S-1 and incorporated herein by
reference).
4.6 Amendment No. 1 to Investor Agreement dated as of October 23, 1996
by and among McLeod, Inc., IES Investments Inc., Midwest Capital
Group Inc., MWR Investments Inc., Clark E. McLeod and Mary E.
McLeod (filed as Exhibit 4.3 to the November 1996 Form S-1 and
incorporated herein by reference).
4.7 Form of 10-1/2% Senior Discount Exchange Note Due 2007 of McLeodUSA
(filed as Exhibit 4.8 to the July 1997 Form S-4 and incorporated
herein by reference).
4.8 Indenture dated as of July 21, 1997 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 9-
1/4% Senior Notes Due 2007 of McLeodUSA (filed as Exhibit 4.9 to
the July 1997 Form S-4 and incorporated herein by reference).
4.9 Form of Initial Global 9-1/4% Senior Note Due 2007 of McLeodUSA
(filed as Exhibit 4.10 to the July 1997 Form S-4 and incorporated
herein by reference).
4.10 Stockholders' Agreement dated June 14, 1997 among McLeodUSA, IES
Investments Inc., Midwest Capital Group, Inc., MWR Investments
Inc., Clark E. McLeod, Mary E. McLeod and Richard A. Lumpkin on
behalf of each of the shareholders of Consolidated Communications
Inc. listed in Schedule 1 thereto (filed as Exhibit 4.12 to the
July 1997 Form S-4 and incorporated herein by reference).
4.11 Amendment No. 1 to Stockholders' Agreement dated as of September
19, 1997 by and among McLeodUSA, IES Investments Inc., Midwest
Capital Group, Inc., MWR Investments Inc., Clark E. McLeod, Mary E.
McLeod and Richard A. Lumpkin on behalf of each of the shareholders
of Consolidated Communications Inc. listed in Schedule I thereto
(filed as Exhibit 4.1 to the Quarterly Report on Form 10-Q, File
No. 0-20763, filed with the SEC on November 14, 1997 and
incorporated herein by reference).
4.12 Form of 9-1/4% Senior Exchange Note Due 2007 of McLeodUSA (filed as
Exhibit 4.14 to the 1997 Form 10-K and incorporated herein by
reference).
4.13 Indenture dated as of March 16, 1998 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 8-
3/8% Senior Notes Due 2008 of McLeodUSA (filed as Exhibit 4.15 to
Registration Statement on Form S-4, File No. 333-52793 (the "May
1998 Form S-4"), and incorporated herein by reference).
4.14 Form of Global 8-3/8% Senior Note Due 2008 of McLeodUSA (contained
in the Indenture filed as Exhibit 4.13).
4.15 Stockholders' Agreement dated November 18, 1998 by and among
McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E. McLeod,
and Richard A. Lumpkin and each of the former shareholders of
Consolidated Communications Inc. ("CCI") and certain permitted
transferees of the former CCI shareholders (filed as Exhibit 99.1
to the Current Report on Form 8-K, File No. 0-20763, filed with the
SEC on November 19, 1998 and incorporated herein by reference).
<PAGE>
4.16 Indenture dated as of October 30, 1998 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 9
1/2% Senior Notes Due 2008 of McLeodUSA (filed as Exhibit 4.19 to
Registration Statement on Form S-4, File No. 333-69621 (the
"December 1998 Form S-4"), and incorporated herein by reference).
4.17 Form of Global 9 1/2% Senior Note Due 2008 of McLeodUSA (contained
in the Indenture filed as Exhibit 4.16).
4.18 Stockholders' Agreement dated as of January 7, 1999, by and among
McLeodUSA, IES Investments Inc., Clark E. McLeod, Mary E. McLeod,
Richard A. Lumpkin, Gail G. Lumpkin, M/C Investors L.L.C. and
Media/Communications Partners III Limited Partnership (filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the SEC on January 14, 1999 and incorporated herein by
reference).
4.19 Indenture dated as of February 22, 1999 between McLeodUSA and
United States Trust Company of New York, as Trustee, relating to
the 8 1/8% Senior Notes Due 2009 of McLeodUSA (filed as Exhibit
4.22 to Annual Report on Form 10-K, File No. 0-20763, filed with
the SEC on March 24, 1999 (the "1998 Form 10-K") and incorporated
herein by reference).
4.20 Form of Global 8 1/8% Senior Note Due 2009 of McLeodUSA (contained
in the Indenture filed as Exhibit 4.19).
4.21 Form of 6.75% Series A preferred stock certificate (filed as
Exhibit 4.1 to the Current Report on Form 8-K, File No. 0-20763,
filed with the SEC on August 9, 1999 and incorporated herein by
reference).
*4.22 Form of Series B preferred stock certificate.
*4.23 Form of Series C preferred stock certificate.
**5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
securities being registered.
**8.1 Opinion of Fried, Frank, Harris, Shriver & Jacobson regarding tax
matters.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1).
*23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Fried, Frank, Harris, Shriver and Jacobson (included in
Exhibit 8.1).
*23.4 Consent of Ernst & Young L.L.P.
*23.5 Consent of PricewaterhouseCoopers LLP.
<PAGE>
*23.6 Consent of Salomon Smith Barney Inc.
*23.7 Consent of Credit Suisse First Boston Corporation.
24.1 Power of attorney (included on signature page).
**99.1 Form of Proxy for Special Meeting of Stockholders of McLeodUSA.
**99.2 Form of Proxy for Special Meeting of Stockholders of Splitrock
Services, Inc.
*99.3 Form of Voting Agreement between McLeodUSA Incorporated and various
stockholders of Splitrock Services, Inc. (included as Appendix B to
the joint proxy statement/prospectus included in this Registration
Statement).
*99.4 Form of Voting Agreement between Splitrock Services, Inc. and
various stockholders of McLeodUSA Incorporated (included as
Appendix C to the joint proxy statement/prospectus included in this
Registration Statement).
*99.5 Form of Stock Option Agreement among McLeodUSA Incorporated and
various stockholders of Splitrock Services, Inc. (included as
Appendix D to the joint proxy statement/prospectus included in this
Registration Statement).
__________________
* Filed herewith.
** To be filed by amendment
<PAGE>
EXHIBIT 3.6
McLEODUSA INCORPORATED
CERTIFICATE OF DESIGNATION OF THE POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF SERIES B CUMULATIVE
CONVERTIBLE PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS
THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
McLeodUSA Incorporated (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the board of directors
of the Corporation (the "Board of Directors") by the Corporation's Amended and
Restated Certificate of Incorporation, as amended (the "Restated Certificate of
Incorporation"), and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, said Board of Directors is authorized
to issue Preferred Stock of the Corporation in one or more series and the Board
of Directors has approved and adopted the following resolution on September 13,
1999 (the "Resolution"):
RESOLVED that, the Board of Directors hereby creates, authorizes
and provides for the issuance of a series of the preferred stock of the
Corporation, par value $.01 per share (such preferred stock designated as
the "Series B Cumulative Convertible Preferred Stock"), consisting of
275,000 shares and having the powers, designation, preferences, relative,
participating, optional and other special rights and the qualifications,
limitations and restrictions thereof that are set forth in the Restated
Certificate of Incorporation and in this Resolution as follows:
1. Number and Designation. 275,000 shares of the Preferred Stock of
----------------------
the Corporation shall constitute a series designated as "Series B Cumulative
Convertible Preferred Stock" (the "Series B Preferred Stock").
2. Definitions. Unless the context otherwise requires, when used
-----------
herein the following terms shall have the meaning indicated.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in New York
City, New York generally are authorized or required by law or other governmental
actions to close.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
<PAGE>
"Class A Common Stock" means any shares of the Corporation's Class A
common stock, par value $.01 per share, now or hereafter authorized to be
issued, and any and all securities of any kind whatsoever of the Corporation
which may be exchanged for or converted into Class A Common Stock, any and all
securities of any kind whatsoever of the Corporation which may be issued on or
after the date hereof in respect of, in exchange for, or upon conversion of
shares of Class A Common Stock pursuant to a merger, consolidation, stock split,
stock dividend, recapitalization of the Corporation or otherwise.
"Common Stock" means the Corporation's Class A Common Stock, and any
other common stock of the Corporation.
"Current Market Price" means the average of the daily Market Prices of
the Common Stock for ten consecutive trading days immediately preceding the date
for which such value is to be computed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute, and the rules and regulations promulgated thereunder.
"Issue Date" means the original date of issuance of shares of Series B
Preferred Stock.
"Liquidation Preference" with respect to a share of Series B Preferred
Stock means, as at any date, the sum of (i) $2,500.00 plus (ii) any Special
Amount with respect to such share plus (iii) an amount equal to any accrued and
unpaid Preferred Dividends (as defined in paragraph 4(a) below) with respect to
such share from the last Dividend Payment Date through such date.
"Market Price" means, with respect to the Common Stock, on any given
day, (i) the price of the last trade, as reported on the Nasdaq National Market,
not identified as having been reported late to such system, or (ii) if the
Common Stock is so traded, but not so quoted, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market, or (iii)
if the Common Stock is not listed or authorized for trading on the Nasdaq
National Market or any comparable system, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose. If the Common Stock is not listed and traded in a manner that the
quotations referred to above are available for the period required hereunder,
the Market Price per share of Common Stock shall be deemed to be the fair value
per share of such security as determined in good faith by the Board of Directors
of the Corporation.
"Net Realizable FMV" means, with respect to a share of Common Stock,
if calculable, the amount of gross proceeds net of underwriters' discounts,
commissions or other selling expenses received by or to be received by the
holder in connection with the sale of such share of Common Stock on a when
issued basis or immediately after the conversion or, in all other cases, an
amount equal to 97% of the Current Market Price of the Common Stock.
"Preference Amount" with respect to a share of Series B Preferred
Stock means, as at any date, the sum of (i) $1818.182 plus (ii) any Special
Amount, whether or not declared,
-2-
<PAGE>
with respect to such share plus (iii) an amount equal to any accrued and unpaid
Preferred Dividends with respect to such share from the last Dividend Payment
Date through such date.
"Series C Designation" means the Certificate of Designation for the
Series C Preferred Stock.
"Series C Preferred Stock" means the Series C Convertible Preferred
Stock, par value $.01 per share, of the Corporation.
"Special Amount" with respect to a share of Series B Preferred Stock
shall mean all dividends and other amounts which have become payable in respect
of such share under paragraph 4(a) but which have not been paid. The Special
Amount with respect to any such share shall be reduced by the amount of any such
dividends and other amounts actually paid in respect of such share under
paragraph 4(c).
"Voting Stock" means, with respect to any person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such person.
3. Rank. (a) The Series B Preferred Stock and Series C Preferred
----
Stock each will, with respect to dividend rights and rights on liquidation,
winding-up and dissolution, rank (i) senior to all classes of Common Stock and
to each other class of Capital Stock of the Corporation or series of Preferred
Stock of the Corporation established hereafter by the Board of Directors of the
Corporation the terms of which 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 as to dividend rights and rights on liquidation,
winding-up and dissolution of the Corporation (collectively referred to,
together with all classes of Common Stock of the Corporation, as "Junior
Securities"); (ii) on a parity with the Corporation's 6.75% Series A Cumulative
Convertible Preferred Stock, par value $.01 per share, and with each class of
Capital Stock of the Corporation or series of Preferred Stock of the Corporation
established hereafter by the Board of Directors of the Corporation, the terms of
which expressly provide that such class or series will rank on a parity with the
Series B Preferred Stock and Series C Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Securities"); and (iii) junior to each class of Capital Stock of the
Corporation or series of Preferred Stock of the Corporation established
hereafter by the Board of Directors of the Corporation, the terms of which
expressly provide that such class or series will rank senior to the Series B
Preferred Stock and Series C Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Corporation (collectively
referred to as "Senior Securities"); provided that the relative powers, rights
and preferences of the Series B Preferred Stock and Series C Preferred Stock
vis-a-vis the other shall be as set forth herein and in the Series C
Designation.
(b) The respective definitions of Junior Securities, Parity
Securities and Senior Securities shall also include any warrants, rights or
options or other securities exercisable or exchangeable for or convertible into
any of the Junior Securities, Parity Securities and Senior Securities, as the
case may be.
-3-
<PAGE>
(c) The Series B Preferred Stock shall be subject to the creation of
Junior Securities and Parity Securities.
4. Dividends. (a) The holders of shares of Series B Preferred Stock
---------
shall be entitled to receive with respect to each share of Series B Preferred
Stock, when, as and if declared by the Board of Directors, out of funds legally
available for the payment of dividends, dividends per annum equal to $127.273
per share in cash (the "Preferred Dividend"). Preferred Dividends shall accrue
and shall be cumulative whether or not declared from the Issue Date and shall be
payable quarterly in arrears on March 31, June 30, September 30 and December 31
of each year (unless such day is not a Business Day, in which event such
dividends shall be payable on the next succeeding Business Day) (each such date
being a "Dividend Payment Date" and each such quarterly period being a "Dividend
Period"), commencing on December 31, 1999. Each such dividend shall be payable
to the holders of record of shares of the Series B Preferred Stock as they
appear on the stock register of the Corporation at the close of business on the
corresponding Record Date. As used herein, the term "Record Date" means, with
respect to the dividend payable on March 31, June 30, September 30 and December
31, respectively, of each year, the preceding March 15, June 15, September 15
and December 15, or such other date, not more than 60 days or less than 10 days
preceding the payment dates thereof, as shall be fixed as the record date by the
Board of Directors.
