<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 19, 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)
<TABLE>
<S><C>
DELAWARE 4813 42-1407240
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
---------------
MCLEODUSA TECHNOLOGY PARK
6400 C STREET SW, P.O. BOX 3177
CEDAR RAPIDS, IA 52406-3177
(319) 790-7775
(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) 790-7800
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
COPIES TO:
<TABLE>
<S><C>
JOSEPH G. CONNOLLY, JR., ESQ. ROBERT I. TOWNSEND, III, ESQ. A. MICHAEL HAINSFURTHER, ESQ.
JAMES G. MCMILLAN, ESQ. CRAVATH, SWAINE & MOORE MUNSCH HARDT KOPF & HARR, PC
HOGAN & HARTSON L.L.P. 825 EIGHTH AVENUE 4000 FOUNTAIN PLACE
555 13TH STREET, N.W. NEW YORK, NEW YORK 10019 1445 ROSS AVENUE
WASHINGTON, D.C. 20004 (212) 474-1000 DALLAS, TEXAS 75202
(202) 637-5600 (214) 855-7500
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after the effectiveness of this Registration Statement and
certain other conditions under the merger agreement are met or waived.
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
<TABLE>
<CAPTION>
======================================== ================== ===================== ===================== =============
Title of each class of Amount to be Proposed maximum Proposed maximum Amount of
securities to be registered registered offering price per aggregate offering registration
unit (1) price (1) fee
---------------------------------------- ------------------ --------------------- --------------------- -------------
<S> <C> <C> <C> <C>
12% Senior Notes Due 2008 $150,000,000 100% $150,000,000 $39,600
11 1/2% Senior Notes Due 2009 $210,000,000 100% $210,000,000 $55,440
======================================== ================== ===================== ===================== =============
</TABLE>
(1)Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933, as amended.
---------------
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>
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The
first prospectus relates to an offer by McLeodUSA Incorporated to exchange
McLeodUSA 12% senior notes due 2008 for all outstanding CapRock Communications
Corp. 12% senior notes due 2008. The second prospectus relates to a concurrent
offer by McLeodUSA Incorporated to exchange McLeodUSA 11 1/2% senior notes due
2009 for all outstanding CapRock Communications Corp. 11 1/2% senior notes due
2009. Final forms of each prospectus will be filed with the Securities and
Exchange Commission under Rule 424(b).
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not issue these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated October 19, 2000
PROSPECTUS LOGO
$210,000,000
McLeodUSA Incorporated
Offer To Exchange
McLeodUSA 11 1/2% Senior Notes Due May 1, 2009
For All Outstanding
CapRock Communications Corp. 11 1/2% Senior Notes Due May 1, 2009
Interest Payable May 1 and November 1, Commencing May 1, 2001
Material Terms of the Exchange Offer
- We are offering to exchange all outstanding CapRock 11 1/2% senior notes
due May 1, 2009 that are validly tendered and not validly withdrawn for an
equal amount of a new series of McLeodUSA 11 1/2 % senior notes due May 1,
2009.
- The exchange offer will expire at 5:00 P.M., New York City time, on
November ___, 2000, unless extended.
- We will accept the CapRock notes for exchange only if holders of at
least a majority of the aggregate principal amount of the CapRock notes
have consented to certain amendments to the indenture governing the
CapRock notes and if the merger of CapRock with a wholly-owned
subsidiary of McLeodUSA is consummated.
- The exchange offer is further subject to customary conditions, including
that the exchange offer not violate applicable law.
- You may withdraw the tender of your CapRock notes at any time before the
expiration of the exchange offer.
- We will not receive any proceeds from the exchange offer.
- You may tender your CapRock notes only in denominations of $1,000 and
multiples of $1,000.
- The exchange of notes should not result in recognition of gain or loss
to exchanging noteholders for U.S. federal income tax purposes.
PLEASE SEE ''RISK FACTORS'' BEGINNING ON PAGE 17 FOR A DISCUSSION OF FACTORS
YOU SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
WE ARE NOT MAKING THIS EXCHANGE OFFER IN ANY STATE OR JURISDICTION WHERE IT IS
NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER,
NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is October ___, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary.......................................................................................... 1
Risk Factors..................................................................................... 17
Cautionary Note Regarding Forward-Looking Statements............................................. 25
The Exchange Offer............................................................................... 26
Use of Proceeds.................................................................................. 36
Information About McLeodUSA...................................................................... 37
Selected Consolidated Financial Data of McLeodUSA................................................ 40
Pro Forma Financial Data......................................................................... 44
Description of the McLeodUSA Notes............................................................... 49
Other McLeodUSA Indebtedness..................................................................... 82
Information About CapRock........................................................................ 84
Selected Consolidated Financial Data of CapRock.................................................. 86
Description of the CapRock Notes................................................................. 89
Legal Matters.................................................................................... 125
Experts.......................................................................................... 125
Where You Can Find More Information.............................................................. 126
Index to Consolidated Financial Statements of Splitrock Services, Inc............................ F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT MAKING AN OFFER
TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS PROSPECTUS
IS ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS. OUR
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE
CHANGED SINCE THAT DATE.
WE HAVE NOT TAKEN NOR WILL WE TAKE ANY ACTION IN ANY JURISDICTION TO PERMIT
A PUBLIC OFFERING OF THE MCLEODUSA NOTES OR THE POSSESSION OR DISTRIBUTION OF
THIS PROSPECTUS OTHER THAN IN THE UNITED STATES.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN OR DELIVERED WITH THIS PROSPECTUS. THIS INFORMATION IS AVAILABLE TO YOU
WITHOUT CHARGE UPON YOUR ORAL OR WRITTEN REQUEST. YOUR REQUESTS SHOULD BE
DIRECTED TO MCLEODUSA INCORPORATED, MCLEODUSA TECHNOLOGY PARK, 6400 C STREET SW,
POST OFFICE BOX 3177, CEDAR RAPIDS, IOWA 52406-3177, ATTENTION: GENERAL COUNSEL
(TELEPHONE (319) 790-7775). IN ORDER TO ENSURE DELIVERY OF THE DOCUMENTS IN
ADVANCE OF THE EXPIRATION OF THE EXCHANGE OFFER, ANY REQUEST SHOULD BE MADE AT
LEAST FIVE BUSINESS DAYS PRIOR TO THE DATE OF SUCH EXPIRATION.
<PAGE>
SUMMARY
THIS DOCUMENT IS A PROSPECTUS OF MCLEODUSA. THIS SUMMARY HIGHLIGHTS
SELECTED INFORMATION FROM THIS PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS ENTIRE
PROSPECTUS AND THE OTHER DOCUMENTS TO WHICH THIS DOCUMENT REFERS YOU, INCLUDING
THE LETTER OF TRANSMITTAL. IN ADDITION, YOU SHOULD CAREFULLY CONSIDER THE
FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS." SEE "WHERE YOU CAN FIND MORE
INFORMATION."
THE COMPANIES
MCLEODUSA INCORPORATED
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 790-7800
McLeodUSA provides selected telecommunications services to customers
nationwide. We provide integrated communications services, including local
services, in many Midwest and Rocky Mountain states and long distance and
advanced data services in all 50 states. We are a facilities-based
telecommunications provider with 361 ATM switches, 37 voice switches, nearly
824,000 local lines and more than 9,000 employees. We expanded our marketplace
for advanced data and Internet services to all 50 states through our March 30,
2000 acquisition of Splitrock Services, Inc. The network acquired in the
Splitrock transaction is capable of transmitting integrated next-generation
data, video and voice services reaching 800 cities and 90% of the U.S.
population. In the next 12 months, we plan to distribute 30 million telephone
directories in 26 states, serving a population of 52 million. We are a
Nasdaq-100 company traded under the symbol "MCLD."
We offer local, long distance, Internet access, data, voice mail and paging
services from a single company on a single bill. We believe we are the first
company in many of our markets to offer one-stop shopping for communications
services tailored to customers' specific needs.
Our core business is providing communications services in competition with
existing local telephone companies, including:
- local and long distance services
- dial and dedicated Internet access
- higher bandwidth Internet access 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
- facilities and services dedicated for a particular customer's use
- telephone and computer sales, leasing, networking, service and
installation
- other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
We also derive revenue from the following services related to our core business:
- sale of advertising in print and electronic telephone directories
- traditional local telephone company services in east central Illinois
and southeast South Dakota
- telemarketing 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 facilities and by leasing capacity from others. We are actively developing
fiber optic communications networks in many of our target local markets to carry
additional communications traffic on our own network. We are actively developing
enhancements to our national network and associated next-generation services.
CAPROCK COMMUNICATIONS CORP.
15601 Dallas Parkway, Suite 700
Dallas, Texas 75001
(972) 982-9596
CapRock is a facilities-based integrated communications service provider
primarily to small and medium-sized business and communications carrier
customers in the Southwestern United States. CapRock offers business customers
an integrated
1
<PAGE>
bundle of communications products and services including local
exchange, domestic and international long distance, enhanced voice, data,
Internet, DSL and dedicated private line services. Additionally, CapRock offers
its communications-intensive business and carrier customers dark fiber, high
bandwidth dedicated fiber infrastructure, terminating access for domestic and
international long distance and ATM, frame relay and IP data transport services.
CapRock's communications services are provided through resale and over its
fiber, voice and data networks. As of June 30, 2000, the CapRock network covered
approximately 4,500 route miles (including 22 metro fiber loops in key markets).
Additionally, as of June 30, 2000, CapRock provided switch-based competitive
local exchange services in 13 markets. As of June 30, 2000, CapRock had 12 voice
and 17 data switches installed and operational on its network.
THE MERGER
On October 2, 2000, CapRock and McLeodUSA entered into a definitive agreement
and plan of merger pursuant to which McLeodUSA, through a newly-formed,
wholly-owned subsidiary, will acquire 100% of the voting securities of CapRock.
In the transaction, each share of CapRock common stock will be exchanged for
0.3876 of a share of McLeodUSA Class A common stock. The merger agreement
provides that the McLeodUSA subsidiary will merge with and into CapRock so that
CapRock will be the surviving corporation and will be wholly-owned by McLeodUSA.
In connection with the proposed merger, McLeodUSA has agreed to file and use its
commercially reasonable efforts to cause to become effective with the SEC a
registration statement with respect to the exchange of the CapRock 12% senior
notes due 2008 for McLeodUSA 12% senior notes due 2008, and with respect to the
exchange of the CapRock 11 1/2% senior notes due 2009 for McLeodUSA 11 1/2%
senior notes due 2009.
2
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
THE EXCHANGE OFFER...................... We are offering to exchange $1,000
principal amount of McLeodUSA 11 1/2%
senior notes due May 1, 2009, which
we refer to as the McLeodUSA notes,
for each $1,000 principal amount of
CapRock's outstanding 11 1/2% senior
notes due May 1, 2009, which we
refer to as the CapRock notes.