(b) The amount of Preferred Dividends payable for each full Dividend
Period for each outstanding share of Series B Preferred Stock shall be computed
by dividing $127.273 by four. The amount of Preferred Dividends payable on the
initial Dividend Payment Date, or in respect of any period shorter or longer
than a full Dividend Period, on the Series B Preferred Stock shall be computed
on the basis of twelve 30-day months and a 360-day year. No interest, or sum or
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the Series B Preferred Stock that may be in arrears.
(c) Accrued and unpaid Special Amounts for any past Dividend Periods
may be declared and paid on any subsequent Dividend Payment Date, to holders of
record on the corresponding Record Date.
(d) So long as any shares of the Series B Preferred Stock are
outstanding, no dividend, except as described in the last sentence of Section
4(e) below and except as described in the next succeeding sentence, shall be
declared or paid or set apart for payment on any Parity Securities, nor shall
any Parity Securities be redeemed, purchased or otherwise acquired for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly (except by conversion into or exchange for Parity Securities or
Junior Securities), unless in each case all Special Amounts have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for such payment on the Series B Preferred Stock
for all Dividend Periods terminating on or prior to the date of payment of the
dividend on, or the date of redemption, purchase, or acquisition for
consideration of, such Parity Securities. When Special Amounts are not paid in
full or a sum sufficient for such payment is not set apart, as aforesaid, all
Special Amounts and additional amounts declared upon shares of the Series B
Preferred Stock and all dividends and additional amounts declared upon any other
Parity Securities shall be declared ratably in proportion to the respective
amounts of Special Amounts and additional
-4-
<PAGE>
amounts accumulated and unpaid on the Series B Preferred Stock and dividends and
additional amounts accumulated and unpaid on such Parity Securities.
(e) So long as any shares of the Series B Preferred Stock are
outstanding, no dividends shall be declared or paid or set apart for payment and
no other distribution shall be declared or made upon Junior Securities, nor
shall any Junior Securities be redeemed, purchased or otherwise acquired (any
such dividend, distribution, redemption, purchase or acquisition being
hereinafter referred to as a "Junior Securities Distribution") for any
consideration (or any moneys be paid to or made available for a sinking fund for
the redemption of any shares of any such stock) by the Corporation, directly or
indirectly (except by conversion into or exchange for Junior Securities), unless
in each case (i) all Special Amounts and additional amounts on all outstanding
shares of the Series B Preferred Stock and accrued and unpaid dividends and
additional amounts on any other Parity Securities shall have been paid or set
apart for payment for all past Dividend Periods with respect to the Series B
Preferred Stock and all past dividend periods with respect to such Parity
Securities and (ii) sufficient funds shall have been paid or set apart for the
payment of the dividend for the current Dividend Period with respect to the
Series B Preferred Stock and the current dividend period with respect to such
Parity Securities. Notwithstanding anything in this Certificate of Designation
to the contrary, the Corporation may declare and pay dividends on Parity Stock
which are payable solely in additional shares of, or by the increase in the
liquidation value of, Parity Stock or on Junior Stock which are payable in
additional shares of, or by the increase in the liquidation value of, Junior
Stock, as applicable, or repurchase, redeem or otherwise acquire Junior Stock in
exchange for Junior Stock, and Parity Stock in exchange for Parity Stock or
Junior Stock.
(f) If at any time from the Issue Date through the date ending five
years thereafter, the Corporation pays a dividend in cash or property other than
in shares of Capital Stock on the Common Stock then at the same time the
Corporation shall declare and pay a dividend on each share of Series B Preferred
Stock in an amount equal to the Series B Per Share Participation Amount. The
"Series B Per Share Participation Amount" means, as at any date, 37.5% of the
amount of dividends that would be paid with respect to the Series B Preferred
Stock and Series C Preferred Stock taken together if converted into Common Stock
on the date established as the record date with respect to such dividend on the
Common Stock divided by the number of shares of Series B Preferred Stock then
outstanding.
5. Liquidation Preference. (a) In the event of any liquidation,
----------------------
dissolution or winding-up of the Corporation, whether voluntary or involuntary,
before any payment or distribution of the assets of the Corporation (whether
capital or surplus) shall be made to or set apart for the holders of Junior
Securities, the holders of the shares of Series B Preferred Stock and Series C
Preferred Stock taken together shall be entitled to receive an amount in cash
equal to the greater of (x) the aggregate Liquidation Preferences (as set forth
herein and in the Series C Designation) of the shares of Series B Preferred
Stock and Series C Preferred Stock as of the date of liquidation, or (y) the
aggregate amount that would have been received with respect to the shares of
Series B Preferred Stock and Series C Preferred Stock if such stock had been
converted to Common Stock immediately prior to such liquidation, dissolution or
winding-up. If, upon any liquidation, dissolution or winding-up of the
Corporation, the assets of the Corporation, or proceeds thereof, shall be
insufficient to pay in full the aforesaid amounts under clause (x) of the
preceding sentence and liquidating payments on all Parity Securities, then such
assets, or
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<PAGE>
proceeds thereof, shall (i) be distributed among the shares of Series B
Preferred Stock and the Series C Preferred Stock taken together and all such
other Parity Securities ratably in accordance with the respective amounts that
would be payable on such shares of Preferred Stock and any such other Parity
Securities if all amounts payable thereon were paid in full and (ii) the amount
distributable under clause (i) to the Series B Preferred Stock and Series C
Preferred Stock taken together, shall first be distributed to the Series B
Preferred Stock until it has received an amount equal to the aggregate
Preference Amounts of all Series B Preferred Stock outstanding as of the date of
liquidation and thereafter 37.5% to the Series B Preferred Stock and 62.5% to
the Series C Preferred Stock. If, upon any liquidation, dissolution or winding-
up of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable to the Series B Preferred Stock and Series C Preferred Stock taken
together shall be sufficient to pay in full the aforesaid amounts under clause
(x) of the first sentence of this subsection 5(a) then such amount shall first
be distributed to the Series B Preferred Stock until it has received an amount
equal to the aggregate Preference Amounts of all Series B Preferred Stock
outstanding as of the date of liquidation and thereafter 37.5% to the Series B
Preferred Stock and 62.5% to the Series C Preferred Stock. Any amounts
distributed with respect to the Series B Preferred Stock pursuant to this
paragraph 5(a) shall be allocated pro rata among the shares of Series B
Preferred Stock. For the purposes of this paragraph 5, neither the sale,
conveyance, exchange or transfer (for cash, shares of stock, securities or other
consideration) of all or substantially all of the property or assets of the
Corporation nor the consolidation or merger of the Corporation with or into one
or more other entities shall be deemed to be a liquidation, dissolution or
winding-up of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities,
after payment shall have been made in full to the holders of the Series B
Preferred Stock and the Series C Preferred Stock taken together, as provided in
this paragraph 5, any other series or class or classes of Junior Securities
shall, subject to the respective terms and provisions (if any) applying thereto,
be entitled to receive any and all assets remaining to be paid or distributed,
and the holders of the Series B Preferred Stock, Series C Preferred Stock and
any Parity Securities shall not be entitled to share therein.
6. Redemption. (a) The Series B Preferred Stock shall not be
----------
redeemable by the Corporation prior to the seventh anniversary of the Issue
Date. On and after the seventh anniversary of the Issue Date, to the extent the
Corporation shall have funds legally available for such payment, and subject to
the rights of the holders pursuant to Section 8 hereof, the Corporation may
redeem at its option shares of Series B Preferred Stock, at any time in whole or
from time to time in part, at a redemption price per share equal to the
Liquidation Preference as of the date fixed for redemption, without interest;
provided that the Corporation 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 outstanding at such time.
(b) To the extent the Corporation shall have funds legally available
therefor, during the 180-day period commencing on the tenth anniversary of the
Issue Date, the holders of the Series B Preferred Stock shall have the right to
cause the Corporation to redeem at any time in whole or from time to time in
part outstanding shares of Series B Preferred Stock, if any, at a redemption
price per share in cash equal to the Liquidation Preference, without interest;
provided
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<PAGE>
that upon any such election the Corporation shall be required to redeem a
proportional amount of the Series C Preferred Stock.
(c) Shares of Series B Preferred Stock which have been issued and
reacquired by the Corporation in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the laws of
the State of Delaware) be retired and have the status of authorized and unissued
shares of the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of the Preferred Stock; provided
that no such issued and reacquired shares of Series B Preferred Stock shall be
reissued or sold as Series B Preferred Stock.
(d) If the Corporation is unable or shall fail to discharge its
obligation to redeem outstanding shares of Series B Preferred Stock pursuant to
paragraph 6(b) (the "Mandatory Redemption Obligation"), the Mandatory Redemption
Obligation shall be discharged as soon as the Corporation is able to discharge
such Mandatory Redemption Obligation. If and so long as any Mandatory
Redemption Obligation with respect to the Series B Preferred Stock shall not be
fully discharged, the Corporation shall not (i) directly or indirectly, redeem,
purchase, or otherwise acquire any Parity Security or discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of any
Parity Securities or (ii) declare or make any Junior Securities Distribution,
or, directly or indirectly, discharge any mandatory or optional redemption,
sinking fund or other similar obligation in respect of any Junior Securities.
7. Procedure for Redemption. (a) In the event that fewer than all
------------------------
the outstanding shares of Series B Preferred Stock are to be redeemed, in the
case of Section 6(a), the number of shares to be redeemed shall be determined by
the Board of Directors and the shares to be redeemed shall be selected pro rata
(with any fractional shares being rounded to the nearest whole shares).
Notwithstanding anything in Section 6 to the contrary, the Corporation shall
only redeem shares of Series B Preferred Stock pursuant to Section 6(a) or 6(b)
on a proportional basis based on the percentage of each series of shares
outstanding at such time.
(b) In the event the Corporation shall redeem shares of Series B
Preferred Stock pursuant to Section 6(a), notice of such redemption shall be
given by first class mail, postage prepaid, mailed not less than 30 days nor
more than 60 days prior to the redemption date, to each holder of record of the
shares to be redeemed at such holder's address as the same appears on the stock
register of the Corporation; provided that neither the failure to give such
notice nor any defect therein shall affect the validity of the giving of notice
for the redemption of any share of Series B Preferred Stock to be redeemed
except as to the holder to whom the Corporation has failed to give said notice
or except as to the holder whose notice was defective. Each such notice shall
state: (i) the redemption date; (ii) the number of shares of Series B Preferred
Stock to be redeemed and, if fewer than all the shares held by such holder are
to be redeemed, the number of shares to be redeemed from such holder; (iii) the
redemption price; (iv) the place or places where certificates for such shares
are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date.
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<PAGE>
(c) Notice having been mailed as aforesaid, if applicable, from and
after the redemption date, dividends on the shares of Series B Preferred Stock
so called for redemption shall cease to accrue, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price and except the right to convert shares so
called for redemption prior to the close of business on the date immediately
preceding the date fixed for such redemption) shall cease. Upon surrender in
accordance with said notice, if applicable, of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors shall so require and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
8. Conversion. (a) (i) Subject to the provisions of this Section 8,
----------
the holders of shares of Series B Preferred Stock shall have the right, at any
time in whole and from time to time in part, at such holders' option, to convert
any or all outstanding shares (and fractional shares) of Series B Preferred
Stock held by such holders into fully paid and non-assessable shares of Class A
Common Stock; 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
Designation. At any time and from time to time the outstanding shares of Series
B Preferred Stock and Series C Preferred Stock taken together shall be
convertible into a number of shares of Class A Common Stock (the "Aggregate
Conversion Shares") equal to the aggregate Liquidation Preferences of the shares
of the Series B Preferred Stock and the Series C Preferred Stock as set forth
herein and in the Series C Designation as of the date of conversion divided by
$36.50, subject to adjustment from time to time pursuant to paragraph 8(g)
hereof (the "Conversion Price"). The Series B Preferred Stock shall be
convertible into a number of shares of Class A Common Stock (the "Aggregate
Series B Conversion Shares") equal to the sum of (A) the aggregate Preference
Amounts with respect to all outstanding shares of Series B Preferred Stock
divided by the Net Realizable FMV of a share of Class A Common Stock at the time
of conversion plus (B) .375 times the excess, if any, of the Aggregate
Conversion Shares over the number determined pursuant to clause (A). Each share
of Series B Preferred Stock being converted shall convert into a number of
shares of Class A Common Stock equal to the Aggregate Series B Conversion Shares
divided by the number of shares of Series B Preferred Stock then outstanding.
Notwithstanding any call for redemption pursuant to Section 6(a), the right to
convert shares so called for redemption shall terminate at the close of business
on the date immediately preceding the date fixed for such redemption unless the
Corporation shall default in making payment of the amount payable upon such
redemption.
(ii) In the case of any partial conversion of Series B Preferred
Stock by the holders thereof, selection of the Series C Preferred Stock for
automatic conversion will be made by the Corporation in compliance with the
requirements of the principal national securities exchange, if any, on which the
Series C Preferred Stock is listed, or if the Series C Preferred Stock is not
listed on a national securities exchange, on a pro rata basis, by lot or such
other method as the Corporation, in its sole discretion, shall deem fair and
appropriate; provided, however, that the Corporation may redeem all the shares
-------- -------
held by holders of fewer than 5 shares of Series C Preferred Stock (or all of
the shares held by the holders who would hold less than
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<PAGE>
5 shares of Series C Preferred Stock as a result of such redemption) as may be
determined by the Corporation.