In order for your CapRock notes to
be exchanged, you must properly
tender them before the exchange
offer expires. All CapRock notes
that are validly tendered and not
validly withdrawn will be
exchanged. We will issue the
McLeodUSA notes promptly after the
exchange offer expires.
You may tender your CapRock notes
for exchange in whole or in part in
integral multiples of $1,000
principal amount.
THE MERGER AGREEMENT.................... In connection with the proposed
merger of CapRock with a
wholly-owned subsidiary of
McLeodUSA, we have agreed to file
and to use our commercially
reasonable efforts to cause to
become effective with the SEC a
registration statement with respect
to the exchange of the CapRock
notes for McLeodUSA notes. We are
making the exchange offer to
satisfy our contractual obligations
under the merger agreement. After
the exchange offer is completed,
you will no longer be entitled to
any exchange with respect to your
CapRock notes.
CONSEQUENCES OF FAILURE TO
EXCHANGE YOUR CAPROCK NOTES.............. Any CapRock notes that are not
tendered to us or are not accepted
for exchange will remain
outstanding and will continue to
accrue interest in accordance with
and otherwise be entitled to all of
the rights and privileges under the
indenture governing the CapRock
notes. CapRock is soliciting
consents, however, to amend this
indenture to, among other things,
eliminate most of the restrictive
covenants and reporting
requirements contained in the
indenture. If CapRock obtains the
requisite number of consents from
the CapRock noteholders, the
indenture will be so amended and
the holders of any CapRock notes
that remain outstanding after the
offer has been completed will be
without the protection that the
deleted restrictive covenants and
reporting requirements gave them.
The receipt by CapRock of the
requisite consents to approve the
amendments to the indenture is a
condition to the consummation of
the exchange offer. See "The
Exchange Offer--Consent
Solicitation; Consequences of
Failure to Tender Your CapRock
Notes."
EXPIRATION DATE......................... The exchange offer will expire at
5:00 p.m., New York City time, on
November ___, 2000 unless extended
by us, in which case the term
"expiration date" will mean the
latest date and time to which the
exchange offer is extended. See
"The Exchange Offer--Expiration
Date; Extensions; Amendments."
3
<PAGE>
CONDITIONS TO THE EXCHANGE
OFFER................................... The exchange offer is subject to
the conditions that:
- CapRock receives the consent of
the holders of at least a
majority of the aggregate
principal amount of the CapRock
notes to certain amendments to
the indenture governing the
CapRock notes
- the proposed merger of CapRock
with a wholly-owned subsidiary
of McLeodUSA is consummated
The exchange offer is further
subject to several customary
conditions which we may waive. There
is no guarantee that these
conditions will be satisfied.
The exchange offer is not
conditioned upon any minimum
principal amount of CapRock notes
being tendered for exchange. See
"The Exchange Offer--Conditions to
the Exchange Offer."
We reserve the right, subject to
applicable law, at any time and from
time to time:
- to delay the acceptance of the
CapRock notes
- to terminate the exchange offer
if specified conditions have
not been satisfied
- to extend the expiration date
of the exchange offer and
retain all tendered CapRock
notes subject, however, to the
right of tendering holders to
withdraw their tender of
CapRock notes
- to waive any condition or
otherwise amend the terms of
the exchange offer in any
respect
See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
PROCEDURES FOR TENDERING
CAPROCK NOTES........................... If you wish to tender your CapRock
notes for exchange, you must:
- complete and sign a Letter of
Transmittal according to the
instructions contained in the
Letter of Transmittal
- forward the Letter of
Transmittal by mail, facsimile
transmission or hand delivery,
together with any other
required documents, to the
exchange agent, either with the
CapRock notes that you tender
or in compliance with the
specified procedures for
guaranteed delivery of your
CapRock notes
Some brokers, dealers, commercial
banks, trust companies and other
nominees may also effect tenders by
book-entry transfer. Please do not
send your Letter of Transmittal or
certificates representing your
CapRock notes to us. You should send
those documents only to the exchange
agent. You should direct any
information requests or questions
regarding how to tender your CapRock
notes to the exchange agent. See
"The Exchange Offer--Exchange
Agent."
4
<PAGE>
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.................................. If your CapRock notes are
registered in the name of a broker,
dealer, commercial bank, trust
company or other nominee, we urge
you to contact such person promptly
if you wish to tender your CapRock
notes pursuant to the exchange
offer. See "The Exchange
Offer--Procedures for Tendering
CapRock Notes."
WITHDRAWAL RIGHTS....................... You may withdraw the tender of your
CapRock notes at any time before
the expiration date by delivering a
written notice of your withdrawal
to the exchange agent according to
the withdrawal procedures described
under the heading "The Exchange
Offer--Withdrawal Rights."
EXCHANGE AGENT.......................... The exchange agent for the exchange
offer is United States Trust
Company of New York. The address,
telephone number and facsimile
number of the exchange agent are
set forth in "The Exchange
Offer--Exchange Agent" and in the
Letter of Transmittal.
USE OF PROCEEDS......................... We will not receive any cash
proceeds from the issuance of the
McLeodUSA notes offered by this
prospectus. See "Use of Proceeds."
UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES........................ Your acceptance of the exchange
offer and the related exchange of
your CapRock notes for McLeodUSA
notes should not cause you to
recognize any taxable gain or loss
for federal income tax purposes.
See "The Exchange Offer--United
States Federal Income Tax
Consequences."
CONSENT SOLICITATION..................... On October 11, 2000, CapRock
commenced a solicitation of
consents from the holders of the
CapRock notes to amend the
indenture under which the CapRock
notes were issued to:
- modify certain restrictive
covenants contained in the
indenture in order to permit
the merger of CapRock with a
wholly-owned subsidiary of
McLeodUSA
- allow the merger of CapRock and
the McLeodUSA subsidiary to be
consummated without triggering
the change of control
provisions of the indenture
- eliminate most of the
restrictive covenants and
reporting requirements
contained in the indenture
CONCURRENT EXCHANGE OFFER................ Concurrently with this exchange
offer and by a separate prospectus,
we are offering to exchange our 12%
senior notes due 2008 for CapRock's
12% senior notes due 2008. The
completion of the exchange offer
contemplated by this prospectus and
the concurrent offering of our 12%
senior notes due 2008 are not
dependent on one another.
See "The Exchange Offer" for more detailed information concerning the terms of
the exchange offer.
5
<PAGE>
SUMMARY OF TERMS OF THE MCLEODUSA NOTES
The exchange offer relates to the exchange of up to $210,000,000 principal
amount of McLeodUSA 11 1/2 % senior notes due May 1, 2009 for up to an equal
principal amount of CapRock 11 1/2 % senior notes due May 1, 2009.
SECURITIES OFFERED...................... $210 million principal amount of
McLeodUSA 11 1/2% senior notes due
MaY 1, 2009.
INTEREST................................ Interest on the McLeodUSA notes
will accrue at the rate of 11 1/2%
per year and will be payable in
cash semi-annually in arrears on
May 1 and November 1, commencing
May 1, 2001. Interest on the
McLeodUSA notes will be deemed to
accrue from November 1, 2000.
RANKING................................. The McLeodUSA notes will not be
secured by any assets and:
- will be subordinated to all of
our existing and future secured
indebtedness, including our
Senior Secured Credit
Facilities and any other Senior
Credit Facility or Qualified
Receivable Facility, each as
defined in this prospectus
- will be subordinated to all
liabilities of our
subsidiaries, including trade
payables
- will be effectively
subordinated in certain
respects to any CapRock notes
and any CapRock 12% senior
notes due 2008 that remain
outstanding after this exchange
offer and our concurrent
exchange offer for CapRock's
12% senior notes due 2008
- will rank equal in right of
payment with all of our
existing and future senior
unsecured indebtedness
- will rank senior in right of
payment to all of our existing
and future subordinated
indebtedness
As of June 30, 2000:
- we had total secured
indebtedness of $631.7 million
- our subsidiaries had total
liabilities of $700.9 million
- we had $1.7 billion of
outstanding senior unsecured
indebtedness that will rank
equal in right of payment with
the McLeodUSA notes
- we had no outstanding
subordinated indebtedness
See "Description of the McLeodUSA
Notes--General."
OPTIONAL REDEMPTION..................... We may redeem the McLeodUSA notes
at our option, in whole or in part,
at any time on or after May 1, 2004
at the redemption prices set forth
in this prospectus, plus accrued
and unpaid interest, if any, to the
date of redemption. In addition,
before May 1, 2002, we may redeem
up to 35% of the aggregate
principal amount of the McLeodUSA
notes originally issued with the
net proceeds of certain public
equity offerings and/or certain
private sales of capital stock to
strategic equity investors, at
111.50% of the principal amount
thereof, plus accrued interest, if
at least 65% of the originally
issued aggregate principal
6
<PAGE>
amount of the McLeodUSA notes
remains outstanding. See
"Description of the McLeodUSA
Notes--Optional Redemption."
CHANGE OF CONTROL....................... Upon a Change of Control, as
defined in this prospectus, you
will have the right to require us
to repurchase all or any part of
your McLeodUSA notes at a purchase
price equal to 101% of their
principal amount plus accrued and
unpaid interest. However, we cannot
assure you we will have the
financial resources necessary to
repurchase the McLeodUSA notes upon
a Change of Control. See
"Description of the McLeodUSA
Notes--Repurchase at the Option of
Holders upon a Change of Control."
RESTRICTIVE COVENANTS................... The indenture governing the
McLeodUSA notes contains several
covenants which, among other
things, restrict our ability and
the ability of our subsidiaries to:
- incur additional indebtedness
- pay dividends
- make distributions in respect
of our or our subsidiaries'
capital stock
- make other restricted payments
- enter into sale and leaseback
transactions
- pledge or mortgage assets
- enter into transactions with
affiliates
- sell assets
- consolidate, merge or sell all
or substantially all of our or
our subsidiaries' assets
These covenants are subject to
important exceptions and
qualifications. See "Description of
the McLeodUSA Notes--Covenants."
7
<PAGE>
COMPARISON OF MCLEODUSA NOTES AND CAPROCK NOTES
<TABLE>
<CAPTION>
MCLEODUSA NOTES CAPROCK NOTES
--------------- -------------
<S> <C> <C>
AGGREGATE PRINCIPAL AMOUNT $210 million $210 million
INTEREST RATE 11 1/2% 11 1/2%
MATURITY May 1, 2009 May 1, 2009
PAYMENT DATES May 1 and May 1 and
November 1 November 1
RANKING The McLeodUSA notes will not be The CapRock notes are not secured by
secured by any assets and will be any assets and are subordinated to all
subordinated to all of McLeodUSA's of CapRock's existing and future
existing and future secured secured indebtedness and to all
indebtedness and to all liabilities liabilities of CapRock's subsidiaries.
of McLeodUSA's subsidiaries. The The CapRock notes rank equal in right
McLeodUSA notes will rank equal in of payment with all of CapRock's
right of payment with all of existing and future senior unsecured
McLeodUSA's existing and future indebtedness and rank senior in right
senior unsecured indebtedness and of payment to all of CapRock's
will rank senior in right of payment existing and future subordinated
to all of McLeodUSA's existing and indebtedness.
future subordinated indebtedness. The
McLeodUSA notes will be effectively
subordinated in certain respects to
any CapRock notes and any CapRock 12%
senior notes due 2008 that remain
outstanding after this exchange offer
and our concurrent exchange offer for
CapRock's 12% senior notes due 2008.