(b) (i) In order to exercise the conversion privilege, the holder of
the shares of Series B Preferred Stock to be converted shall surrender the
certificate representing such shares at the principal executive offices of the
Corporation, with a written notice of election to convert completed and signed,
specifying the number of shares to be converted. Unless the shares issuable on
conversion are to be issued in the same name as the name in which such shares of
Series B Preferred Stock are registered, each share surrendered for conversion
shall be accompanied by instruments of transfer, in form satisfactory to the
Corporation, duly executed by the holder or the holder's duly authorized
attorney, and an amount sufficient to pay any transfer or similar tax.
(ii) As promptly as practicable after the surrender by the holder
of the certificates for shares of Series B Preferred Stock as aforesaid, the
Corporation shall issue and shall deliver to such holder, or on the holder's
written order to the holder's transferee, (x) a certificate or certificates for
the whole number of shares of Class A Common Stock issuable upon the conversion
of such shares in accordance with the provisions of this paragraph 8, (y) any
cash adjustment required pursuant to Section 8(f), and (z) in the event of a
conversion in part, a certificate or certificates for the whole number of shares
of Series B Preferred Stock not being so converted.
(iii)Each conversion of shares of Series B Preferred Stock
pursuant to paragraph 8(a) shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for shares
of Series B Preferred Stock shall have been surrendered and such notice received
by the Corporation as aforesaid, and the person in whose name or names any
certificate or certificates for shares of Class A Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder of record of the
shares of Class A Common Stock represented thereby at such time on such date and
such conversion shall be into a number of whole shares of Class A Common Stock
in respect of the shares of Series B Preferred Stock being converted as
determined in accordance with this Section 8 at such time on such date. All
shares of Class A Common Stock delivered upon conversion of the Series B
Preferred Stock will upon delivery be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any preemptive
rights. Upon the surrender of certificates representing the shares of Series B
Preferred Stock to be converted, the shares to be so converted shall no longer
be deemed to be outstanding and all rights of a holder with respect to such
shares surrendered for conversion shall immediately terminate except the right
to receive the Class A Common Stock and other amounts payable pursuant to this
paragraph 8 and a certificate or certificates representing the shares of Series
B Preferred Stock not converted.
(c) (i) Upon delivery to the Corporation by a holder of shares of
Series B Preferred Stock of a notice of election to convert, the right of the
Corporation to redeem such shares of Series B Preferred Stock shall terminate,
regardless of whether a notice of redemption has been mailed as aforesaid.
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<PAGE>
(ii) If a holder of Series B Preferred Stock delivers to the
Corporation a certificate therefor and a notice of election to convert, the
Series B Preferred Stock to be converted shall cease to accrue dividends
pursuant to paragraph 4 but shall continue to be entitled to receive pro rata
dividends for the period from the last Dividend Payment Date to the date of
delivery of the notice of election to convert in preference to and in priority
over any dividends on any Junior Securities.
(iii)Except as provided above and in paragraph 8(g), the
Corporation shall make no payment or adjustment for accrued and unpaid dividends
on shares of Series B Preferred Stock, whether or not in arrears, on conversion
of such shares or for dividends theretofore paid on the shares of Class A Common
Stock.
(d) (i) The Corporation covenants that it will at all times reserve
and keep available, free from preemptive rights, such number of its authorized
but unissued shares of Class A Common Stock as shall be required for the purpose
of effecting conversions of the Series B Preferred Stock.
(ii) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon conversion of the Series B
Preferred Stock, the Corporation shall comply with all applicable federal and
state laws and regulations which require action to be taken by the Corporation.
(e) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Class A Common Stock on conversion of the Series B Preferred Stock pursuant
hereto; provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issue or delivery of
shares of Class A Common Stock in a name other than that of the holder of the
Series B Preferred Stock to be converted and no such issue or delivery shall be
made unless and until the person requesting such issue or delivery has paid to
the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(f) In connection with the conversion of any shares of Series B
Preferred Stock, no fractions of shares of Class A Common Stock shall be
required to be issued to the holder of such shares of Series B Preferred Stock,
but in lieu thereof the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to such fractional interest
multiplied by the Market Price per share of Class A Common Stock on the business
day next preceding the business day on which such shares of Series B Preferred
Stock are deemed to have been converted.
(g) (i) In case the Corporation shall at any time after the Issue
Date (A) declare a dividend or make a distribution on Common Stock payable in
Common Stock, (B) subdivide or split the outstanding Common Stock, (C) combine
or reclassify the outstanding Common Stock into a smaller number of shares, (D)
issue any shares of its Capital Stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Corporation is the continuing corporation), or (E)
consolidate with, or merge with or into, any other person, the Conversion Price
in effect at
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<PAGE>
the time of the record date for such dividend or distribution or on the
effective date of such subdivision, split, combination, consolidation, merger or
reclassification shall be adjusted so that the conversion of the Series B
Preferred Stock after such time shall entitle the holder to receive the
aggregate number of shares of Common Stock or other securities of the
Corporation (or other securities into which such shares of Common Stock have
been converted, exchanged, combined, consolidated, merged or reclassified
pursuant to clause 8(g)(i)(C), 8(g)(i)(D) or 8(g)(i)(E) above) which, if the
Series B Preferred Stock had been converted immediately prior to such time, such
holder would have owned upon such conversion and been entitled to receive by
virtue of such dividend, distribution, subdivision, split, combination,
consolidation, merger or reclassification. Such adjustment shall be made
successively whenever an event listed above shall occur.
(ii) In case the Corporation shall issue or sell any Common Stock
(or rights, options, warrants or other securities convertible into or
exercisable or exchangeable for shares of Common Stock) without consideration or
for a consideration per share (or having a conversion, exchange or exercise
price per share) less than the Conversion Price on the date of such issuance
(or, in the case of convertible or exchangeable or exercisable securities, less
than the Conversion Price as of the date of issuance of the rights, options,
warrants or other securities in respect of which shares of Common Stock were
issued) then, and in each such case, the Conversion Price shall be reduced to an
amount determined by multiplying (A) the Conversion Price in effect on the day
immediately prior to such date by (B) a fraction, the numerator of which shall
be the sum of (1) the number of shares of Common Stock outstanding immediately
prior to such sale or issuance multiplied by the then applicable Conversion
Price (such then applicable Conversion Price being the "Adjustment Price") and
----------------
(2) the aggregate consideration receivable by the Corporation for the total
number of shares of Common Stock so issued (or into or for which the rights,
options, warrants or other securities are convertible, exercisable or
exchangeable), and the denominator of which shall be the sum of (x) the total
number of shares of Common Stock outstanding immediately prior to such sale or
issue and (y) the number of additional shares of Common Stock issued (or into or
for which the rights, options, warrants or other securities may be converted,
exercised or exchanged), multiplied by the Adjustment Price. In case any
portion of the consideration to be received by the Corporation shall be in a
form other than cash, the fair market value of such noncash consideration shall
be utilized in the foregoing computation. Such fair market value shall be
determined in good faith by the Board of Directors.
(iii)In case the Corporation shall fix a record date for the
issuance on a pro rata basis of rights, options or warrants to the holders of
its Common Stock or other securities entitling such holders to subscribe for or
purchase shares of Common Stock (or securities convertible into or exercisable
or exchangeable for shares of Common Stock) at a price per share of Common Stock
(or having a conversion, exercise or exchange price per share of Common Stock,
in the case of a security convertible into, or exerciseable or exchangeable for,
shares of Common Stock) less than the Conversion Price on such record date, the
maximum number of shares of Common Stock issuable upon exercise of such rights,
options or warrants (or conversion of such convertible securities) shall be
deemed to have been issued and outstanding as of such record date and the
Conversion Price shall be adjusted pursuant to paragraph 8(g)(ii) hereof, as
though such maximum number of shares of Common Stock had been so issued for an
aggregate consideration payable by the holders of such rights, options, warrants
or other securities prior to their receipt of such shares of Common Stock. In
case any portion of such consideration shall be in a form other than cash, the
fair market value of such noncash
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<PAGE>
consideration shall be determined as set forth in paragraph 8(g)(ii) hereof.
Such adjustment shall be made successively whenever such record date is fixed;
and in the event that such rights, options or warrants are not so issued or
expire in whole or in part unexercised, or in the event of a change in the
number of shares of Common Stock to which the holders of such rights, options or
warrants are entitled (other than pursuant to adjustment provisions therein
comparable to those contained in this paragraph 8(g)), the Conversion Price
shall again be adjusted as follows: (A) in the event that all of such rights,
options or warrants expire unexercised, the Conversion Price shall be the
Conversion Price that would then be in effect if such record date had not been
fixed; (B) in the event that less than all of such rights, options or warrants
expire unexercised, the Conversion Price shall be adjusted pursuant to paragraph
8(g)(ii) to reflect the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants that remain outstanding (without
taking into effect shares of Common Stock issuable upon exercise of rights,
options or warrants that have lapsed or expired); and (C) in the event of a
change in the number of shares of Common Stock to which the holders of such
rights, options or warrants are entitled, the Conversion Price shall be adjusted
to reflect the Conversion Price which would then be in effect if such holder had
initially been entitled to such changed number of shares of Common Stock.
Notwithstanding anything herein to the contrary, no further adjustment to the
Conversion Price shall be made upon the issuance or sale of Common Stock upon
the exercise of any rights, options or warrants to subscribe for or purchase
Common Stock, if any adjustment in the Conversion Price was made or required to
be made upon the record date for the issuance or sale of such rights, options or
warrants under this clause 8(g)(iii).
(iv) In case the Corporation shall fix a record date for the
making of a distribution to all holders of any class of Common Stock (including
any such distribution made in connection with a consolidation or merger in which
the Corporation is the continuing corporation) of evidences of indebtedness,
assets or other property, the Conversion Price to be in effect after such record
date shall be determined by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction, (A) the numerator of which
shall be the Conversion Price immediately prior to such distributions less the
fair market value (determined as set forth in paragraph 8(g)(ii) hereof) of the
portion of the assets, other property or evidence of indebtedness so to be
distributed which is applicable to one share of Common Stock and (B) the
denominator of which shall be the Conversion Price immediately prior to such
distributions. Such adjustments shall be made successively whenever such a
record date is fixed; and in the event that such distribution is not so made,
the Conversion Price shall again be adjusted to be the Conversion Price which
would then be in effect if such record date had not been fixed. An adjustment to
the Conversion Price also shall be made in respect of dividends and
distributions paid exclusively in cash to all holders of any class of Common
Stock (excluding any dividend or distribution in connection with the
liquidation, dissolution or winding-up of the Corporation, whether voluntary or
involuntary, and any cash that is distributed upon a merger, consolidation or
other transaction for which an adjustment pursuant to paragraph 8(g)(i) is made)
where the sum of (1) all such cash dividends and distributions made within the
preceding 12 months in respect of which no adjustment has been made and (2) any
cash and the fair market value (determined as set forth in paragraph 8(g)(ii)
hereof) of other consideration paid in respect of any repurchases of Common
Stock by the Corporation or any of its subsidiaries within the preceding 12
months in respect of which no adjustment has been made, exceeds 2% of the
Corporation's market capitalization (being the product of the then Current
Market Price of the Common Stock times the aggregate number of shares of Common
Stock then outstanding on the record date for
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<PAGE>
such distribution). The Conversion Price to be in effect after such adjustment
shall be determined by subtracting from the Conversion Price in effect prior to
such adjustment an amount equal to the quotient of (A) the sum of clause (1) and
clause (2) above and (B) the number of shares of Common Stock outstanding on the
date such adjustment is to be determined.
(v) No adjustment to the Conversion Price pursuant to (a)
paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv) above shall be required unless such
adjustment would require an increase or decrease of at least $.50 in the
Conversion Price or (b) paragraph 8(g)(ii) above shall be required with respect
to rights, options, warrants or other securities outstanding on the Issue Date
or issued pursuant to the Company's employee benefit plans in effect on the
Issue Date or reserved for issuance thereunder as of the Issue Date; provided,
however, that any adjustments which by reason of paragraph 8(g)(v)(a) are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this paragraph 8(g) shall be made
by the Corporation and shall be made to the nearest four decimal points.
(vi) In the event that, at any time as a result of the provisions
of this paragraph 8(g), a holder of Series B Preferred Stock upon subsequent
conversion shall become entitled to receive any shares of Capital Stock of the
Corporation other than Common Stock, the number of such other shares so
receivable upon conversion of Series B Preferred Stock shall thereafter be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions contained herein.