OPTIONAL REDEMPTION McLeodUSA may redeem the McLeodUSA CapRock may redeem the CapRock
notes at any time on or after May 1, notes at any time on or after May 1,
2004 at the redemption prices 2004 at the redemption prices set forth
set forth in this prospectus. in this prospectus.
MANDATORY REDEMPTION None None
CHANGE OF CONTROL Upon a change of control, a McLeodUSA Upon a change of control, a CapRock
noteholder will be able to require noteholder can require CapRock to
McLeodUSA to repurchase all or any repurchase all or any part of its
part of its McLeodUSA notes at a CapRock notes at a purchase price
purchase price equal to 101% of their equal to 101% of their principal
principal amount plus accrued and amount plus accrued and unpaid
unpaid interest. interest.
8
<PAGE>
PUBLIC EQUITY OFFERING AND Before May 1, 2002, McLeodUSA may Before May 1, 2002, CapRock may redeem
STRATEGIC EQUITY SALE OPTIONAL redeem up to 35% of the aggregate up to 35% of the aggregate principal
REDEMPTION principal amount of the McLeodUSA amount of the CapRock notes originally
notes originally issued with the net issued with the net proceeds of
proceeds of certain public equity certain public equity offerings and/or
offerings and/or certain private certain private sales of capital stock
sales of capital stock to strategic to strategic equity investors, at
equity investors, at 111.50% of the 111.50% of the principal amount
principal amount thereof, plus thereof, plus accrued interest, if at
accrued interest, if at least 65% of least 65% of the originally issued
the originally issued aggregate aggregate principal amount of the
principal amount of the McLeodUSA CapRock notes remains outstanding.
notes remains outstanding.
RESTRICTIVE COVENANTS Subject to important exceptions and Subject to important exceptions and
qualifications, the indenture qualifications, the indenture
governing the McLeodUSA notes governing the CapRock notes contains
contains several covenants which, several covenants which, among other
among other things, restrict the things, restrict the ability of
ability of McLeodUSA and its CapRock and its subsidiaries to:
subsidiaries to:
- incur additional indebtedness
- incur additional indebtedness
- pay dividends
- pay dividends
- make distributions in respect of
- make distributions in respect of capital stock of CapRock or its
capital stock of McLeodUSA or subsidiaries
its subsidiaries
- make other restricted payments
- make other restricted payments
- enter into sale and leaseback
- enter into sale and leaseback transactions
transactions
- pledge or mortgage assets
- pledge or mortgage assets
- enter into transactions with
- enter into transactions with affiliates
affiliates
- sell assets
- sell assets
- consolidate, merge or sell all or
- consolidate, merge or sell all substantially all assets of
or substantially all assets of CapRock or its subsidiaries
McLeodUSA or its subsidiaries
</TABLE>
On October 11, 2000, CapRock commenced a solicitation of consents from the
holders of the CapRock notes to amend the indenture under which the CapRock
notes were issued to (a) modify certain restrictive covenants contained in the
indenture in order to permit the merger of CapRock with a wholly-owned
subsidiary of McLeodUSA, (b) allow the merger of CapRock and the McLeodUSA
subsidiary to be consummated without triggering the change of control provisions
of the indenture and (c) eliminate most of the restrictive covenants and
reporting requirements contained in the indenture.
RISK FACTORS
You should carefully consider the factors set forth under the caption "Risk
Factors" before tendering your CapRock notes for McLeodUSA notes.
9
<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,
1999 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
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, 1999, 1998 and
1997, and for each of the three years in the period ended December 31, 1999 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
Splitrock Services, Inc........................................... March 30, 2000
</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, Splitrock
and CapRock as if they had been acquired at the beginning of the periods
presented and the as adjusted information in the balance sheet data in the table
includes the Ovation, Splitrock and CapRock financial position as of the date
presented. The 1999 pro forma amounts include adjustments to the CapRock 1999
historical financial statements to give effect to the issuance by CapRock in May
1999 of $210 million of its 11 1/2% senior notes as if the note issuance had
occurred at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has outstanding:
<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
Senior Secured Credit Facilities $575 million May 30, 2000
</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 1/8% senior notes, the
Series A, B and C preferred stock and the Senior Secured Credit Facilities as
if they had occurred at the beginning of 1999.
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
10
<PAGE>
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. On February 29, 2000, McLeodUSA
announced that its board of directors had declared a three-for-one stock split
to be effected in the form of a stock dividend. The record date for the stock
split was April 4, 2000. Stockholders of record at the market close on that date
received two additional shares of McLeodUSA Class A common stock for each share
held. Distribution of the additional shares took place on April 24, 2000. All
information in the selected consolidated financial data has been adjusted to
reflect the two-for-one stock split and the three-for-one stock split.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs and
the portion of rental expense that is representative of the interest component
of rental expense (deemed to be one-third of rental expense which management
believes is a reasonable approximation of the interest component). For each of
the years ended December 31, 1995, 1996, 1997, 1998 and 1999, earnings were
insufficient to cover fixed charges by $11.4 million, $22.6 million, $84.4
million, $135.5 million, and $243.3 million, respectively. For the six months
ended June 30, 1999 and 2000, earnings were insufficient to cover fixed charges
by $118.5 million and $207.7 million, respectively. On a pro forma basis,
earnings would not have been sufficient to cover fixed charges by $523.3 million
and $313.5 million for the year ended December 31, 1999 and the six months ended
June 30, 2000, respectively.
(TABLE BEGINS ON THE NEXT PAGE)
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
PRO FORMA
---------
1995 1996 1997 1998 1999 1999
----------- ----------- ---------- ------------ ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue................................. $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 908,792 $1,210,667
---------- ---------- ---------- ----------- ---------- ----------
Operating expenses:
Cost of service....................... 19,667 52,624 151,190 323,208 457,085 699,401
Selling, general and administrative... 18,054 46,044 148,158 260,931 392,687 481,488
Depreciation and amortization......... 1,835 8,485 33,275 89,107 190,695 346,131
Other................................. -- 2,380 4,632 5,575 -- --
---------- ---------- ---------- ----------- ---------- ----------
Total operating expenses ............. 39,556 109,533 337,255 678,821 1,040,467 1,527,020
Operating loss.......................... (10,558) (28,210) (69,369) (74,675) (131,675) (316,353)
Interest income (expense), net.......... (771) 5,369 (11,967) (52,234) (94,244) (191,068)
Other income............................ -- 495 1,426 1,997 5,637 7,163
Income taxes............................ -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------
Net loss................................ (11,329) (22,346) (79,910) (124,912) (220,282) (500,528)
Preferred stock dividends............... -- -- -- -- (17,727) (54,375)
---------- ---------- ---------- ----------- ---------- ----------
Loss applicable to common stock......... $ (11,329) $ (22,346) $ (79,910) $ (124,912) $ (238,009) $ (554,633)
========== ========== ========== =========== ========== ==========
Loss per common share................... $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
========== ========== ========== =========== =========== ===========
Weighted average common shares
outstanding........................... 168,024 243,036 329,844 376,842 443,130 559,751
========== ========== ========== =========== ========== ==========
Ratio of earnings to fixed charges...... -- -- -- -- -- --
========== ========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
PRO FORMA
---------
1999 2000 2000
----------- ------------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue $403,771 $ 620,082 $ 769,055
-------- --------- ---------
Operating expenses:
Cost of service......................................................... 205,507 344,426 466,226
Selling, general and administrative..................................... 178,339 256,563 309,973
Depreciation and amortization........................................... 78,708 163,193 213,415
Other................................................................... -- -- 872
--------- --------- ---------
Total operating expenses................................................ 462,554 764,182 990,486
Operating loss............................................................ (58,783) (144,100) (221,431)
Interest income (expense), net............................................ (50,666) (42,077) (70,486)
Other income.............................................................. 562 1,971 1,996
Income taxes.............................................................. -- -- --
--------- --------- ---------
Net loss.................................................................. (108,887) (184,206) (289,921)
Preferred stock dividends................................................. -- (27,204) (27,204)
--------- ---------- ---------
Loss applicable to common stock........................................... $(108,887) $(211,410) $(317,125)
========= ========= =========
Loss per common share..................................................... $ (.26) $ (.40) $ (.54)
========= ========= =========
Weighted average common shares outstanding................................ 423,210 529,109 590,221
========= ========= =========
Ratio of earnings to fixed charges........................................ -- -- --
========= ========= =========
</TABLE>
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 2000
-------------------------------------------------- ---------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ---------- ---------
(UNAUDITED)(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................... $ 8,507 $224,401 $ 517,869 $ 793,192 $1,569,473 $1,647,070 $1,879,002
Working capital (deficit)........ $(1,208) $185,968 $ 378,617 $ 613,236 $1,272,794 $ 859,997 $ 913,955
Property and equipment, net...... $16,119 $ 92,123 $ 373,804 $ 629,746 $1,270,032 $1,897,962 $2,321,001
Total assets..................... $28,986 $452,994 $1,345,652 $1,925,197 $4,203,147 $7,069,543 $7,791,496
Long-term debt................... $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,763,725 $2,370,370 $2,718,588
Redeemable convertible preferred
stock.......................... $ -- $ -- $ -- $ -- $1,000,000 $1,000,000 $1,000,000
Stockholders' equity............. $14,958 $403,429 $ 559,379 $ 462,806 $1,108,542 $2,878,436 $3,074,207
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PRO FORMA
----------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment............... $ 6,364 $ 79,845 $179,255 $289,923 $580,003 $ 820,756
Business acquisitions....................... $ 8,333 $ 93,937 $421,882 $ 49,737 $736,626 $3,376,180
EBITDA(1)...................................... $(8,723) $(17,345) $(31,462) $ 20,007 $ 59,020 $ 29,778
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
PRO FORMA
1999 2000 2000
---------- ---------- -----------
(UNAUDITED)(UNAUDITED)(UNAUDITED)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment........................................ $220,390 $ 559,834 $ 804,163
Business acquisitions................................................ $525,161 $2,052,925 $2,415,523
EBITDA(1)............................................................... $ 19,925 $ 19,093 $ (7,144)
</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.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth financial data as of and for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 and as of and for the six months
ended June 30, 1999 and 2000. The business combination among CapRock's
predecessor companies was completed on August 26, 1998, and was accounted for as
a pooling of interests. Accordingly, these Consolidated Financial Statements
include CapRock's three predecessor companies (CapRock Telecommunications Corp.,
CapRock Fiber Network, LTD. and IWL Communications, Incorporated) as though
these entities were always a part of CapRock.