(vii)If, as a result of the operation of paragraphs 8(g)(ii),
8(g)(iii) or 8(g)(iv) above and corresponding provisions in the Series C
Designation, the cumulative number of shares of Class A Common Stock issued or
issuable upon conversion of the Series B Preferred Stock and Series C Preferred
Stock, after giving effect to (x) the adjustments described in such paragraphs
and corresponding provisions in the Series C Designation and (y) all prior
conversions of the Series B Preferred Stock and Series C Preferred Stock, would
equal or exceed a number (the "Threshold Number") equal to 20% of the
outstanding shares of Class A Common Stock as of the Issue Date and if the
Company receives a written opinion of its outside counsel that the issuance of
such shares in excess of the Threshold Number would violate the rules of the
Nasdaq National Market or any other exchange on which the Class A Common Stock
is then quoted or traded, then until and unless the Corporation obtains the
approval of its common stockholders for the issuance of any such shares of Class
A Common Stock in excess of the Threshold Number, the holders shall only be
entitled to exercise their conversion rights with respect to a maximum number of
Series B and Series C Preferred Stock that would not result in an amount of
shares of Class A Common Stock being issued in excess of the Threshold Number,
but in any case, the Conversion Price shall be adjusted as provided in such
paragraphs. If, as a result of the operation of the preceding sentence, the
conversion rights of the holders of Series B Preferred Stock are limited by
operation thereof because appropriate stockholder approval has not been
obtained, the Corporation agrees for the benefit of the holders of Series B
Preferred Stock and Series C Preferred Stock to use its reasonable best efforts
to seek, as promptly as reasonably practicable, the requisite approval of its
common stockholders (and shall seek such approval as often as necessary to
obtain such approval), and will recommend to its stockholders that they vote in
favor of a resolution providing for such approval, for the amount of shares of
Class A Common Stock that would be issued or issuable upon conversion in full of
all outstanding Series B and Series C Preferred Stock. Notwithstanding anything
to the contrary set
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forth above, the holders of Series B Preferred Stock and Series C Preferred
Stock shall be entitled to exercise such holders' conversion rights in full
(after giving effect to any and all anti-dilution adjustments resulting from
operation of paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv)) in connection with any
merger, consolidation or other transaction in which such Series B Preferred
Stock, Series C Preferred Stock or Class A Common Stock is being converted into
or exchanged for cash, securities or other property in connection with such
merger, consolidation or other transaction. In the event that the Corporation
elects to redeem the shares of Series B Preferred Stock and Series C Preferred
Stock at a time when the holders' right to convert such shares into Class A
Common Stock is limited as provided in this paragraph (g), and such holders seek
to exercise such conversion rights prior to the date fixed for redemption in
accordance with this Section 8 (the "Redemption Date"), then if the total number
of shares of Class A Common Stock issued or issuable upon conversion of such
shares, after giving effect to any adjustments provided under the first sentence
of this section (the "Cumulative Number"), would exceed the Threshold Number,
the holders shall be entitled to convert such number of shares of Series B
Preferred Stock and Series C Preferred Stock into a number of shares of Class A
Common Stock up to the Threshold Number, and with respect to the balance of such
shares, the Corporation shall cancel such shares and shall pay the holders in
lieu thereof an amount in cash equal to (a)(i) the Cumulative Number minus (ii)
the Threshold Number multiplied by (b) the Market Price per share of Class A
Common Stock on the business day next preceding the business day which is deemed
the Redemption Date.
(h) All adjustments pursuant to this paragraph 8 shall be notified to
the holders of the Series B Preferred Stock and such notice shall be accompanied
by a schedule of computations of the adjustments.
9. Voting Rights. (a) The holders of record of shares of Series B
-------------
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section 9 or as otherwise provided by law.
(b) (i) On the Issue Date, the Board of Directors shall cause the
total number of directors then constituting the whole Board of Directors to be
increased by two and the holders of the outstanding shares of Series B Preferred
Stock shall be entitled to designate two directors (the "Two Designees," who
shall be designated specifically as the "First Designee" and the "Second
Designee," respectively) for election to the Board of Directors of the
Corporation and, voting separately as a series, shall have the exclusive right
to vote for the election of such designees to the Board of Directors; provided
that, notwithstanding the foregoing, after the Issue Date, (i) the holders of
the outstanding shares of the Series B Preferred Stock shall continue to be
entitled to designate two directors for election to the Board of Directors and,
voting separately as a series, shall continue to have the exclusive right to
vote for the election of such designees to the Board of Directors, for as long
as, and only for as long as, at least 40% of the shares of Series B Preferred
Stock issued on the Issue Date remains outstanding; (ii) the entitlement of the
holders of outstanding shares of Series B Preferred Stock to designate two
directors for election to the 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 designees to the Board of Directors, shall
cease immediately upon less than 40% of the shares of Series B Preferred Stock
issued on the Issue Date being outstanding, and the holders of the outstanding
shares of the Series B Preferred Stock shall be entitled to designate one
director
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<PAGE>
(the "Single Designee," who initially shall be the Second Designee continuing as
a director) for election to the Board of Directors and, voting separately as a
series, shall have the exclusive right to vote for the election
of such designee to the Board of Directors, and to designate one Board Observer
(as hereinafter defined), for as long as, and only for so long as, less than 40%
but more than 20% of the shares of Series B Preferred Stock issued on the Issue
Date remains outstanding; (iii) the entitlement of the holders of outstanding
shares of Series B Preferred Stock to designate one director for election to the
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 Board of Directors, and the exclusive right of the holders
of outstanding shares of Series B Preferred Stock to designate one Board
Observer, and the rights of such Board Observer, shall cease immediately upon
20% or less of the shares of Series B Preferred Stock issued on the Issue Date
being outstanding, and the holders of the outstanding shares of Series B
Preferred Stock shall be entitled to designate two Board Observers for as long
as, and only for as long as, 20% or less (but at least one) of the shares of
Series B Preferred Stock issued on the Issue Date remains outstanding; (iv)
immediately upon no shares of Series B Preferred Stock issued on the Issue Date
being outstanding, the entitlement of the holders of outstanding shares of
Series B Preferred Stock to designate two Board Observers, and the rights of
such Board Observers, shall cease; (v) immediately upon less than 40% but more
than 20% of the shares of Series B Preferred Stock issued on the Issue Date
being outstanding, the Board of Directors shall cause the total number of
directors then constituting the whole Board of Directors to be decreased by one,
and the term of office of the First Designee shall terminate; and (vi)
immediately upon 20% or less of the shares of Series B Preferred Stock issued on
the Issue Date being outstanding, the Board of Directors shall cause the total
number of directors then constituting the whole Board of Directors to be
decreased by one, and the term of office of the Single Designee shall terminate.
Any or all of the Two Designees and the Single Designee may be removed with or
without cause by the holders of the shares of Series B Preferred Stock. "Board
Observer" means a person who shall not be a member of the Board of Directors and
who shall have the rights as agreed to with the Corporation.
(ii) If and whenever six quarterly dividends payable on the
Series B Preferred Stock have not been paid in full or if the Corporation shall
have failed to discharge its Mandatory Redemption Obligation or the Corporation
shall have failed to comply with Section 9(d) hereof, the total number of
directors then constituting the whole Board of Directors automatically shall be
increased by one and the holders of outstanding shares of Series B Preferred
Stock, voting separately as a single series, shall be entitled to elect one
additional director to serve on the Board of Directors at any annual meeting of
stockholders or special meeting held in place thereof, or at a special meeting
of the holders of the Series B Preferred Stock called as hereinafter provided.
Whenever all arrears in dividends and Special Amounts on the Series B Preferred
Stock then outstanding shall have been paid and dividends thereon for the
current quarterly dividend period shall have been paid or declared and set apart
for payment, or the Company shall have fulfilled its Mandatory Redemption
Obligation, as the case may be, then the right of the holders of outstanding
shares of Series B Preferred Stock to elect such additional director shall cease
(but subject always to the same provisions for the vesting of such voting rights
in the case of any similar future arrearage in six quarterly dividends or
failure to fulfill any Mandatory Redemption Obligation), and the term of office
of any person elected as director by the holders of outstanding shares of Series
B Preferred Stock pursuant to this subparagraph (b)(ii) shall forthwith
terminate and the total number of directors then constituting the whole Board of
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<PAGE>
Directors automatically shall be reduced by one. At any time after voting power
to elect one additional director shall have become vested and be continuing in
the holders of outstanding shares of Series B Preferred Stock pursuant to this
subparagraph (b)(ii), or if a vacancy shall exist in the office of a director
elected by the holders of outstanding shares of Series B Preferred Stock
pursuant to this subparagraph (b)(ii), a proper officer of the Corporation may,
and upon the written request of the holders of record of at least twenty-five
percent (25%) of the shares of Series B Preferred Stock then outstanding
addressed to the Secretary of the Corporation shall, call a special meeting of
the holders of Series B Preferred Stock, for the purpose of electing the one
additional director which such holders are entitled to elect pursuant to this
subparagraph (b)(ii). If such meeting shall not be called by a proper officer of
the Corporation within twenty (20) days after personal service of said written
request upon the Secretary of the Corporation, or within twenty (20) days after
mailing the same within the United States by certified mail, addressed to the
Secretary of the Corporation at its principal executive offices, then the
holders of record of at least twenty-five percent (25%) of the outstanding
shares of Series B Preferred Stock may designate in writing one of their number
to call such meeting at the expense of the Corporation, and such meeting may be
called by the person so designated upon the notice required for the annual
meeting of stockholders of the Corporation and shall be held at the place for
holding the annual meetings of stockholders. Any holder of Series B Preferred
Stock so designated shall have, and the Corporation shall provide, access to the
lists of stockholders to be called pursuant to the provisions hereof.
(c) Without the written consent of holders of a majority of the
outstanding shares of Series B Preferred Stock or the affirmative vote of
holders of a majority of the outstanding shares of Series B Preferred Stock at a
meeting of the holders of Series B Preferred Stock called for such purpose, the
Corporation will not amend, alter or repeal any provision of the Restated
Certificate of Incorporation or this Certificate of Designation so as to
adversely affect the preferences, rights or powers of the Series B Preferred
Stock or to authorize the issuance of, or to issue any, additional shares of
Series B Preferred Stock; provided that any such amendment that changes any
dividend or other amount payable on or the liquidation preference of the Series
B Preferred Stock shall require the written consent of holders of two-thirds of
the outstanding shares of Series B Preferred Stock or the affirmative vote of
holders of two-thirds of the outstanding shares of Series B Preferred Stock at a
meeting of the holders of Series B Preferred Stock called for such purpose.
(d) Without the written consent of holders of a majority of the
outstanding shares of Series B Preferred Stock or the affirmative vote of
holders of a majority of the outstanding shares of Series B Preferred Stock at a
meeting of such holders called for such purpose, the Corporation will not
create, authorize or issue any Senior Securities.
(e) The Corporation may, without the consent of any holder of Series
B Preferred Stock, consolidate with or merge with or into, or convey, transfer
or lease all or substantially all its assets as an entirety to, any Person,
provided that: (1) the successor, transferee or lessee (if not the Corporation)
is organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia and the Series B Preferred Stock shall
be converted into or exchanged for and shall become shares of, or interests in,
such successor, transferee or lessee, having in respect of such successor,
transferee, or lessee substantially the same powers, preferences and relative,
participating, optional or other special
-16-
<PAGE>
rights and the qualifications, limitations or restrictions thereof, that the
Series B Preferred Stock has immediately prior to such transaction; and (2) the
Corporation delivers to the transfer agent an officers' certificate and an
opinion of counsel stating that such consolidation, merger, conveyance, transfer
or lease complies with this Certificate of Designation. In the event of any
consolidation or merger or conveyance, transfer or lease of all or substantially
all of the assets of the Corporation that is permitted pursuant to this
paragraph (e), the successor resulting from such consolidation or into which the
Corporation is merged or the transferee or lessee to which such conveyance,
transfer or lease is made, will succeed to, and be substituted for, and may
exercise every right and power of, the Corporation with respect to the Series B
Preferred Stock (or the shares or interests into, or for which, the Series B
Preferred Stock is converted or exchanged), and thereafter, except in the case
of a lease, the predecessor (if still in existence) shall be released from its
obligations and covenants with respect to the Series B Preferred Stock.
(f) In exercising the voting rights set forth in this paragraph 9,
each share of Series B Preferred Stock shall have one vote per share. Except as
otherwise required by applicable law or as set forth herein, the shares of
Series B Preferred Stock shall not have any relative, participating, optional or
other special voting rights and powers and the consent of the holders thereof
shall not be required for the taking of any corporate action.
10. Reports. So long as any of the Series B Preferred Stock is
-------
outstanding, in the event the Corporation is not required to file quarterly and
annual financial reports with the Securities and Exchange Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act, the Corporation will furnish
the holders of the Series B Preferred Stock with reports containing the same
information as would be required in such reports.
11. General Provisions. (a) The term "person" as used herein means
------------------
any corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
(b) The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Corporation or a
subsidiary of the Corporation.
(c) The headings of the sections, paragraphs, subparagraphs, clauses
and subclauses of this Certificate of Designation are for convenience of
reference only and shall not define, limit or affect any of the provisions
hereof.
* * *
-17-
<PAGE>
IN WITNESS WHEREOF, said McLeodUSA Incorporated has caused this
Certificate of Designations to be signed by Stephen C. Gray, its President and
Chief Operating Officer this 13th day of September, 1999.
McLEODUSA INCORPORATED
By: /s/ Stephen C. Gray
----------------------------------------------
Name: Stephen C. Gray
Title: President and Chief Operating Officer
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<PAGE>
EXHIBIT 3.7
McLEODUSA INCORPORATED
CERTIFICATE OF DESIGNATION OF THE POWERS, PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF SERIES C CONVERTIBLE
PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
McLeodUSA Incorporated (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware, does
hereby certify that, pursuant to authority conferred upon the board of directors
of the Corporation (the "Board of Directors") by the Corporation's Amended and
Restated Certificate of Incorporation, as amended (the "Restated Certificate of
Incorporation") and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware, said Board of Directors is authorized
to issue Preferred Stock of the Corporation in one or more series and the Board
of Directors has approved and adopted the following resolution on September 13,
1999 (the "Resolution"):
RESOLVED that, the Board of Directors hereby creates, authorizes
and provides for the issuance of a series of preferred stock of the
Corporation, par value $.01 per share (such preferred stock designated as
the "Series C Convertible Preferred Stock"), consisting of 125,000 shares
and having the powers, designation, preferences, relative, participating,
optional and other special rights and the qualifications, limitations and
restrictions thereof that are set forth in the Restated Certificate of
Incorporation and in this Resolution as follows:
1. Number and Designation. 125,000 shares of the Preferred Stock of
----------------------
the Corporation shall constitute a series designated as "Series C Convertible
Preferred Stock" (the "Series C Preferred Stock").