In May 1998, IWL Communications changed its fiscal year-end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996,
combines the operating activity of IWL Communications for the year ended June
30, 1996, with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six-month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year-ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $29,407 $50,970 $75,349 $121,774 $192,623
Costs of Services......................... 21,185 39,357 52,471 83,221 115,676
------ ------ ------ ------ -------
Gross profit........................ 8,222 11,613 22,878 38,553 76,947
Operating expenses:
Selling, general and administrative... 7,326 8,983 14,074 23,528 56,535
Merger related expenses............... - - - 2,313 -
Depreciation and amortization......... 1,186 1,536 3,346 4,887 9,698
----- ----- ----- ----- -----
Total operating expenses........... 8,512 10,519 17,420 30,728 66,233
----- ------ ------ ------ ------
Operating income (loss)................... (290) 1,094 5,458 7,825 10,714
Interest expense, net..................... (484) (585) (1,603) (6,441) (17,861)
Other income (expense).................... 151 42 220 106 1,526
---- ------ ------ ------ -----
Income (loss) before income taxes and
extraordinary item.................... (623) 551 4,075 1,490 (5,621)
Income tax expense (benefit).............. 48 227 1,513 1,267 (2,080)
---- --- ----- ----- -------
Income (loss) before extraordinary item... (671) 324 2,562 223 (3,541)
Extraordinary item - extinguishment of debt 645 - - - -
------- ------ -------- -------- --------
Net income (loss)................... $ (26) $ 324 $ 2,562 $ 223 $ (3,541)
======== ====== ======== ======== =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item.................... $(623) $551 $4,075 $1,490 $(5,621)
Pro forma income taxes, as if CapRock
Fiber were a C corporation............ (211) 143 1,475 1,267 (2,080)
----- --- ----- ----- -------
Income (loss) before extraordinary item (412) 408 2,600 223 (3,541)
Extraordinary item, net of taxes...... 397 - - - -
------- ----- ----- ----- -----
Pro forma net income (loss)......... $ (15) $ 408 $ 2,600 $ 223 $ (3,541)
======== ====== ======== ======== =========
Historical and pro forma income (loss)
per common share:
Income (loss) before extraordinary item $(0.02) $0.01 $0.09 $0.01 $(0.11)
Extraordinary item, net of tax........ $ 0.02 - - - -
------ ----- ----- ----- -----
Basic and diluted..................... $ - $0.01 $0.09 $0.01 $(0.11)
======= ====== ====== ====== =======
Weighted average shares outstanding:
Basic................................. 25,926 27,146 27,984 28,899 31,727
Diluted............................... 25,936 27,156 28,481 30,028 31,727
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 2000
-------- ------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 74,596 $ 113,936
Costs of Services......................... 44,919 79,220
-------- ---------
Gross profit........................ 29,677 34,716
Operating expenses:
Selling, general and administrative... 25,012 43,398
Merger related expenses............... - -
Depreciation and amortization......... 3,337 9,077
-------- ---------
Total operating expenses........... 28,349 52,475
-------- ---------
Operating income (loss)................... 1,328 (17,759)
Interest expense, net..................... (7,134) (7,021)
Other income (expense).................... (135) 25
--------- ---------
Income (loss) before income taxes and
extraordinary item.................... (5,941) (24,755)
Income tax expense (benefit).............. (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary item... (3,606) (15,637)
Extraordinary item - extinguishment
of debt................................. - -
-------- ---------
Net income (loss)................... $ 3,606 $ (15,637)
======== =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item................. $ (5,941) $ (24,755)
Pro forma income taxes, as if CapRock
Fiber were a C corporation......... (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary
item............................... (3,606) (15,637)
Extraordinary item, net of taxes...... - -
-------- ---------
Pro forma net income (loss)......... $ (3,606) $ (15,637)
======== =========
Historical and pro forma income (loss)
per common share:
Income (loss) before extraordinary
item................................ $ (0.12) $ (0.47)
Extraordinary item, net of tax........ - -
-------- ---------
Basic and diluted..................... $ (0.12) $ (0.47)
======== =========
Weighted average shares outstanding:
Basic................................. 30,321 33,406
Diluted............................... 30,321 33,406
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ (797) $ (2,153) $ (305) $ 102,489 $ 216,145
Property, plant and equipment, net........ 6,705 15,901 27,341 59,607 228,601
Total assets.............................. 13,198 28,522 49,389 191,966 548,835
Long-term debt and capital lease
obligations............................. 2,443 13,254 21,062 145,187 347,502
Stockholders' equity...................... 3,552 3,886 14,086 16,062 96,030
OPERATING DATA:
EBITDA(1)................................. $ 896 $ 2,630 $ 8,804 $ 15,025 $ 20,412
Cash flows provided by (used in)
operations.............................. 827 781 4,112 7,125 (13,302)
Cash flows used in investing activities... (1,919) (9,350) (12,987) (134,350) (264,623)
Cash flows provided by financing
activities.............................. 903 8,605 12,114 123,990 283,338
Capital expenditures...................... (2,282) (10,212) (13,631) (36,855) (201,289)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1999 2000
-------- ------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ 337,555 $ 104,312
Property, plant and equipment, net........ 97,360 423,039
Total assets.............................. 479,533 676,174
Long-term debt and capital lease
obligations............................. 347,012 348,218
Stockholders' equity...................... 94,939 177,738
OPERATING DATA:
EBITDA(1)................................. $ (4,665) $ (8,682)
Cash flows provided by (used in)
operations.............................. (14,897) 50,799
Cash flows used in investing activities... (258,169) (159,910)
Cash flows provided by financing
activities.............................. 283,872 107,113
Capital expenditures...................... (45,717) (216,263)
</TABLE>
(1) EBITDA consists of operating income or loss before interest, income taxes,
depreciation and amortization and other nonrecurring operating expenses. EBITDA
is a measure commonly used in the communications industry. EBITDA is not a
measure of financial performance under generally accepted accounting principles
and should not be considered as an alternative to net income as a measure of
performance nor as an alternative to cash flow as a measure of liquidity.
16
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE TENDERING
YOUR CAPROCK NOTES FOR MCLEODUSA NOTES. YOU SHOULD ALSO CONSIDER THE OTHER
INFORMATION IN THIS PROSPECTUS, INCLUDING THE SEC REPORTS ON FORMS 10-K, 10-Q
AND 8-K AND IN THE OTHER DOCUMENTS CONSIDERED A PART OF THIS PROSPECTUS. SEE
"WHERE YOU CAN FIND MORE INFORMATION." THE TERMS "WE," "US," "OUR" OR OTHER
VARIATIONS THEREOF, AS USED IN THIS "RISK FACTORS" SECTION, REFER TO MCLEODUSA
AND ITS SUBSIDIARIES UNLESS THE CONTEXT REQUIRES A DIFFERENT MEANING.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, INCLUDING
CAPROCK, INTO OUR OPERATIONS, WHICH COULD SLOW OUR GROWTH.
The integration of acquired companies, including the proposed acquisition
of CapRock, into our operations 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
our service offerings
- inability to maintain uniform standards, controls, procedures and
policies
- impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with the merger or other similar transactions could slow our growth
or lower the quality of our services, which could reduce customer demand and
have a negative impact upon the price at which the McLeodUSA notes trade after
this exchange offer.
CONTINUED RAPID GROWTH OF OUR NETWORK, SERVICES AND SUBSCRIBERS COULD BE SLOWED
IF WE CANNOT MANAGE THIS GROWTH.
We have rapidly expanded and developed our network, services and
subscribers. This has placed and will continue to place, in part as a result of
the merger, significant demands on our management, operational and financial
systems and procedures and controls. We may not be able to manage our
anticipated growth effectively, which would harm our 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, legislative and other governmental developments
- changes in the competitive climate in which we operate
- development of customer billing, order processing and network
management systems
- availability of financing
- technological developments
- availability of rights-of-way, franchises, building access and antenna
sites
- existence of strategic alliances or relationships
- emergence of future opportunities
We will need to continue to improve our operational and financial systems
and our procedures and controls as we grow. We must also develop, train and
manage our employees.
WE EXPECT TO INCUR SIGNIFICANT LOSSES OVER THE NEXT SEVERAL YEARS.
If we do not become profitable in the future, we could have difficulty
obtaining funds to continue our operations or repay the McLeodUSA notes. We have
incurred net losses every year since we began operations. Since January 1, 1995,
our net losses applicable to common stock have been as follows:
17
<PAGE>
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ --------
<S> <C>
1995....................... $ 11.3 million
1996....................... $ 22.3 million
1997....................... $ 79.9 million
1998....................... $124.9 million
1999....................... $238.0 million
First 6 months of 2000..... $211.4 million
</TABLE>
We expect to incur significant operating losses during the next several
years while we develop our business and expand our fiber optic communications
network.
FAILURE TO RAISE NECESSARY CAPITAL COULD RESTRICT OUR ABILITY TO DEVELOP OUR
NETWORK AND SERVICES AND ENGAGE IN STRATEGIC ACQUISITIONS.
We need significant capital to continue to expand our operations,
facilities, network and services, including, following the merger, the expansion
and operation of CapRock. We cannot assure you that our capital resources will
permit us to fund our planned network deployment and operations or achieve
operating profitability. Failure to generate or raise sufficient funds may
require us to delay or abandon some of our expansion plans or expenditures,
which could harm our business and competitive position.
As of June 30, 2000, based on the combined McLeodUSA and CapRock business
plan, capital requirements and growth projections as of that date, we estimated
that we would require approximately $1.5 billion through 2002 to fund our
planned capital expenditures and operating expenses. We expect to meet these
funding needs through the existing cash balances of McLeodUSA and CapRock, our
existing lines of credit and income from future operations. Our estimated
aggregate capital requirements include the projected costs of:
- expanding our 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 in limited markets
- funding general corporate expenses
- completing recent acquisitions, including the merger
- constructing, acquiring, developing or improving telecommunications
assets
Our estimate of future capital requirements is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The actual amount and timing of our
future capital requirements may differ substantially from our estimate due to
factors such as:
- strategic acquisition costs and effects of acquisitions on our business
plan, capital requirements and growth projections
- unforeseen delays
- cost overruns
- engineering design changes
- changes in demand for our services
- regulatory, technological or competitive developments
- new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities.
Our projected funding plan assumes that (a) the indentures governing the
CapRock notes and the CapRock 12% senior notes due 2008 are amended to provide
that the acquisition of CapRock does not constitute a change of control and (b)
such notes will either remain outstanding as amended to remove various covenants
or be exchanged for our notes pursuant to the terms of the exchange offers.