2. Definitions. Unless the context otherwise requires, when used
-----------
herein the following terms shall have the meaning indicated.
"Board of Directors" means the Board of Directors of the Corporation.
"Business Day" means any day except Saturday, Sunday and any day which
shall be a legal holiday or a day on which banking institutions in New York
City, New York generally are authorized or required by law or other governmental
actions to close.
"Capital Stock" means, with respect to any person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of such person's capital stock, whether
outstanding on the Issue Date or issued after the Issue Date, and any and all
rights (other than any evidence of indebtedness), warrants or options
exchangeable for or convertible into such capital stock.
<PAGE>
"Class A Common Stock" means the Corporation's Class A common stock,
par value $.01 per share, now or hereafter authorized to be issued, and any and
all securities of any kind whatsoever of the Corporation which may be exchanged
for or converted into Class A Common Stock, any and all securities of any kind
whatsoever of the Corporation which may be issued on or after the date hereof in
respect of, in exchange for, or upon conversion of shares of Class A Common
Stock pursuant to a merger, consolidation, stock split, stock dividend,
recapitalization of the Corporation or otherwise.
"Common Stock" means the Corporation's Class A Common Stock and any
other common stock of the Corporation.
"Current Market Price" means the average of the daily Market Prices of
the Common Stock for ten consecutive trading days immediately preceding the date
for which such value is to be computed.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute, and the rules and regulations promulgated thereunder.
"Issue Date" means the original date of issuance of shares of Series C
Preferred Stock.
"Liquidation Preference" with respect to a share of Series C Preferred
Stock means, as at any date, $2,500.00 plus an amount equal to any accrued and
unpaid dividends with respect to such share through such date.
"Market Price" means, with respect to the Common Stock, on any given
day, (i) the price of the last trade, as reported on the Nasdaq National Market,
not identified as having been reported late to such system, or (ii) if the
Common Stock is so traded, but not so quoted, the average of the last bid and
ask prices, as those prices are reported on the Nasdaq National Market, or (iii)
if the Common Stock is not listed or authorized for trading on the Nasdaq
National Market or any comparable system, the average of the closing bid and
asked prices as furnished by two members of the National Association of
Securities Dealers, Inc. selected from time to time by the Corporation for that
purpose. If the Common Stock is not listed and traded in a manner that the
quotations referred to above are available for the period required hereunder,
the Market Price per share of Common Stock shall be deemed to be the fair value
per share of such security as determined in good faith by the Board of Directors
of the Corporation.
"Net Realizable FMV" means, with respect to a share of Common Stock,
if calculable, the amount of gross proceeds net of underwriters' discounts,
commissions or other selling expenses received by or to be received by the
holder in connection with the sale of such share of Common Stock on a when
issued basis or immediately after the conversion or, in all other cases, an
amount equal to 97% of the Current Market Price of the Common Stock.
"Series B Designation" means the Certificate of Designation for the
Series B Preferred Stock.
"Series B Preferred Stock" means the Series B Cumulative Convertible
Preferred Stock, par value $.01 per share, of the Corporation.
2
<PAGE>
"Voting Stock" means, with respect to any person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such person.
3. Rank. (a) The Series B Preferred Stock and Series C Preferred
----
Stock each will, with respect to dividend rights and rights on liquidation,
winding-up and dissolution, rank (i) senior to all classes of Common Stock and
to each other class of Capital Stock of the Corporation or series of Preferred
Stock of the Corporation established hereafter by the Board of Directors of the
Corporation the terms of which 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 as to dividend rights and rights on liquidation,
winding-up and dissolution of the Corporation (collectively referred to,
together with all classes of Common Stock of the Corporation, as "Junior
Securities"); (ii) on a parity with the Corporation's 6.75% Series A Cumulative
Convertible Preferred Stock, par value $.01 per share, and with each class of
Capital Stock of the Corporation or series of Preferred Stock of the Corporation
established hereafter by the Board of Directors of the Corporation, the terms of
which expressly provide that such class or series will rank on a parity with the
Series B Preferred Stock and Series C Preferred Stock as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively referred to as
"Parity Securities"); and (iii) junior to each class of Capital Stock of the
Corporation or series of Preferred Stock of the Corporation established
hereafter by the Board of Directors of the Corporation, the terms of which
expressly provide that such class or series will rank senior to the Series B
Preferred Stock and Series C Preferred Stock as to dividend rights and rights on
liquidation, winding-up and dissolution of the Corporation (collectively
referred to as "Senior Securities"); provided that the relative powers, rights
and preferences of the Series B Preferred Stock and Series C Preferred Stock
vis-a-vis the other shall be as set forth herein and in the Series B
Designation.
(b) The respective definitions of Junior Securities, Parity
Securities and Senior Securities shall also include any warrants, rights,
options or other securities exercisable or exchangeable for or convertible into
any of the Junior Securities, Parity Securities and Senior Securities, as the
case may be.
(c) The Series C Preferred Stock shall be subject to the creation of
Junior Securities and Parity Securities.
4. Dividends. If at any time from the Issue Date through the date
---------
ending five years thereafter, the Corporation pays a dividend in cash or
property other than in shares of Capital Stock on the Common Stock then at the
same time the Corporation shall declare and pay a dividend on each share of
Series C Preferred Stock an amount equal to the Series C Per Share Participation
Amount. The "Series C Per Share Participation Amount" means, as at any date,
62.5% of the amount of dividends that would be paid with respect to the Series B
Preferred Stock and Series C Preferred Stock taken together if converted into
Common Stock on the date established as the record date with respect to such
dividend on the Common Stock divided by the number of shares of Series C
Preferred Stock then outstanding.
5. Liquidation Preference. (a) In the event of any liquidation,
----------------------
dissolution or winding-up of the Corporation, whether voluntary or involuntary,
before any payment or
3
<PAGE>
distribution of the assets of the Corporation (whether capital or surplus) shall
be made to or set apart for the holders of Junior Securities, the holders of the
shares of Series B Preferred Stock and Series C Preferred Stock taken together
shall be entitled to receive an amount in cash equal to the greater of (x) the
aggregate Liquidation Preferences (as set forth herein and in the Series B
Designation) of the shares of Series B Preferred Stock and Series C Preferred
Stock as of the date of liquidation, or (y) the aggregate amount that would have
been received with respect to the shares of Series B Preferred Stock and Series
C Preferred Stock if such stock had been converted to Common Stock immediately
prior to such liquidation, dissolution or winding-up. If, upon any liquidation,
dissolution or winding-up of the Corporation, the assets of the Corporation, or
proceeds thereof, shall be insufficient to pay in full the aforesaid amounts
under clause (x) of the preceding sentence and liquidating payments on all
Parity Securities, then such assets, or proceeds thereof, shall (i) be
distributed among the shares of Series B Preferred Stock and the Series C
Preferred Stock taken together and all such other Parity Securities ratably in
accordance with the respective amounts that would be payable on such shares of
Preferred Stock and any such other Parity Securities if all amounts payable
thereon were paid in full and (ii) the amount distributable under clause (i) to
the Series B Preferred Stock and Series C Preferred Stock taken together, shall
first be distributed to the Series B Preferred Stock until it has received an
amount equal to the aggregate Preference Amounts (as defined in the Series B
Designation) of all Series B Preferred Stock outstanding as of the date of
liquidation and thereafter 37.5% to the Series B Preferred Stock and 62.5% to
the Series C Preferred Stock. If, upon any liquidation, dissolution or winding-
up of the Corporation, the assets of the Corporation, or proceeds thereof,
distributable to the Series B Preferred Stock and Series C Preferred Stock taken
together shall be sufficient to pay in full the aforesaid amounts under clause
(x) of the first sentence of this subsection 5(a) then such amount shall first
be distributed to the Series B Preferred Stock until it has received an amount
equal to the aggregate Preference Amounts (as defined in the Series B
Designation) of all Series B Preferred Stock outstanding as of the date of
liquidation and thereafter 37.5% to the Series B Preferred Stock and 62.5% to
the Series C Preferred Stock. Any amounts distributed with respect to the Series
C Preferred Stock pursuant to this paragraph 5(a) shall be allocated pro rata
among the shares of Series C Preferred Stock. For the purposes of this paragraph
5, neither the sale, conveyance, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Corporation nor the consolidation or merger of the
Corporation with or into one or more other entities shall be deemed to be a
liquidation, dissolution or winding-up of the Corporation.
(b) Subject to the rights of the holders of any Parity Securities,
after payment shall have been made in full to the holders of the Series B
Preferred Stock and the Series C Preferred Stock taken together, as provided in
this paragraph 5, any other series or class or classes of Junior Securities
shall, subject to the respective terms and provisions (if any) applying thereto,
be entitled to receive any and all assets remaining to be paid or distributed,
and the holders of the Series C Preferred Stock, Series B Preferred Stock and
any Parity Securities shall not be entitled to share therein.
6. Redemption. (a) The Series C Preferred Stock shall not be
----------
redeemable by the Corporation prior to the seventh anniversary of the Issue
Date. On and after the seventh anniversary of the Issue Date, to the extent the
Corporation shall have funds legally available for such payment, and subject to
the rights of the holders pursuant to Section 8 hereof, the Corporation may
redeem at its option shares of Series C Preferred Stock, at any time in whole or
4
<PAGE>
from time to time in part, at a redemption price per share equal to the
Liquidation Preference as of the date fixed for redemption, without interest;
provided that the Corporation shall only be entitled to redeem shares of the
Series C Preferred Stock if shares of the Series B Preferred Stock are also
redeemed on a proportional basis based on the percentage of each series of
shares outstanding at such time.
(b) Pursuant to the Series B Designation, to the extent the
Corporation shall have funds legally available therefor, during the 180-day
period commencing on the tenth anniversary of the Issue Date, the holders of the
Series B Preferred Stock shall have the right to cause the Corporation to redeem
at any time in whole or from time to time in part outstanding shares of Series B
Preferred Stock, if any, at a redemption price per share in cash equal to the
Liquidation Preference (as set forth in the Series B Designation), without
interest; provided that upon any such election the Corporation shall be required
to redeem a proportional amount of the Series C Preferred Stock.
(c) Shares of Series C Preferred Stock which have been issued and
reacquired by the Corporation in any manner, including shares purchased or
redeemed, shall (upon compliance with any applicable provisions of the laws of
the State of Delaware) be retired and have the status of authorized and unissued
shares of the class of Preferred Stock undesignated as to series and may be
redesignated and reissued as part of any series of the Preferred Stock; provided
that no such issued and reacquired shares of Series C Preferred Stock shall be
reissued or sold as Series C Preferred Stock.
(d) If the Corporation is unable or shall fail to discharge its
obligation to redeem outstanding shares of Series B Preferred Stock and Series C
Preferred Stock pursuant to paragraph 6(b) (the "Mandatory Redemption
Obligation"), the Mandatory Redemption Obligation shall be discharged as soon as
the Corporation is able to discharge such Mandatory Redemption Obligation. If
and so long as any Mandatory Redemption Obligation with respect to the Series B
Preferred Stock and Series C Preferred Stock shall not be fully discharged, the
Corporation shall not (i) directly or indirectly, redeem, purchase, or otherwise
acquire any Parity Security or discharge any mandatory or optional redemption,
sinking fund or other similar obligation in respect of any Parity Securities or
(ii) declare or make any Junior Securities Distribution (as defined in the
Series B Designation), or, directly or indirectly, discharge any mandatory or
optional redemption, sinking fund or other similar obligation in respect of any
Junior Securities.
7. Procedure for Redemption. (a) In the event that fewer than all
------------------------
the outstanding shares of Series C Preferred Stock are to be redeemed, in the
case of Section 6(a), the number of shares to be redeemed shall be determined by
the Board of Directors and the shares to be redeemed shall be selected pro rata
(with any fractional shares being rounded to the nearest whole shares).
Notwithstanding anything in Section 6 to the contrary, the Corporation shall
only redeem shares of Series C Preferred Stock pursuant to Section 6(a) or 6(b)
on a proportional basis based on the percentage of each series of shares
outstanding at such time.
(b) In the event the Corporation shall redeem shares of Series C
Preferred Stock pursuant to Section 6(a), notice of such redemption shall be
given by first class mail, postage prepaid, mailed not less than 30 days nor
more than 60 days prior to the redemption date,
5
<PAGE>
to each holder of record of the shares to be redeemed at such holder's address
as the same appears on the stock register of the Corporation; provided that
neither the failure to give such notice nor any defect therein shall affect the
validity of the giving of notice for the redemption of any share of Series C
Preferred Stock to be redeemed except as to the holder to whom the Corporation
has failed to give said notice or except as to the holder whose notice was
defective. Each such notice shall state: (i) the redemption date; (ii) the
number of shares of Series C Preferred Stock to be redeemed and, if fewer than
all the shares held by such holder are to be redeemed, the number of shares to
be redeemed from such holder; (iii) the redemption price; (iv) the place or
places where certificates for such shares are to be surrendered for payment of
the redemption price; and (v) that dividends on the shares to be redeemed will
cease to accrue on such redemption date.