We may meet any additional capital needs by issuing additional debt or
equity securities or borrowing funds from one or more lenders. We cannot assure
you that we will have timely access to additional financing sources on
acceptable terms. If we do not, we may not be able to expand our markets,
operations, facilities, network and services as we intend. See "Information
About McLeodUSA."
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OUR HIGH LEVEL OF DEBT COULD LIMIT OUR FLEXIBILITY IN RESPONDING TO BUSINESS
DEVELOPMENTS AND PUT US AT A COMPETITIVE DISADVANTAGE.
We have substantial debt, which could adversely affect us in a number of
ways, including:
- limiting our ability to obtain necessary financing in the future
- limiting our flexibility to plan for, or react to, changes in our
business
- requiring us to use a substantial portion of our cash flow from
operations to pay debt rather than for other purposes, such as working
capital or capital expenditures
- making us more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage
- making us more vulnerable to a downturn in our business
As of June 30, 2000, we had $2.4 billion of long-term debt, including $1.7
billion of debt under our senior notes and $575 million under our credit
facilities. We also had $1.0 billion of redeemable convertible preferred stock
and $2.9 billion of stockholders' equity. In addition, upon completion of the
merger and the exchange offers, we expect to have $360 million of long-term debt
resulting from the exchange of McLeodUSA notes for the CapRock notes and the
exchange of our 12% senior notes due 2008 for the CapRock 12% senior notes due
2008. As a result, we expect our fixed charges to exceed our earnings for the
foreseeable future.
COVENANTS IN DEBT INSTRUMENTS RESTRICT OUR CAPACITY TO BORROW AND INVEST, WHICH
COULD IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR OPERATIONS.
The indentures governing the terms of our long-term debt impose operating
and financial restrictions. In addition, under the terms of our credit
facilities, we have granted a security interest in substantially all of our and
our subsidiaries assets. These restrictions and encumbrances limit our
discretion in some business matters, which could make it more difficult for us
to expand, finance our operations or engage in other business activities that
may be in our interest. These restrictions limit or prohibit our ability to:
- incur additional debt
- pay dividends or make other distributions
- make investments or other restricted payments
- enter into sale and leaseback transactions
- pledge, mortgage or permit liens upon assets
- enter into transactions with affiliates
- sell assets
- consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt
could become immediately due and payable.
OUR DEPENDENCE ON THE MEGABELLS TO PROVIDE MOST OF OUR COMMUNICATIONS SERVICES
COULD MAKE IT MORE DIFFICULT FOR US TO OFFER OUR SERVICES AT A PROFIT.
The original seven regional Bell operating companies that resulted from the
divestiture by AT&T in 1984 of its local telephone systems are now concentrated
into four large incumbent "MegaBells." We depend on these MegaBells to provide
most of our core local and some of its long distance services. Today, without
using the communications facilities of these companies, we could not provide
bundled local and long distance services to most of our customers. Because of
this dependence, our communications services are highly susceptible to changes
in the conditions for access to these facilities and to inadequate service
quality provided by the MegaBells, and therefore we may have difficulty offering
our services on a profitable and competitive basis.
Qwest Communications International Inc. (successor to U S WEST
Communications, Inc.) and SBC Communications Inc. (including its wholly-owned
subsidiary Ameritech Corporation) are our primary suppliers of local lines to
our customers and communications services that allow us to transfer and
connect calls. Upon completion of the merger, BellSouth will also become our
supplier. The
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communications facilities of our suppliers allow us to provide local
service, long distance service and private lines dedicated to our customers'
use. If these suppliers or other companies deny or limit our access to their
communications network elements or wholesale services, we may not be able to
offer our communications services at profitable rates.
Our plan to provide local service using our own communications network
equipment also depends on the MegaBells. In order to interconnect our network
equipment and other communications facilities to network elements controlled by
the MegaBells, we must first negotiate and enter into interconnection agreements
with them. Interconnection obligations imposed on the MegaBells by the
Telecommunications Act of 1996 have been and continue to be subject to a variety
of legal proceedings, the outcome of which could affect our ability to obtain
interconnection agreements on acceptable terms. There can be no assurance that
we will succeed in obtaining interconnection agreements on terms that would
permit us to offer local services using our own communications network
facilities at profitable and competitive rates.
ACTIONS BY THE MEGABELLS MAY MAKE IT MORE DIFFICULT FOR US TO OFFER OUR
COMMUNICATIONS SERVICES.
The MegaBells have pursued several measures that may make it more difficult
for us to offer our communications services. For example, in February 1996, U S
WEST, which has since been acquired by Qwest, filed tariffs and other notices
with the public utility commissions in its fourteen-state service region to
limit future Centrex access to its switches. Centrex access allows us to
aggregate lines, have control over several characteristics of those lines and
provide a set of standard features on those lines. We use Qwest's Centrex
services to provide most of our local communications services in Qwest's service
territories.
In January 1997, U S WEST proposed interconnection surcharges in several of
the states in its service region, which would increase our costs in providing
communications services in those states.
In addition, during the past year Qwest filed proposals with the Iowa
Utilities Board to reduce the retail prices charged by Qwest for various
business services which, if approved, would have the effect of reducing our
margins on competitive local business services in Iowa.
We have challenged or are challenging these actions before the FCC or
applicable state public utility commissions. We cannot assure you we will
succeed in our challenges to these or other actions by Qwest that would prevent
or deter us from using Qwest's Centrex service or communications network
elements. If Qwest successfully withdraws or limits our access to Centrex
services in any jurisdiction, we may not be able to offer communications
services in that jurisdiction, which could harm our business.
We anticipate that Qwest will also pursue legislation in states within our
target market area to reduce state regulatory oversight over its rates and
operations. If adopted, these initiatives could make it more difficult for us to
challenge Qwest's actions in the future.
SBC/Ameritech has also introduced measures that may make it more difficult
for us to offer certain types of communications services. For example, in 1998
and 1999, Ameritech assessed extra special construction charges to install
service for customers when we leased a line from them. Ameritech did not assess
comparable charges to retail customers that ordered service directly from
SBC/Ameritech, which put us at a disadvantage. We have challenged or are
challenging these actions by SBC/Ameritech before the applicable state public
utility commissions. Though we have succeeded in three such challenges, there
can be no assurance that we will succeed in our challenges to these or other
actions by SBC/Ameritech that would prevent or deter us from competing with
them. If SBC/Ameritech can successfully charge us extraordinary costs to install
service when it does not assess the same charges to retail customers, we may not
be able to offer communications services in that location, which would harm our
business.
COMPETITION IN THE COMMUNICATIONS SERVICES INDUSTRY COULD CAUSE US TO LOSE
CUSTOMERS AND REVENUE AND COULD MAKE IT MORE DIFFICULT FOR US TO ENTER NEW
MARKETS.
We face intense competition in all of our markets. This competition could
result in loss of customers and lower revenue for us. It could also make it more
difficult for us to enter new markets. Existing local telephone companies,
including Qwest,
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SBC/Ameritech, BellSouth and Verizon, currently dominate their local
telecommunications markets. Three major competitors, AT&T, WorldCom and
Sprint, dominate the long distance market. Hundreds of other companies also
compete in the long distance marketplace. AT&T, WorldCom and Sprint also
offer local telecommunications services in many locations.
Our 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 we focus our sales
efforts, which may create downward pressure on the prices for our services and
negatively affect our returns. Many of our existing and potential competitors
have financial and other resources far greater than ours. In addition, the trend
toward mergers and strategic alliances in the communications industry may
strengthen some of our competitors and could put us at a significant competitive
disadvantage.
IF THE MEGABELLS ARE ALLOWED TO OFFER BUNDLED LOCAL AND LONG DISTANCE SERVICES
IN OUR MARKETS, IT COULD CAUSE US TO LOSE CUSTOMERS AND REVENUES AND COULD MAKE
IT MORE DIFFICULT FOR US TO ENTER NEW MARKETS.
Presently the MegaBells are prohibited from offering interLATA long
distance services to customers in their regions until they have shown compliance
with the Telecommunications Act of 1996. The MegaBells are attempting to show
compliance and are seeking authority to offer in-region interLATA long distance
service. Southwestern Bell has obtained such authority in Texas.
If the MegaBells, which have resources far greater than ours, are
authorized to bundle interLATA long distance service and local service in our
markets before the MegaBell local markets are effectively open to competition,
such an offering by the MegaBells could cause us to lose customers and revenues
and make it more difficult for us to compete in those new markets.
WE MAY NOT SUCCEED IN DEVELOPING OR MAKING A PROFIT FROM WIRELESS SERVICES.
Our effort to offer wireless services involves a high degree of risk and
will impose significant demands on our management and financial resources.
Developing wireless services may require us to, among other things, spend
substantial time and money to acquire, build and test a wireless infrastructure
and enter into roaming arrangements with wireless operators in other markets.
Our business plan does not currently include substantial funds for the
development of wireless services. In order to offer wireless services on a
widespread basis, we would need to obtain additional funding by issuing
additional debt or equity securities or by borrowing funds from one or more
lenders. We may not succeed in developing wireless services. Even if we spend
substantial amounts to develop wireless services, we may not make a profit from
wireless operations.
Our ability to successfully offer wireless services will also depend on a
number of factors beyond our control, including:
- changes in communications service rates charged by other companies
- changes in the supply and demand for wireless services due to
competition with other wireline and wireless operators in the same
geographic area
- changes in the federal, state or local regulatory requirements
affecting the operation of wireless systems
- changes in wireless technologies that could render obsolete the
technology and equipment we choose for our wireless services
COMPETITION IN THE WIRELESS TELECOMMUNICATIONS INDUSTRY COULD MAKE IT MORE
DIFFICULT FOR US TO SUCCESSFULLY OFFER WIRELESS SERVICES.
The wireless telecommunications industry is experiencing increasing
competition and significant
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technological change. This will make it more difficult for us to gain a share
of the wireless communications market. We expect up to eight wireless
competitors in each of our potential target wireless markets. We could face
additional competition from mobile satellite services.
Many of our potential wireless competitors have financial and other
resources far greater than ours and have more experience testing new or improved
products and services. In addition, several wireless competitors operate or plan
to operate wireless telecommunications systems that encompass most of the United
States, which could give them a significant competitive advantage, particularly
if we offer only regional wireless services.
THE SUCCESS OF OUR COMMUNICATIONS SERVICES WILL DEPEND ON OUR ABILITY TO KEEP
PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.
Communications technology is changing rapidly. These changes influence the
demand for our services. We need to be able to anticipate these changes and to
develop new and enhanced products and services quickly enough for the changing
market. This will determine whether we can continue to increase our revenue and
number of subscribers and remain competitive.
THE LOSS OF KEY PERSONNEL COULD WEAKEN OUR TECHNICAL AND OPERATIONAL EXPERTISE,
DELAY OUR INTRODUCTION OF NEW SERVICES OR ENTRY INTO NEW MARKETS AND LOWER THE
QUALITY OF OUR SERVICES.
We may not be able to attract, develop, motivate and retain experienced and
innovative personnel. There is intense competition for qualified personnel in
our lines of business. The loss of the services of key personnel, or the
inability to attract additional qualified personnel, could cause us to make less
successful strategic decisions, which could hinder the introduction of new
services or the entry into new markets. We could also be less prepared for
technological or marketing problems, which could reduce our ability to serve our
customers and lower the quality of our services. As a result, our financial
condition could be adversely affected.
Our future success depends on the continued employment of our senior
management team, particularly Clark E. McLeod, the Chairman and Chief Executive
Officer of McLeodUSA, Stephen C. Gray, the President and Chief Operating Officer
of McLeodUSA and the President and Chief Executive Officer of the Local Services
operations of McLeodUSA, and Roy A. Wilkens, the Chief Technology Officer of
McLeodUSA and the President and Chief Executive Officer of the Network and Data
Services operations of McLeodUSA.
FAILURE TO OBTAIN AND MAINTAIN NECESSARY PERMITS AND RIGHTS-OF-WAY COULD DELAY
INSTALLATION OF OUR NETWORKS AND INTERFERE WITH OUR OPERATIONS.
To obtain access to rights-of-way needed to install our fiber optic cable,
we must reach agreements with state highway authorities, local governments,
transit authorities, local telephone companies and other utilities, railroads,
long distance carriers and other parties. The failure to obtain or maintain any
rights-of-way could delay our planned network expansion, interfere with our
operations and harm our business. For example, if we lose access to a
right-of-way, we may need to spend significant sums to remove and relocate our
facilities.
GOVERNMENT REGULATION MAY INCREASE OUR COST OF PROVIDING SERVICES, SLOW OUR
EXPANSION INTO NEW MARKETS AND SUBJECT OUR SERVICES TO ADDITIONAL COMPETITIVE
PRESSURES.
Our facilities and services are subject to federal, state and local
regulations. The time and expense of complying with these regulations could slow
down our expansion into new markets, increase our costs of providing services
and subject us to additional competitive pressures. One of the primary purposes
of the Telecommunications Act of 1996 was to open the local telephone services
market to competition. While this has presented us with opportunities to enter
local telephone markets, it also 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, we need to obtain and maintain licenses, permits and other
regulatory approvals in connection with some of our services. Any of the
following could harm our business:
- failure to maintain proper federal and state tariffs
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- failure to maintain proper state certifications
- failure to comply with federal, state or local laws and regulations
- failure to obtain and maintain required licenses and permits
- burdensome license or permit requirements to operate in public
rights-of-way
- burdensome or adverse regulatory requirements
- delays in obtaining or maintaining required authorizations
WE DEPEND UPON PAYMENTS FROM OUR SUBSIDIARIES TO PAY PRINCIPAL AND INTEREST ON
OUR DEBT OBLIGATIONS.
We are a holding company, which means we conduct all of our operations and
derive all of our operating income from our subsidiaries. Our ability to pay our
obligations, including our obligation to pay principal and interest on the
McLeodUSA notes, depends on receiving dividends and other payments from our
subsidiaries, raising additional funds in a public or private equity or debt
offering or selling assets. Our subsidiaries constitute separate legal entities
and have no obligation to pay any amounts due on the McLeodUSA notes or to make
funds available to us. Our subsidiaries' ability to pay dividends or make other
payments or advances to us will depend on their operating results and the
requirements of applicable law.
THE MCLEODUSA NOTES ARE SUBORDINATE TO OUR SUBSIDIARIES' OBLIGATIONS AND OUR OWN
SECURED OBLIGATIONS.
The McLeodUSA notes will be effectively subordinated in right of payment
to all liabilities of our subsidiaries. This means that in the event of a
bankruptcy, liquidation or reorganization, our subsidiaries must pay their
creditors in full before we could use their assets to pay you. As of June 30,
2000, our subsidiaries had total liabilities after the elimination of loans and
advances from us to our subsidiaries of approximately $700.9 million. In
addition, the indenture governing the McLeodUSA notes and the indentures
governing our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior
notes, 9 1/2% senior notes and 8 1/8% senior notes, which we refer to
collectively as our indentures, permit us and our subsidiaries to incur
additional debt.
The McLeodUSA notes will be unsecured and will be subordinated to our
secured debt. This means if we default on any of our secured debt, our secured
creditors could foreclose on their collateral and receive payment out of the
proceeds of that collateral before we could use those assets to pay you. If the
value of the collateral is less than the amount owed, our secured creditors will
have equal rights with you to our remaining assets. As of June 30, 2000, we had
total secured debt of approximately $631.7 million. The indentures permit us and
our subsidiaries to incur additional secured debt, including unlimited purchase
money debt.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE MCLEODUSA NOTES WHICH COULD MAKE
IT MORE DIFFICULT FOR YOU TO SELL MCLEODUSA NOTES AND COULD ADVERSELY AFFECT
THEIR PRICE.
The McLeodUSA notes constitute a new issue of securities for which no
established trading market exists. Consequently, it may be more difficult for
you to sell McLeodUSA notes. If McLeodUSA notes are traded after their initial
issuance, they may trade at a discount, depending upon:
- our financial condition
- prevailing interest rates
- the market for similar securities
- other factors beyond our control, including general economic conditions
We do not intend to apply for a listing or quotation of McLeodUSA notes on
any securities exchange. We cannot assure you of the development or liquidity of
any trading market for the McLeodUSA notes following the exchange offer.
HOLDERS OF CAPROCK NOTES WHO FAIL TO TENDER MAY EXPERIENCE DIMINISHED LIQUIDITY
AFTER THE EXCHANGE OFFER.
We have not conditioned the exchange offer on receipt of any minimum or
maximum principal amount of CapRock notes. As CapRock notes are tendered and
accepted in the exchange offer, the principal amount of remaining CapRock
notes will
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decrease. This decrease will reduce the liquidity of the trading market for
the CapRock notes which may make it more difficult for you to sell them. We
cannot assure you of the liquidity, or even the continuation, of the trading
market for the CapRock notes following the exchange offer.
HOLDERS OF CAPROCK NOTES WHO FAIL TO TENDER WILL HAVE FEWER RIGHTS UNDER THE
CAPROCK INDENTURE FOLLOWING EFFECTIVENESS OF THE PROPOSED AMENDMENTS TO THE
CAPROCK INDENTURE.
On October 11, 2000, CapRock commenced a solicitation of consents from the
holders of the CapRock notes to amend the indenture under which the CapRock
notes were issued. If the required consents with respect to the CapRock notes
are received and the amendments to the CapRock indenture become operative, both
of which are a condition to consummation of the exchange offer, the CapRock
notes will no longer be entitled to the benefits of certain restrictive
covenants and certain other provisions of the indenture that will have been
eliminated by the amendments. The CapRock indenture, as so amended, will
continue to govern the terms of all CapRock notes that remain outstanding after
the amendments are operative. The elimination of these restrictive covenants and
other provisions will permit CapRock to, among other things, incur indebtedness,
pay dividends and make other restricted payments, incur liens and make
investments which would otherwise not have been permitted under the CapRock
indenture. It is possible that any such actions that CapRock will be permitted
to take as a result of the changes to the CapRock indenture will increase the
risk with respect to CapRock.
THE OBLIGATION TO MAKE PAYMENTS UNDER THE CAPROCK NOTES THAT REMAIN OUTSTANDING
AFTER THE EXCHANGE OFFER WILL REMAIN WITH CAPROCK.
As a result of the proposed merger of our wholly-owned subsidiary into
CapRock, CapRock will become our wholly-owned subsidiary. In addition,
notwithstanding the merger, CapRock will remain the obligor under the CapRock
indenture and any CapRock notes that remain outstanding after consummation of
the exchange offer. Neither we nor any of our subsidiaries, other than CapRock,
will guarantee or otherwise agree to pay the interest on or repay the principal
amount of the CapRock notes. Holders will have no direct claim against us or any
of our subsidiaries, other than CapRock, for payment under the CapRock indenture
and the CapRock notes.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans, our future capital requirements, forecasted demographic and
economic trends relating to our industry, our ability to complete acquisitions,
including the merger of CapRock with a subsidiary of McLeodUSA, to realize
anticipated cost savings and other benefits from acquisitions and to recover
acquisition-related costs, and similar matters are forward-looking statements.
These statements are subject to known and unknown risks, uncertainties and other
factors that could cause events or our actual results to differ materially from
the statements. The forward-looking information is based on various factors and
was derived using numerous assumptions. In some cases, you can identify these
statements by our use of forward-looking words such as "may," "will," "should,"
"anticipate," "estimate," "expect," "plan," "believe," "predict," "potential" or
"intend." You should be aware that these statements only reflect our
predictions. Actual events or results may differ substantially. Important
factors that could cause our actual results to be materially different from our
expectations include those discussed in this prospectus under the caption "Risk
Factors" and those discussed in documents incorporated by reference in this
prospectus. 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 EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the proposed merger of CapRock with a wholly-owned
subsidiary of McLeodUSA, we have agreed to file and to use our commercially
reasonable efforts to cause to become effective with the SEC a registration
statement with respect to the exchange of the CapRock notes for McLeodUSA notes.
A copy of the merger agreement has been filed as an exhibit to the registration
statement of which this prospectus is a part. We are making the exchange offer
to satisfy our contractual obligations under the merger agreement.
If you tender your CapRock notes in exchange for McLeodUSA notes, you will
represent to us that:
- you have full power and authority to tender, exchange, sell, assign and
transfer the tendered CapRock notes
- we will acquire good, marketable and unencumbered title to the CapRock
notes you tender, free and clear of all liens, restrictions, charges
and encumbrances
- the CapRock notes you tender for exchange are not subject to any
adverse claims or proxies (other than consents or proxies granted in
connection with the consent solicitation currently being conducted by
CapRock)
You also will warrant and agree that you will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and transfer
of the CapRock notes you tender in the exchange offer.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of CapRock notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" or "noteholder"
with respect to the exchange offer means any person in whose name the CapRock
notes are registered on CapRock's books or any other person who has obtained a
properly completed bond power from the registered holder, or any participant in
DTC whose name appears on a security position listing as a holder of CapRock
notes, which, for purposes of the exchange offer, include beneficial interests
in the CapRock notes held by direct or indirect participants in DTC and CapRock
notes held in definitive form.
TERMS OF THE EXCHANGE OFFER
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying Letter of Transmittal, to exchange
$1,000 principal amount of McLeodUSA notes for each $1,000 principal amount of
CapRock notes properly tendered prior to the expiration date and not properly
withdrawn according to the procedures described below. Holders may tender their
CapRock notes in whole or in part in integral multiples of $1,000 principal
amount.