(c) Notice having been mailed as aforesaid, if applicable, from and
after the redemption date, dividends on the shares of Series C Preferred Stock
so called for redemption shall cease to accrue, and all rights of the holders
thereof as stockholders of the Corporation (except the right to receive from the
Corporation the redemption price and except the right to convert shares so
called for redemption prior to the close of business on the date immediately
preceding the date fixed for such redemption) shall cease. Upon surrender in
accordance with said notice, if applicable, of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if the Board of
Directors shall so require and the notice shall so state), such shares shall be
redeemed by the Corporation at the redemption price aforesaid. In case fewer
than all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares without cost to
the holder thereof.
8. Conversion. (a) (i) Pursuant to the provisions of the Series B
----------
Designation, the holders of shares of Series B Preferred Stock have the right,
at any time in whole and from time to time in part, at such holders' option, to
convert any or all outstanding shares (and fractional shares) of Series B
Preferred Stock held by such holders into fully paid and non-assessable shares
of Class A Common Stock. Upon the exercise by any holder of Series B Preferred
Stock of its conversion option, a proportional amount, based on the percentage
of each series of shares outstanding, of the Series C Preferred Stock shall
automatically convert into fully paid and non-assessable shares of Class A
Common Stock, subject to the provisions of this Section 8. At any time and from
time to time the outstanding shares of Series B Preferred Stock and Series C
Preferred Stock taken together shall be convertible into a number of shares of
Class A Common Stock (the "Aggregate Conversion Shares") equal to the aggregate
Liquidation Preferences of the shares of the Series B Preferred Stock and the
Series C Preferred Stock as set forth herein and in the Series B Designation as
of the date of conversion divided by $36.50, subject to adjustment from time to
time pursuant to paragraph 8(g) hereof (the "Conversion Price"). The Series C
Preferred Stock shall be convertible into a number of shares of Class A Common
Stock (the "Aggregate Series C Conversion Shares") equal to .625 times the
excess, if any, of (A) the Aggregate Conversion Shares over (B) the aggregate
Preference Amounts (as defined in the Series B Designation) with respect to all
outstanding shares of Series B Preferred Stock divided by the Net Realizable FMV
of a share of Class A Common Stock at the time of conversion. Each share of
Series C Preferred Stock being converted shall convert into a number of shares
of Class A Common Stock equal to the Aggregate Series C Conversion Shares
divided by the number of shares of Series C Preferred Stock then outstanding.
Notwithstanding any call for redemption pursuant to Section 6(a), the holders'
right to convert shares so called for
6
<PAGE>
redemption shall terminate at the close of business on the date immediately
preceding the date fixed for such redemption unless the Corporation shall
default in making payment of the amount payable upon such redemption.
(ii) In the case of any partial conversion of Series B Preferred
Stock by the holders thereof, selection of the Series C Preferred Stock for
automatic conversion will be made by the Corporation in compliance with the
requirements of the principal national securities exchange, if any, on which the
Series C Preferred Stock is listed, or if the Series C Preferred Stock is not
listed on a national securities exchange, on a pro rata basis, by lot or such
other method as the Corporation, in its sole discretion, shall deem fair and
appropriate; provided, however, that the Corporation may redeem all the shares
-------- -------
held by holders of fewer than 5 shares of Series C Preferred Stock (or all of
the shares held by the holders who would hold less than 5 shares of Series C
Preferred Stock as a result of such redemption) as may be determined by the
Corporation. The Corporation shall provide prompt written notice (including the
number of shares so converted) of the automatic conversion of shares of Series C
Preferred Stock pursuant to this paragraph 8 to the holders of record of the
shares so converted.
(b) (i) Promptly upon receipt of notice of automatic conversion of
shares of Series C Preferred Stock pursuant to paragraph 8(a) (including the
number of shares to be so converted), the holder of the shares of Series C
Preferred Stock so converted shall surrender the certificate representing such
shares at the principal executive offices of the Corporation. Unless the shares
issuable on conversion are to be issued in the same name as the name in which
such shares of Series C Preferred Stock are registered, each certificate so
surrendered shall be accompanied by instruments of transfer, in form
satisfactory to the Corporation, duly executed by the holder or the holder's
duly authorized attorney, and an amount sufficient to pay any transfer or
similar tax.
(ii) As promptly as practicable after the surrender by the
holder of the certificates for shares of Series C Preferred Stock as aforesaid,
the Corporation shall issue and shall deliver to such holder, or on the holder's
written order to the holder's transferee, (x) a certificate or certificates for
the whole number of shares of Class A Common Stock issuable upon the conversion
of such shares in accordance with the provisions of this paragraph 8, (y) any
cash adjustment required pursuant to Section 8(f), and (z) in the event of a
conversion in part, a certificate or certificates for the whole number of shares
of Series C Preferred Stock not being so converted.
(iii) Each conversion of shares of Series C Preferred Stock
pursuant to paragraph 8(a) shall be deemed to have been effected immediately
prior to the close of business on the date on which the certificates for shares
of Series B Preferred Stock shall have been surrendered and the notice of
election to convert received by the Corporation in accordance with the
procedures set forth in Section 8 of the Series B Designation, and the person in
whose name or names any certificate or certificates for shares of Class A Common
Stock shall be issuable upon such conversion shall be deemed to have become the
holder of record of the shares of Class A Common Stock represented thereby at
such time on such date and such conversion shall be into a number of whole
shares of Class A Common Stock in respect of the shares of Series C Preferred
Stock being converted as determined in accordance with this Section 8 at such
time on such date. All shares of Class A Common Stock delivered upon conversion
of the Series C
7
<PAGE>
Preferred Stock will upon delivery be duly and validly issued and fully paid and
non-assessable, free of all liens and charges and not subject to any preemptive
rights. Upon automatic conversion of shares of Series C Preferred Stock, the
shares so converted shall no longer be deemed to be outstanding and all rights
of a holder with respect to such converted shares shall immediately terminate
except the right to receive the Class A Common Stock and other amounts payable
pursuant to this paragraph 8 and a certificate or certificates representing the
shares of Series C Preferred Stock not converted.
(c) (i) Upon delivery to the Corporation by a holder of shares of
Series B Preferred Stock of a notice of election to convert, the right of the
Corporation to redeem the applicable shares of Series C Preferred Stock shall
terminate, regardless of whether a notice of redemption has been mailed as
aforesaid.
(ii) If a holder of Series B Preferred Stock delivers to the
Corporation a certificate therefor and a notice of election to convert, the
Series C Preferred Stock to be converted shall cease to accrue dividends
pursuant to paragraph 4.
(iii) Except as provided above and in paragraph 8(g), the
Corporation shall make no payment or adjustment for accrued and unpaid dividends
on shares of Series C Preferred Stock, whether or not in arrears, on conversion
of such shares or for dividends theretofore paid on the shares of Class A Common
Stock.
(d) (i) The Corporation covenants that it will at all times reserve
and keep available, free from preemptive rights, such number of its authorized
but unissued shares of Class A Common Stock as shall be required for the purpose
of effecting conversions of the Series C Preferred Stock.
(ii) Prior to the delivery of any securities which the
Corporation shall be obligated to deliver upon conversion of the Series C
Preferred Stock, the Corporation shall comply with all applicable federal and
state laws and regulations which require action to be taken by the Corporation.
(e) The Corporation will pay any and all documentary stamp or similar
issue or transfer taxes payable in respect of the issue or delivery of shares of
Class A Common Stock on conversion of the Series C Preferred Stock pursuant
hereto; provided that the Corporation shall not be required to pay any tax which
may be payable in respect of any transfer involved in the issue or delivery of
shares of Class A Common Stock in a name other than that of the holder of the
Series C Preferred Stock to be converted and no such issue or delivery shall be
made unless and until the person requesting such issue or delivery has paid to
the Corporation the amount of any such tax or has established, to the
satisfaction of the Corporation, that such tax has been paid.
(f) In connection with the conversion of any shares of Series C
Preferred Stock, no fractions of shares of Class A Common Stock shall be
required to be issued to the holder of such shares of Series C Preferred Stock,
but in lieu thereof the Corporation shall pay a cash adjustment in respect of
such fractional interest in an amount equal to such fractional interest
multiplied by the Market Price per share of Class A Common Stock on the business
day
8
<PAGE>
next preceding the business day on which such shares of Series C Preferred Stock
are deemed to have been converted.
(g) (i) In case the Corporation shall at any time after the Issue
Date (A) declare a dividend or make a distribution on Common Stock payable in
Common Stock, (B) subdivide or split the outstanding Common Stock, (C) combine
or reclassify the outstanding Common Stock into a smaller number of shares, (D)
issue any shares of its Capital Stock in a reclassification of Common Stock
(including any such reclassification in connection with a consolidation or
merger in which the Corporation is the continuing corporation), or (E)
consolidate with, or merge with or into, any other person, the Conversion Price
in effect at the time of the record date for such dividend or distribution or on
the effective date of such subdivision, split, combination, consolidation,
merger or reclassification shall be adjusted so that the conversion of the
Series C Preferred Stock after such time shall entitle the holder to receive the
aggregate number of shares of Common Stock or other securities of the
Corporation (or other securities into which such shares of Common Stock have
been converted, exchanged, combined, consolidated, merged or reclassified
pursuant to clause 8(g)(i)(C), 8(g)(i)(D) or 8(g)(i)(E) above) which, if the
Series C Preferred Stock had been converted immediately prior to such time, such
holder would have owned upon such conversion and been entitled to receive by
virtue of such dividend, distribution, subdivision, split, combination,
consolidation, merger or reclassification. Such adjustment shall be made
successively whenever an event listed above shall occur.
(ii) In case the Corporation shall issue or sell any Common Stock
(or rights, options, warrants or other securities convertible into or
exercisable or exchangeable for shares of Common Stock) without consideration or
for a consideration per share (or having a conversion, exercise or exchange
price per share) less than the Conversion Price on the date of such issuance
(or, in the case of convertible or exchangeable or exercisable securities, less
than the Conversion Price as of the date of issuance of the rights, options,
warrants or other securities in respect of which shares of Common Stock were
issued), then, and in each such case, the Conversion Price shall be reduced to
an amount determined by multiplying (A) the Conversion Price in effect on the
day immediately prior to such date by (B) a fraction, the numerator of which
shall be the sum of (1) the number of shares of Common Stock outstanding
immediately prior to such sale or issuance multiplied by the then applicable
Conversion Price (such then applicable Conversion Price being the "Adjustment
----------
Price") and (2) the aggregate consideration receivable by the Corporation for
- -----
the total number of shares of Common Stock so issued (or into or for which the
rights, options, warrants or other securities are convertible, exercisable or
exchangeable), and the denominator of which shall be the sum of (x) the total
number of shares of Common Stock outstanding immediately prior to such sale or
issue and (y) the number of additional shares of Common Stock issued (or into or
for which the rights, options, warrants or other securities may be converted,
exercised or exchanged), multiplied by the Adjustment Price. In case any portion
of the consideration to be received by the Corporation shall be in a form other
than cash, the fair market value of such noncash consideration shall be utilized
in the foregoing computation. Such fair market value shall be determined in good
faith by the Board of Directors.
(iii)In case the Corporation shall fix a record date for the
issuance on a pro rata basis of rights, options or warrants to the holders of
its Common Stock or other securities entitling such holders to subscribe for or
purchase shares of Common Stock (or securities convertible into or exercisable
or exchangeable for shares of Common Stock) at a price
9
<PAGE>
per share of Common Stock (or having a conversion, exercise or exchange price
per share of Common Stock, in the case of a security convertible into, or
exerciseable or exchangeable for, shares of Common Stock) less than the
Conversion Price on such record date, the maximum number of shares of Common
Stock issuable upon exercise of such rights, options or warrants (or conversion
of such convertible securities) shall be deemed to have been issued and
outstanding as of such record date and the Conversion Price shall be adjusted
pursuant to paragraph 8(g)(ii) hereof, as though such maximum number of shares
of Common Stock had been so issued for an aggregate consideration payable by the
holders of such rights, options, warrants or other securities prior to their
receipt of such shares of Common Stock. In case any portion of such
consideration shall be in a form other than cash, the fair market value of such
noncash consideration shall be determined as set forth in paragraph 8(g)(ii)
hereof. Such adjustment shall be made successively whenever such record date is
fixed; and in the event that such rights, options or warrants are not so issued
or expire in whole or in part unexercised, or in the event of a change in the
number of shares of Common Stock to which the holders of such rights, options or
warrants are entitled (other than pursuant to adjustment provisions therein
comparable to those contained in this paragraph 8(g)), the Conversion Price
shall again be adjusted as follows: (A) in the event that all of such rights,
options or warrants expire unexercised, the Conversion Price shall be the
Conversion Price that would then be in effect if such record date had not been
fixed; (B) in the event that less than all of such rights, options or warrants
expire unexercised, the Conversion Price shall be adjusted pursuant to paragraph
8(g)(ii) to reflect the maximum number of shares of Common Stock issuable upon
exercise of such rights, options or warrants that remain outstanding (without
taking into effect shares of Common Stock issuable upon exercise of rights,
options or warrants that have lapsed or expired); and (C) in the event of a
change in the number of shares of Common Stock to which the holders of such
rights, options or warrants are entitled, the Conversion Price shall be adjusted
to reflect the Conversion Price which would then be in effect if such holder had
initially been entitled to such changed number of shares of Common Stock.