The exchange offer is not conditioned upon any minimum principal amount of
CapRock notes being tendered for exchange. We reserve the right to purchase or
make offers for any CapRock notes that remain outstanding after the expiration
date or, as set forth under "--Conditions to the Exchange Offer," to terminate
the exchange offer and, to the extent permitted by applicable law, purchase
CapRock notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers could differ from the terms
of the exchange offer. As of the date of this prospectus, $210 million principal
amount of CapRock notes is outstanding.
Holders of CapRock notes do not have any appraisal or dissenters' rights in
connection with the exchange offer. CapRock notes which are not tendered for, or
are tendered but not accepted in connection with, the exchange
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offer will remain outstanding. For a description of the consequences of not
tendering CapRock notes for exchange see "--Consent Solicitation;
Consequences of Failure to Tender Your CapRock Notes."
If any tendered CapRock notes are not accepted for exchange because of an
invalid tender, the occurrence of other events set forth in this prospectus or
otherwise, certificates for the unaccepted CapRock notes will be returned,
without expense, to the tendering holder of those notes promptly after the
expiration date.
Holders who tender CapRock notes in connection with the exchange offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of CapRock notes in connection with the exchange offer. We will pay all
charges and expenses, other than applicable taxes described below, in connection
with the exchange offer. See "--Fees and Expenses" for a description of the fees
and expenses that we will pay in connection with the exchange offer.
Neither the McLeodUSA nor the CapRock board of directors makes any
recommendation to holders of CapRock notes as to whether to tender or refrain
from tendering all or any portion of their CapRock notes in the exchange offer.
In addition, no one has been authorized to make any similar recommendation.
Holders of CapRock notes must make their own decision whether to tender in the
exchange offer and, if so, the aggregate amount of CapRock notes to tender after
reading this prospectus and the Letter of Transmittal and consulting with their
advisers, if any, based on their financial position and requirements.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" means 5:00 p.m., New York City time, on November
____, 2000, unless we extend the exchange offer, in which case the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended.
We expressly reserve the right in our sole discretion, subject to
applicable law, at any time and from time to time,
- to delay the acceptance of the CapRock notes for exchange
- to terminate the exchange offer, whether or not any CapRock notes have
been accepted for exchange, if we determine, in our sole discretion,
that any of the events or conditions referred to under "--Conditions to
the Exchange Offer" has occurred or exists or has not been satisfied
- to extend the expiration date of the exchange offer and retain all
CapRock notes tendered in the exchange offer, subject, however, to the
right of holders of CapRock notes to withdraw their tendered CapRock
notes as described under "--Withdrawal Rights"
- to waive any condition or otherwise amend the terms of the exchange
offer in any respect
If the exchange offer is amended in a manner that we determine to
constitute a material change, or if we waive a material condition of the
exchange offer, we will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of the
CapRock notes, and we will extend the exchange offer to the extent required by
Rule 14e-1 under the Securities Exchange Act.
Any delay in acceptance, termination, extension or amendment will be
followed promptly by:
- oral or written notice of the change to the exchange agent, with any
such oral notice to be promptly confirmed in writing
- a public announcement of the change, which announcement, in the case of
an extension, will be made no later than 9:00 a.m., New York City time,
on the next business day after the previously scheduled expiration date
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Without limiting the manner in which we may choose to make any public
announcement, and subject to applicable laws, we shall have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF MCLEODUSA NOTES
Upon the terms and subject to the conditions of the exchange offer,
promptly after the expiration date we will exchange, and will issue to the
exchange agent, McLeodUSA notes for CapRock notes validly tendered and not
withdrawn as described under "--Withdrawal Rights."
In all cases, delivery of McLeodUSA notes in exchange for CapRock notes
tendered and accepted for exchange in the exchange offer will be made only after
timely receipt by the exchange agent of:
- CapRock notes or a book-entry confirmation of a book-entry transfer of
CapRock notes into the exchange agent's account at DTC
- the Letter of Transmittal, or a facsimile of the letter, properly
completed and duly executed, with any required signature guarantees
- any other documents required by the Letter of Transmittal
Accordingly, the delivery of McLeodUSA notes might not be made to all
tendering holders at the same time, and will depend upon when CapRock notes,
book-entry confirmations with respect to CapRock notes and other required
documents are received by the exchange agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of CapRock notes into the exchange agent's account at DTC.
Subject to the terms and conditions of the exchange offer, we will be
deemed to have accepted for exchange, and thereby exchanged, CapRock notes
validly tendered and not withdrawn as, if and when we give oral or written
notice to the exchange agent of our acceptance of those CapRock notes for
exchange in the exchange offer. Any such oral notice shall be promptly confirmed
in writing. Our acceptance for exchange of CapRock notes tendered through any of
the procedures described above will constitute a binding agreement between the
tendering holder and us upon the terms and subject to the conditions of the
exchange offer. The exchange agent will act as our agent for the purpose of
receiving tenders of CapRock notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
CapRock notes, Letters of Transmittal and related documents and transmitting
McLeodUSA notes to holders who validly tendered CapRock notes. The exchange will
be made promptly after the expiration date. If for any reason whatsoever the
acceptance for exchange or the exchange of any CapRock notes tendered in the
exchange offer is delayed, whether before or after our acceptance for exchange
of CapRock notes, or we extend the exchange offer or are unable to accept for
exchange or exchange CapRock notes tendered in the exchange offer, then, without
prejudice to our rights set forth in this prospectus, the exchange agent may,
nevertheless, on our behalf and subject to Rule 14e-1(c) under the Securities
Exchange Act, retain tendered CapRock notes and such CapRock notes may not be
withdrawn except to the extent tendering holders are entitled to withdrawal
rights as described under "--Withdrawal Rights."
CONSENT SOLICITATION; CONSEQUENCES OF FAILURE TO TENDER YOUR CAPROCK NOTES
On October 11, 2000, CapRock commenced a solicitation of consents from the
holders of the CapRock notes to amend the indenture under which the CapRock
notes were issued to (a) modify certain restrictive covenants contained in the
indenture in order to permit the merger of CapRock with a wholly-owned
subsidiary of McLeodUSA, (b) allow the merger of CapRock and the McLeodUSA
subsidiary to be consummated without triggering the change of control provisions
of the indenture and (c) eliminate most of the restrictive covenants and
reporting requirements contained in the indenture.
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Any CapRock notes that are not tendered to us or are not accepted for
exchange will remain outstanding and will continue to accrue interest in
accordance with and otherwise be entitled to all of the rights and privileges
under the indenture governing the CapRock notes. If CapRock obtains the
requisite number of consents from the CapRock noteholders, however, the
indenture will be amended as summarized in the preceding paragraph and the
holders of any CapRock notes that remain outstanding after the exchange offer
will be without the protection that the deleted restrictive covenants and
reporting requirements gave them. The elimination of these restrictive covenants
and other provisions will permit CapRock to, among other things, incur
indebtedness, pay dividends and make other restricted payments, incur liens and
make investments which would otherwise not have been permitted under the CapRock
indenture. It is possible that any such actions that CapRock will be permitted
to take as a result of the changes to the CapRock indenture will increase the
risk with respect to the CapRock notes. The receipt by CapRock of the requisite
consents to approve the amendments to the CapRock indenture is a condition to
the consummation of the exchange offer.
Notwithstanding the merger, CapRock will remain the obligor under the
CapRock indenture and any CapRock notes that remain outstanding after
consummation of the exchange offer.
CONCURRENT EXCHANGE OFFER
Concurrently with this exchange offer and by a separate prospectus, we are
offering to exchange our 12% senior notes due 2008 for CapRock's 12% senior
notes due 2008. We refer to this exchange offer as the "Concurrent Exchange
Offer." The completion of the exchange offer contemplated by this prospectus and
the Concurrent Exchange Offer are not dependent on one another.
PROCEDURES FOR TENDERING CAPROCK NOTES
VALID TENDER. Except as set forth below, in order for CapRock notes to
be validly tendered in the exchange offer, either:
1. before the expiration date,
- a properly completed and duly executed Letter of Transmittal, or
facsimile of the letter with any required signature guarantees
and any other required documents, must be received by the
exchange agent at the address set forth under "--Exchange Agent,"
and
- tendered CapRock notes must be received by the exchange agent, or
such CapRock notes must be tendered according to the procedures
for book-entry transfer described below and a book-entry
confirmation must be received by the exchange agent, or
2. the guaranteed delivery procedures set forth below must be complied
with.
If less than all of the CapRock notes are being tendered, a tendering
holder should fill in the amount of CapRock notes being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of CapRock notes
delivered to the exchange agent will be deemed to have been tendered unless
otherwise indicated.
If any Letter of Transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by us, evidence
satisfactory to us, in our sole discretion, of such person's authority to so act
must be submitted.
Any beneficial owner of CapRock notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial owner
wishes to participate in the exchange offer.
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The method of delivery of CapRock notes, the Letter of Transmittal and all
other required documents is at the option and sole risk of the tendering holder,
and delivery will be deemed made only when actually received by the exchange
agent. Instead of delivery by mail, we recommend that holders use an overnight
or hand delivery service. In all cases, holders should allow sufficient time to
assure timely delivery and should obtain proper insurance. No Letter of
Transmittal or CapRock notes should be sent to McLeodUSA. Holders may request
their respective brokers, dealers, commercial banks, trust companies or nominees
to effect these transactions for them.