Notwithstanding anything herein to the contrary, no further adjustment to the
Conversion Price shall be made upon the issuance or sale of Common Stock upon
the exercise of any rights, options or warrants to subscribe for or purchase
Common Stock, if any adjustment in the Conversion Price was made or required to
be made upon the record date for the issuance or sale of such rights, options or
warrants under this clause 8(g)(iii).
(iv) In case the Corporation shall fix a record date for the
making of a distribution to all holders of any class of Common Stock (including
any such distribution made in connection with a consolidation or merger in which
the Corporation is the continuing corporation) of evidences of indebtedness,
assets or other property, the Conversion Price to be in effect after such record
date shall be determined by multiplying the Conversion Price in effect
immediately prior to such record date by a fraction, (A) the numerator of which
shall be the Conversion Price immediately prior to such distribution less the
fair market value (determined as set forth in paragraph 8(g)(ii) hereof) of the
portion of the assets, other property or evidence of indebtedness so to be
distributed which is applicable to one share of Common Stock, and (B) the
denominator of which shall be the Conversion Price immediately prior to such
distribution. Such adjustments shall be made successively whenever such a record
date is fixed; and in the event that such distribution is not so made, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such record date had not been fixed. An adjustment to the
Conversion Price also shall be made in respect of dividends and distributions
paid exclusively in cash to all holders of any class of Common Stock (excluding
any dividend or
10
<PAGE>
distribution in connection with the liquidation, dissolution or winding-up of
the Corporation, whether voluntary or involuntary, and any cash that is
distributed upon a merger, consolidation or other transaction for which an
adjustment pursuant to paragraph 8(g)(i) is made) where the sum of (1) all such
cash dividends and distributions made within the preceding 12 months in respect
of which no adjustment has been made and (2) any cash and the fair market value
(determined as set forth in paragraph 8(g)(ii) hereof)of other consideration
paid in respect of any repurchases of Common Stock by the Corporation or any of
its subsidiaries within the preceding 12 months in respect of which no
adjustment has been made, exceeds 2% of the Corporation's market capitalization
(being the product of the then Current Market Price of the Common Stock times
the aggregate number of shares of Common Stock then outstanding on the record
date for such distribution). The Conversion Price to be in effect after such
adjustment shall be determined by subtracting from the Conversion Price in
effect prior to such adjustment an amount equal to the quotient of (A) the sum
of clause (1) and clause (2) above and (B) the number of shares of Common Stock
outstanding on the date such adjustment is to be determined.
(v) No adjustment to the Conversion Price pursuant to (a)
paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv) above shall be required unless such
adjustment would require an increase or decrease of at least $.50 in the
Conversion Price or (b) paragraph 8(g)(ii) above shall be required with respect
to rights, options, warrants or other securities outstanding on the Issue Date
or issued pursuant to the Company's employee benefit plans in effect on the
Issue Date or reserved for issuance thereunder as of the Issue Date; provided,
however, that any adjustments which by reason of this paragraph 8(g)(v)(a) are
not required to be made shall be carried forward and taken into account in any
subsequent adjustment. All calculations under this paragraph 8(g) shall be made
by the Corporation and shall be made to the nearest four decimal points.
(vi) In the event that, at any time as a result of the provisions
of this paragraph 8(g), a holder of Series C Preferred Stock upon subsequent
conversion shall become entitled to receive any shares of Capital Stock of the
Corporation other than Common Stock, the number of such other shares so
receivable upon conversion of Series C Preferred Stock shall thereafter be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions contained herein.
(vii)If, as a result of the operation of paragraphs 8(g)(ii),
8(g)(iii) or 8(g)(iv) above and corresponding provisions in the Series B
Designation, the cumulative number of shares of Class A Common Stock issued or
issuable upon conversion of the Series B Preferred Stock and Series C Preferred
Stock, after giving effect to (x) the adjustments described in such paragraphs
and corresponding provisions in the Series B Designation and (y) all prior
conversions of Series B Preferred Stock and Series C Preferred Stock, would
equal or exceed a number (the "Threshold Number") equal to 20% of the
outstanding shares of Class A Common Stock as of the Issue Date and if the
Company receives a written opinion of its outside counsel that the issuance of
such shares in excess of the Threshold Number would violate the rules of the
Nasdaq National Market or any other exchange on which the Class A Common Stock
is then quoted or traded, then until and unless the Corporation obtains the
approval of its common stockholders for the issuance of any such shares of Class
A Common Stock in excess of the Threshold Number, the holders shall only be
entitled to exercise their conversion rights with respect to a maximum number of
Series B and Series C Preferred Stock that would not result in
11
<PAGE>
an amount of shares of Class A Common Stock being issued in excess of the
Threshold Number, but in any case, the Conversion Price shall be adjusted as
provided in such paragraphs. If, as a result of the operation of the preceding
sentence, the conversion rights of the holders of Series C Preferred Stock are
limited by operation thereof because appropriate stockholder approval has not
been obtained, the Corporation agrees for the benefit of the holders of Series B
Preferred Stock and Series C Preferred Stock to use its reasonable best efforts
to seek, as promptly as reasonably practicable, the requisite approval of its
common stockholders (and shall seek such approval as often as necessary to
obtain such approval), and will recommend to its stockholders that they vote in
favor of a resolution providing for such approval, for the amount of shares of
Class A Common Stock that would be issued or issuable upon conversion in full of
all outstanding Series B and Series C Preferred Stock. Notwithstanding anything
to the contrary set forth above, the holders of Series B Preferred Stock and
Series C Preferred Stock shall be entitled to exercise such holders' conversion
rights in full (after giving effect to any and all anti-dilution adjustments
resulting from operation of paragraphs 8(g)(ii), 8(g)(iii) or 8(g)(iv)) in
connection with any merger, consolidation or other transaction in which such
Series B Preferred Stock, Series C Preferred Stock or Class A Common Stock is
being converted into or exchanged for cash, securities or other property in
connection with such merger, consolidation or other transaction. In the event
that the Corporation elects to redeem the shares of Series B Preferred Stock and
Series C Preferred Stock at a time when the holders' right to convert such
shares into Class A Common Stock is limited as provided in this paragraph (g),
and such holders seek to exercise such conversion rights prior to the date fixed
for redemption in accordance with this Section 8 (the "Redemption Date"), then
if the total number of shares of Class A Common Stock issued or issuable upon
conversion of such shares, after giving effect to any adjustments provided under
the first sentence of this section (the "Cumulative Number"), would exceed the
Threshold Number, the holders shall be entitled to convert such number of shares
of Series B Preferred Stock and Series C Preferred Stock into a number of shares
of Class A Common Stock up to the Threshold Number, and with respect to the
balance of such shares, the Corporation shall cancel such shares and shall pay
the holders in lieu thereof an amount in cash equal to (a)(i) the Cumulative
Number minus (ii) the Threshold Number multiplied by (b) the Market Price per
share of Class A Common Stock on the business day next preceding the business
day which is deemed the Redemption Date.
(h) All adjustments pursuant to this paragraph 8 shall be notified to
the holders of the Series C Preferred Stock and such notice shall be accompanied
by a schedule of computations of the adjustments.
9. Voting Rights. (a) The holders of record of shares of Series C
-------------
Preferred Stock shall not be entitled to any voting rights except as hereinafter
provided in this Section 9 or as otherwise provided by law.
(b) (i) So long as any shares of Series C Preferred Stock are issued
and outstanding, the holders of the Series C Preferred Stock shall be entitled
to designate one Board Observer. "Board Observer" means a person who shall not
be a member of the Board of Directors and who shall have the rights as agreed to
with the Corporation.
(ii) If and whenever the Corporation shall have failed to
discharge its Mandatory Redemption Obligation or the Corporation shall have
failed to comply with Section
12
<PAGE>
9(d) hereof, the total number of directors then constituting the whole Board of
Directors automatically shall be increased by one and the holders of outstanding
shares of Series C Preferred Stock, voting separately as a single series, shall
be entitled to elect one additional director to serve on the Board of Directors
at any annual meeting of stockholders or special meeting held in place thereof,
or at a special meeting of the holders of the Series C Preferred Stock called as
hereinafter provided. Whenever the Corporation shall have fulfilled its
Mandatory Redemption Obligation, then the right of the holders of the
outstanding shares of the Series C Preferred Stock to elect such additional
director shall cease (but subject always to the same provisions for the vesting
of such voting rights in the case of any future failure to fulfill any Mandatory
Redemption Obligation), and the term of office of any person elected as director
by the holders of outstanding shares of Series C Preferred Stock pursuant to
this subparagraph (b)(ii) shall forthwith terminate and the total number of
directors then constituting the whole Board of Directors automatically shall be
reduced by one. At any time after voting power to elect one additional director
shall have become vested and be continuing in the holders of outstanding shares
of Series C Preferred Stock pursuant to this subparagraph (b)(ii), or if a
vacancy shall exist in the office of a director elected by the holders of
outstanding shares of Series C Preferred Stock pursuant to this subparagraph
(b)(ii), a proper officer of the Corporation may, and upon the written request
of the holders of record of at least twenty-five percent (25%) of the shares of
Series C Preferred Stock then outstanding addressed to the Secretary of the
Corporation shall, call a special meeting of the holders of Series C Preferred
Stock, for the purpose of electing the one additional director which such
holders are entitled to elect pursuant to this subparagraph (b)(ii). If such
meeting shall not be called by a proper officer of the Corporation within twenty
(20) days after personal service of said written request upon the Secretary of
the Corporation, or within twenty (20) days after mailing the same within the
United States by certified mail, addressed to the Secretary of the Corporation
at its principal executive offices, then the holders of record of at least
twenty-five percent (25%) of the outstanding shares of Series C Preferred Stock
may designate in writing one of their number to call such meeting at the expense
of the Corporation, and such meeting may be called by the person so designated
upon the notice required for the annual meeting of stockholders of the
Corporation and shall be held at the place for holding the annual meetings of
stockholders. Any holder of Series C Preferred Stock so designated shall have,
and the Corporation shall provide, access to the lists of stockholders to be
called pursuant to the provisions hereof.
(c) Without the written consent of holders of a majority of the
outstanding shares of Series C Preferred Stock or the affirmative vote of
holders of a majority of the outstanding shares of Series C Preferred Stock at a
meeting of the holders of Series C Preferred Stock called for such purpose, the
Corporation will not amend, alter or repeal any provision of the Restated
Certificate of Incorporation or this Certificate of Designation so as to
adversely affect the preferences, rights or powers of the Series C Preferred
Stock or to authorize the issuance of, or to issue any, additional shares of
Series C Preferred Stock; provided that any such amendment that changes any
dividend or other amount payable on or the liquidation preference of the Series
C Preferred Stock shall require the written consent of holders of two-thirds of
the outstanding shares of Series C Preferred Stock or the affirmative vote of
holders of two-thirds of the outstanding shares of Series C Preferred Stock at a
meeting of the holders of Series C Preferred Stock called for such purpose.
13
<PAGE>
(d) Without the written consent of holders of a majority of the
outstanding shares of Series C Preferred Stock or the affirmative vote of
holders of a majority of the outstanding shares of Series C Preferred Stock at a
meeting of such holders called for such purpose, the Corporation will not
create, authorize or issue any Senior Securities.
(e) The Corporation may, without the consent of any holder of Series
C Preferred Stock, consolidate with or merge with or into, or convey, transfer
or lease all or substantially all its assets as an entirety to, any Person,
provided that: (1) the successor, transferee or lessee (if not the Corporation)
is organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia and the Series C Preferred Stock shall
be converted into or exchanged for and shall become shares of, or interests in,
such successor, transferee or lessee, having in respect of such successor,
transferee, or lessee substantially the same powers, preferences and relative,
participating, optional or other special rights and the qualifications,
limitations or restrictions thereof, that the Series C Preferred Stock has
immediately prior to such transaction; and (2) the Corporation delivers to the
transfer agent an officers' certificate and an opinion of counsel stating that
such consolidation, merger, conveyance, transfer or lease complies with this
Certificate of Designation. In the event of any consolidation or merger or
conveyance, transfer or lease of all or substantially all of the assets of the
Corporation that is permitted pursuant to this paragraph (e), the successor
resulting from such consolidation or into which the Corporation is merged or the
transferee or lessee to which such conveyance, transfer or lease is made, will
succeed to, and be substituted for, and may exercise every right and power of,
the Corporation with respect to the Series C Preferred Stock (or shares or
interests into, or for which, the Series C Preferred Stock is converted or
exchanged), and thereafter, except in the case of a lease, the predecessor (if
still in existence) shall be released from its obligations and covenants with
respect to the Series C Preferred Stock.
(f) In exercising the voting rights set forth in this paragraph 9,
each share of Series C Preferred Stock shall have one vote per share. Except as
otherwise required by applicable law or as set forth herein, the shares of
Series C Preferred Stock shall not have any relative, participating, optional or
other special voting rights and powers and the consent of the holders thereof
shall not be required for the taking of any corporate action.
10. Reports. So long as any of the Series C Preferred Stock is
-------
outstanding, in the event the Corporation is not required to file quarterly and
annual financial reports with the Securities and Exchange Commission pursuant to
Section 13 or Section 15(d) of the Exchange Act, the Corporation will furnish
the holders of the Series C Preferred Stock with reports containing the same
information as would be required in such reports.
11. General Provisions. (a) The term "person" as used herein means
------------------
any corporation, limited liability company, partnership, trust, organization,
association, other entity or individual.
(b) The term "outstanding", when used with reference to shares of
stock, shall mean issued shares, excluding shares held by the Corporation or a
subsidiary of the Corporation.
14
<PAGE>
(c) The headings of the sections, paragraphs, subparagraphs, clauses
and subclauses of this Certificate of Designation are for convenience of
reference only and shall not define, limit or affect any of the provisions
hereof.
* * *
15
<PAGE>
IN WITNESS WHEREOF, said McLeodUSA Incorporated has caused this
Certificate of Designations to be signed by Stephen C. Gray, its President and
Chief Operating Officer this 13th day of September, 1999.
McLEODUSA INCORPORATED
By: /s/ Stephen C. Gray
-----------------------------------------------
Name: Stephen C. Gray
Title: President and Chief Operating Officer
16
<PAGE>
EXHIBIT 4.22
FORM OF SERIES B PREFERRED STOCK
FACE OF SECURITY
Series B Preferred Stock Series B Preferred Stock
Number Shares
[B- ] [ ]
Incorporated under the
laws of the State of Delaware CUSIP NO.: 582266 30 0
Series B Cumulative Convertible Preferred Stock
(par value $0.01 per share)
(liquidation preference $2,500.00 per share)
of McLeodUSA Incorporated
McLeodUSA Incorporated, a Delaware corporation (the "Company"), hereby certifies
that [ ] (the "Holder") is the registered owner of fully paid and
non-assessable preferred securities of the Company designated the Series B
Cumulative Convertible Preferred Stock (par value $0.01 per share) (liquidation
preference $2,500.00 per share) (the "Series B Preferred Stock"). The shares of
Series B Preferred Stock are transferable on the books and records of the
Registrar, in person or by a duly authorized attorney, upon surrender of this
certificate duly endorsed and in proper form for transfer. The designations,
rights, privileges, restrictions, preferences and other terms and provisions of
the Series B Preferred Stock represented hereby are issued and shall in all
respects be subject to the provisions of the Certificate of Designation of the
Powers, Preferences and Relative, Participating, Optional and other Special
Rights of Series B Cumulative Convertible Preferred Stock and Qualifications,
Limitations and Restrictions thereof dated September 13, 1999, as the same may
be amended from time to time (the "Certificate of Designation"). Capitalized
terms used herein but not defined shall have the meaning given them in the
Certificate of Designation. The Company will provide a copy of the Certificate
of Designation to a Holder without charge upon written request to the Company at
its principal place of business.
Reference is hereby made to select provisions of the Series B Preferred Stock
set forth on the reverse hereof, and to the Certificate of Designation, which
select provisions and the Certificate of Designation shall for all purposes have
the same effect as if set forth at this place.
Upon receipt of this certificate, the Holder is bound by the Certificate of
Designation and is entitled to the benefits thereunder.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Company has executed this certificate this [
] day of [ ], [ ].
McLEODUSA INCORPORATED
By ____________________
Name:
Title: [Seal]
By ___________________
Name:
Title:
<PAGE>
REVERSE OF SECURITY
Dividends on each share of Series B Preferred Stock evidenced by this
certificate shall be payable in cash at a rate per annum as provided in the
Certificate of Designation
The shares of Series B Preferred Stock evidenced by this certificate shall be
redeemable as provided in the Certificate of Designation and the Company's
Amended and Restated Certificate of Incorporation. The shares of Series B
Preferred Stock evidenced by this certificate shall be convertible into the
Company's Class A Common Stock in the manner and according to the terms set
forth in the Certificate of Designation.
The company is authorized to issue more than one class or series of stock. As
required under Delaware law, the Company shall furnish to any Holder upon
request and without charge, a full summary statement of the designations, voting
rights, preferences, limitations and special rights of the shares of each class
or series authorized to be issued by the Company so far as they have been fixed
and determined and the authority of the Board of Directors to fix and determine
the designations, voting rights, preferences, limitations and special rights of
the classes and series of securities of the Company.
The shares of Series B Preferred Stock represented by this certificate have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
or under any applicable state laws. The shares of Series B Preferred Stock
represented by this certificate have been acquired by the registered owner
hereof for investment and not with a view to or for sale in connection with any
distribution thereof within the meaning of the 1933 Act. The shares may not be
sold, pledged, transferred or assigned except in a transaction which is exempt
under the provisions of the 1933 Act or any applicable state securities laws, or
pursuant to an effective registration statement or in a transaction otherwise in
compliance with applicable federal and state securities laws.
The sale, pledge, transfer, assignment or other disposition of the shares of
Series B Preferred Stock represented by this certificate is restricted by and
subject to the provisions of a Stock Purchase Agreement dated as of August 30,
1999, a copy of which is available upon request for inspection at the offices of
the Company. Any such request should be addressed to the Secretary of the
Company.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned sells, assigns and transfers the shares of
Series B Preferred Stock evidenced hereby to:__________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert assignee's social security or tax identification number)_______________
_______________________________________________________________________________
_______________________________________________________________________________
(Insert address and zip code of assignee) and irrevocably appoints:____________
_______________________________________________________________________________
_______________________________________________________________________________
agent to transfer the shares of Series B Preferred Stock evidenced hereby on the
books of the Corporation with full power of substitution in the premises.
Date:_________________________________
Signature:____________________________
(Sign exactly as your name appears on the other side of this Series B Preferred
Stock Certificate) Signature Guarantee:/1/
/1/ (Signature should be guaranteed by an "eligible guarantor institution," that
is, a bank, stockbroker, savings and loan association or credit union with
membership in an approved signature guarantee medallion program, pursuant to SEC
Rule 17Ad-15.)
<PAGE>
EXHIBIT 4.23
FORM OF SERIES C PREFERRED STOCK
FACE OF SECURITY
Series C Preferred Stock Series C Preferred Stock
Number Shares
[C- ] [ ]
Incorporated under the
laws of the State of Delaware CUSIP NO.: 582266 40 9
Series C Convertible Preferred Stock
(par value $0.01 per share)
(liquidation preference $2,500.00 per share)
of McLeodUSA Incorporated
McLeodUSA Incorporated, a Delaware corporation (the "Company"), hereby certifies
that [ ] (the "Holder") is the registered owner of fully paid and
non-assessable preferred securities of the Company designated the Series C
Convertible Preferred Stock (par value $0.01 per share) (liquidation preference
$2,500.00 per share) (the "Series C Preferred Stock"). The shares of Series C
Preferred Stock are transferable on the books and records of the Registrar, in
person or by a duly authorized attorney, upon surrender of this certificate duly
endorsed and in proper form for transfer. The designations, rights, privileges,
restrictions, preferences and other terms and provisions of the Series C
Preferred Stock represented hereby are issued and shall in all respects be
subject to the provisions of the Certificate of Designation of the Powers,
Preferences and Relative, Participating, Optional and other Special Rights of
Series C Convertible Preferred Stock and Qualifications, Limitations and
Restrictions thereof dated September 13, 1999, as the same may be amended from
time to time (the "Certificate of Designation"). Capitalized terms used herein
but not defined shall have the meaning given them in the Certificate of
Designation. The Company will provide a copy of the Certificate of Designation
to a Holder without charge upon written request to the Company at its principal
place of business.
Reference is hereby made to select provisions of the Series C Preferred Stock
set forth on the reverse hereof, and to the Certificate of Designation, which
select provisions and the Certificate of Designation shall for all purposes have
the same effect as if set forth at this place.
Upon receipt of this certificate, the Holder is bound by the Certificate of
Designation and is entitled to the benefits thereunder.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Company has executed this certificate this [
] day of [ ], [ ].
McLEODUSA INCORPORATED
By ____________________
Name:
Title: [Seal]
By ___________________
Name:
Title:
<PAGE>
REVERSE OF SECURITY
The shares of Series C Preferred Stock evidenced by this certificate shall be
redeemable as provided in the Certificate of Designation and the Company's
Amended and Restated Certificate of Incorporation. The shares of Series C
Preferred Stock evidenced by this certificate shall be convertible into the
Company's Class A Common Stock in the manner and according to the terms set
forth in the Certificate of Designation.
The company is authorized to issue more than one class or series of stock. As
required under Delaware law, the Company shall furnish to any Holder upon
request and without charge, a full summary statement of the designations, voting
rights, preferences, limitations and special rights of the shares of each class
or series authorized to be issued by the Company so far as they have been fixed
and determined and the authority of the Board of Directors to fix and determine
the designations, voting rights, preferences, limitations and special rights of
the classes and series of securities of the Company.
The shares of Series C Preferred Stock represented by this certificate have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
or under any applicable state laws. The shares of Series C Preferred Stock
represented by this certificate have been acquired by the registered owner
hereof for investment and not with a view to or for sale in connection with any
distribution thereof within the meaning of the 1933 Act. The shares may not be
sold, pledged, transferred or assigned except in a transaction which is exempt
under the provisions of the 1933 Act or any applicable state securities laws, or
pursuant to an effective registration statement or in a transaction otherwise in
compliance with applicable federal and state securities laws.
The sale, pledge, transfer, assignment or other disposition of the shares of
Series C Preferred Stock represented by this certificate is restricted by and
subject to the provisions of a Stock Purchase Agreement dated as of August 30,
1999, a copy of which is available upon request for inspection at the offices of
the Company. Any such request should be addressed to the Secretary of the
Company.
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned sells, assigns and transfers the shares of
Series C Preferred Stock evidenced hereby to:_________________________________
______________________________________________________________________________
______________________________________________________________________________
(Insert assignee's social security or tax identification number)______________
______________________________________________________________________________
______________________________________________________________________________
(Insert address and zip code of assignee) and irrevocably appoints:___________
______________________________________________________________________________
______________________________________________________________________________
agent to transfer the shares of Series C Preferred Stock evidenced hereby on the
books of the Corporation with full power of substitution in the premises.
Date:_________________________________
Signature:____________________________
(Sign exactly as your name appears on the other side of this Series C Preferred
Stock Certificate) Signature Guarantee:/1/_____________________________________
/1/ (Signature should be guaranteed by an "eligible guarantor institution," that
is, a bank, stockbroker, savings and loan association or credit union with
membership in an approved signature guarantee medallion program, pursuant to SEC
Rule 17Ad-15.)
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Form S-4 Registration Statement of our
McLeodUSA Incorporated reports dated January 27, 1999, (except with respect to
the matter discussed in Note 16, as to which the date is March 5, 1999) and to
all references to our Firm included in or made a part of this Registration
Statement.
Chicago, Illinois
January 31, 2000
<PAGE>
Exhibit 23.4
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of McLeodUSA
Incorporated for the registration of 33,275,152 shares of its Class A Common
Stock and to the incorporation by reference therein of our report dated
February 26, 1999, with respect to the consolidated financial statements of
Ovation Communications, Inc. as of December 31, 1998 and 1997 and for the
period from March 27, 1997 (inception) to December 31, 1997 and the year ended
December 31, 1998, included in the Registration Statement on Form S-4
(No. 333-71811) of McLeodUSA Incorporated filed with the Securities and
Exchange Commission.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 1, 2000
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-4 of McLeodUSA Incorporated of our reports dated March 24,
1999, except as to the reverse stock split described in Note 12 which is as of
July 12, 1999, relating to the financial statements and financial statement
schedule appearing in Splitrock Services, Inc.'s Registration Statement on Form
S-1 (No. 333-79909), as amended. We also consent to the reference to us under
the headings "Experts" and "Selected Financial Data of Splitrock" in this
Registration Statement.
PricewaterhouseCoopers LLP
Houston, Texas
January 31, 2000
<PAGE>
Exhibit 23.6
[Salomon Smith Barney Letterhead]
CONSENT OF SALOMON SMITH BARNEY INC.
We hereby consent to the use of our name in, to the description of our opinion
letter under the caption "Opinion of the McLeodUSA Financial Advisor" in, and to
the inclusion of our opinion letter as Appendix E to, the Joint Proxy
Statement/Prospectus that is made a part of the Registration Statement on Form
S-4 (File Number 33-___________) of McLeodUSA Incorporated. By giving such
consent we do not thereby admit that we are experts with respect to any part of
such Registration Statement within the meaning of the term "expert" as used in,
or that we come within the category of persons whose consent is required under,
the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission promulgated thereunder.
Salomon Smith Barney Inc.
By: /s/ Tom King
---------------------------------
Managing Director
New York, New York
Dated: January 31, 2000
<PAGE>
EXHIBIT 23.7
Board of Directors
Splitrock Service, Inc.
9012 New Trails Drive
The Woodlands, Texas 77381
Members of the Board:
We hereby consent to the inclusion and our opinion letter to the Board
of Directors of Splitrock Services, Inc. ("Splitrock") as Appendix F to the
Joint Proxy Statement/Prospectus of Splitrock and McLeodUSA Incorporated
("McLeodUSA") relating to the proposed merger involving Splitrock and McLeodUSA
and references thereto in such Joint Proxy Statement/Prospectus under the
captions "SUMMARY--Opinions of Financial Advisors" and "THE MERGER--Opinion of
the Splitrock Financial Advisor." In giving such consent, we do not admit that
we come within the category of persons whose consent is required under, and we
do not admit that we are "experts" for purposes of, the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
By: /s/ Credit Suisse First Boston Corporation
------------------------------------------
CREDIT SUISSE FIRST BOSTON CORPORATION
New York, New York
February 1, 2000