BOOK-ENTRY TRANSFER. The exchange agent will make a request to establish an
account with respect to the CapRock notes at DTC for purposes of the exchange
offer within two business days after the date of this prospectus. Any financial
institution that is a participant in DTC's book-entry transfer facility system
may make a book-entry delivery of the CapRock notes by causing DTC to transfer
those CapRock notes into the exchange agent's account at DTC according to DTC's
procedures for transfers. However, although delivery of CapRock notes may be
effected through book-entry transfer into the exchange agent's account at DTC,
the Letter of Transmittal, or facsimile of the letter, properly completed and
duly executed, with any required signature guarantees and any other required
documents, must in any case be delivered to and received by the exchange agent
at its address set forth under "--Exchange Agent" before the expiration date, or
the guaranteed delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT
SIGNATURE GUARANTEES. Tendering holders do not need to endorse their
certificates for CapRock notes and signature guarantees on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are unnecessary
unless:
1. a certificate for CapRock notes is registered in a name other than
that of the person surrendering the certificate, or
2. a registered holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal
In either of these cases, the certificates for CapRock notes must be duly
endorsed or accompanied by a properly executed bond power, with the endorsement
or signature on the bond power and on the Letter of Transmittal or the notice of
withdrawal, as the case may be, guaranteed by a firm or other entity identified
in Rule 17Ad-15 under the Securities Exchange Act as an "eligible guarantor
institution," including, as such terms are defined in that rule:
- a bank
- a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer
- a credit union
- a national securities exchange, registered securities association or
clearing agency
- a savings association that is a participant in a Securities Transfer
Association
unless surrendered on behalf of such eligible institution. See the instructions
to the Letter of Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender CapRock notes in the
exchange offer and the certificates for the CapRock notes are not immediately
available or time will not permit all required documents to reach the exchange
agent before the expiration date, or the procedures for book-entry transfer
cannot be completed on a timely basis, the CapRock notes may nevertheless be
tendered, provided that all of the following guaranteed delivery procedures are
complied with:
- the tenders are made by or through an eligible institution
- before the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter
of Transmittal, stating the name and address of the holder of CapRock
notes and the amount of CapRock
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notes tendered, stating that the tender is being made by the notice
and guaranteeing that within three New York Stock Exchange trading
days after the date of execution of the Notice of Guaranteed Delivery,
the certificates for all physically tendered CapRock notes, in proper
form for transfer, or a book-entry confirmation, as the case may be,
and any other documents required by the Letter of Transmittal will be
deposited by the eligible institution with the exchange agent. The
Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the exchange agent and must include a guarantee
by an eligible institution in the form set forth in the Notice of
Guaranteed Delivery
- the certificates (or book-entry confirmation) representing all tendered
CapRock notes, in proper form for transfer, together with a properly
completed and duly executed Letter of Transmittal, with any required
signature guarantees and any other documents required by the Letter of
Transmittal, are received by the exchange agent within three New York
Stock Exchange trading days after the date of execution of the Notice
of Guaranteed Delivery
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange of
any tendered CapRock notes will be determined by us, and that determination
shall be final and binding on all parties. We reserve the right to reject any
and all tenders that we determine are not in proper form or the acceptance for
exchange of which may, in the view of our counsel, be unlawful. We also reserve
the right, subject to applicable law, to waive any of the conditions of the
exchange offer as set forth under "--Conditions to the Exchange Offer" or any
defect or irregularity in any tender of CapRock notes of any particular holder
whether or not we waive similar defects or irregularities in the case of other
holders.
Our interpretation of the terms and conditions of the exchange offer,
including the Letter of Transmittal and its instructions, will be final and
binding on all parties. No tender of CapRock notes will be deemed to have been
validly made until all defects or irregularities with respect to such tender
have been cured or waived. Neither we, any of our affiliates, the exchange agent
or any other person shall be under any duty to give any notification of any
defects or irregularities in tenders or incur any liability for failure to give
any such notification.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of CapRock notes may be
withdrawn at any time before the expiration date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the exchange agent at its address set forth under "--Exchange Agent" before the
expiration date. Any notice of withdrawal must specify the name of the person
who tendered the CapRock notes to be withdrawn, the principal amount of CapRock
notes to be withdrawn and, if certificates for such CapRock notes have been
tendered, the name of the registered holder of the CapRock notes as set forth on
the CapRock notes, if different from that of the person who tendered the CapRock
notes.
If certificates for CapRock notes have been delivered or otherwise
identified to the exchange agent, the notice of withdrawal must specify the
serial numbers on the particular certificates for the CapRock notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
eligible institution, except in the case of CapRock notes tendered for the
account of an eligible institution.
If CapRock notes have been tendered by the procedures for book-entry
transfer set forth in "--Procedures for Tendering CapRock Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of CapRock notes and must otherwise comply with the
procedures of DTC. Withdrawals of tenders of CapRock notes may not be rescinded.
CapRock notes properly withdrawn will not be deemed validly tendered for
purposes of the exchange offer, but may be retendered at any subsequent time
before the expiration date by following any of the procedures described above
under "--Procedures for Tendering CapRock Notes."
All questions as to the validity, form and eligibility, including time of
receipt, of such withdrawal notices will be determined by us, which
determination shall be final and binding on all parties. Neither we, any of our
affiliates,
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the exchange agent or any other person shall be under any duty to give any
notification of any defects or irregularities in any notice of withdrawal or
incur any liability for failure to give any such notification. Any CapRock
notes which have been tendered but which are withdrawn will be returned to
the holder of those notes promptly after withdrawal.
INTEREST ON THE MCLEODUSA NOTES
Interest on the McLeodUSA notes will be payable semi-annually in arrears on
May 1 and November 1 of each year at a rate of 11 1/2 % per annum, commencing
May 1, 2001. Interest on the McLeodUSA notes will be deemed to accrue from
November 1, 2000.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer or any extension
of the exchange offer, we will not be required to accept for exchange, or to
exchange, any CapRock notes for any McLeodUSA notes and will not be required to
issue McLeodUSA notes in exchange for any CapRock notes and, as described below,
may, at any time and from time to time, terminate or amend the exchange offer,
whether or not any CapRock notes have been accepted for exchange, or may waive
any conditions to or amend the exchange offer, if any of the following
conditions have occurred or exists or have not been satisfied before the
expiration date:
- CapRock has not received sufficient consents to amend the indenture
governing the CapRock notes to (a) modify certain restrictive
covenants contained in the indenture in order to permit the merger of
CapRock with a wholly-owned subsidiary of McLeodUSA, (b) allow the
merger of CapRock and the McLeodUSA subsidiary to be consummated
without triggering the change of control provisions of the indenture
and (c) eliminate most of the restrictive covenants and reporting
requirements contained in the indenture
- the merger of CapRock with the wholly-owned subsidiary of McLeodUSA
has not occurred
- any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect
to the exchange offer or the acquisition of CapRock which, in our
judgment, would reasonably be expected to impair our ability to proceed
with the exchange offer
- any law, statute, rule or regulation shall have been adopted or enacted
which, in our judgment, would reasonably be expected to impair our
ability to proceed with the exchange offer or the acquisition of
CapRock
- a stop order shall have been issued by the SEC or any state securities
authority suspending the effectiveness of the registration statement of
which this prospectus is a part, or proceedings shall have been
initiated or, to our knowledge, threatened for that purpose
- any governmental approval has not been obtained, which approval we
shall, in our judgment, deem necessary for the consummation of the
exchange offer as contemplated hereby or the acquisition of CapRock
- any change, or any development involving a prospective change, in our
business or financial affairs has occurred which, in our judgment,
might materially impair our ability to proceed with the exchange offer
or the acquisition of CapRock
If we determine that any of the foregoing events or conditions has occurred
or exists or has not been satisfied at any time prior to the expiration date, we
may, subject to applicable law, terminate the exchange offer, whether or not any
CapRock notes have been accepted for exchange, or may waive any such condition
or otherwise amend the terms of the exchange offer in any respect. If such
waiver or amendment constitutes a material change to the exchange offer, we will
promptly disclose such waiver or amendment by means of a prospectus supplement
that will be distributed to the registered holders of the CapRock notes, and we
will extend the exchange offer to the extent required by Rule 14e-1 under the
Securities Exchange Act.
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UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes, subject to the limitations set
forth below, certain U.S. federal income tax consequences of the exchange offer.
The discussion is based upon provisions of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), its legislative history, judicial authority,
current administrative rulings and practice, and existing and proposed Treasury
Regulations, all as in effect and existing on the date of this prospectus.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the validity of the statements and
conclusions set forth below. Any such changes or interpretations may be
retroactive and could adversely affect an exchanging noteholder. This discussion
assumes that the CapRock notes and the McLeodUSA notes are held as capital
assets (as defined in Section 1221 of the Code) by the noteholders. This
discussion applies only to a person who is (a) a citizen or resident of the
United States for United States federal income tax purposes, (b) treated as a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (c) an estate
the income of which is subject to United States federal income taxation
regardless of its source, (d) a trust that is subject to the primary supervision
of a court within the United States and the control of a United States person as
described in Section 7701(a)(30) of the Code, or (e) a trust that has a valid
election in effect under applicable Treasury Regulations to be treated as a
United States person (each a "U.S. Holder"). This discussion does not purport to
deal with all aspects of U.S. federal income taxation that might be relevant to
particular noteholders in light of their personal investment circumstances or
status, nor does it discuss the U.S. federal income tax consequences to certain
types of noteholders subject to special treatment under the U.S. federal income
tax laws, such as certain financial institutions, insurance companies,
corporations that accumulate earnings to avoid federal income tax, dealers in
securities or foreign currency, traders in securities that elect to apply a
mark-to-market method of accounting, tax-exempt organizations, or persons that
hold CapRock notes that are a hedge against, or that are hedged against,
currency risk or that are part of a straddle or conversion transaction, or
persons whose functional currency is not the U.S. dollar. Moreover, the effect
of any applicable state, local or foreign tax laws is not discussed.
If CapRock notes are held by a partnership, the tax treatment of a
partner will generally depend upon the status of the partner and the activities
of the partnership. Partners of partnerships holding CapRock notes should
consult their tax advisors.
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH HOLDER
OF CAPROCK NOTES IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX ADVISORS TO
DETERMINE THE IMPACT OF SUCH NOTEHOLDER'S PERSONAL TAX SITUATION ON THE
ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS, OF THE EXCHANGE OFFER.
THE MERGER. As explained above, in connection with the proposed merger
of CapRock with a wholly-owned subsidiary of McLeodUSA, we have entered into a
merger agreement pursuant to which we agreed to file and use our commercially
reasonable efforts to cause to become effective with the SEC a registration
statement with respect to the exchange of the CapRock notes for McLeodUSA notes.
For federal income tax purposes, we believe that the merger and the exchange
offer should be treated as occurring under a single integrated plan.
The obligation of CapRock to consummate the merger is conditioned upon
the receipt by CapRock of the opinion of Munsch Hardt Kopf & Harr, P.C., counsel
to CapRock, that on the basis of the facts, representations and assumptions set
forth or referred to in such opinion, for U.S. federal income tax purposes, the
merger will qualify as a tax free reorganization under Section 368(a) of the
Code, and that each of McLeodUSA and CapRock will be a party to the
reorganization within the meaning of Section 368(b) of the Code. However,
CapRock has not requested nor will it request an advance ruling from the
Internal Revenue Service as to the tax consequences of the merger, and there can
be no assurance that the Internal Revenue Service will agree with the
conclusions set forth in this opinion.
FEDERAL INCOME TAX CONSEQUENCES TO EXCHANGING NOTEHOLDERS. The federal
income tax consequences to CapRock noteholders who exchange their CapRock notes
for McLeodUSA notes will depend in part upon whether
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their CapRock notes and the McLeodUSA notes constitute "securities." The term
"security" is not defined in the Code or applicable regulations and has not
been clearly defined by court decisions. Although there are a number of
factors that may affect the determination of whether a debt instrument is a
"security," one of the most important factors is the original term of the
instrument, or the length of time between the issuance of the instrument and
its maturity. In general, instruments with an original term of more than ten
years are likely to be treated as "securities," and instruments with an
original term of less than five years are unlikely to be treated as
"securities." Although it is not entirely free from doubt, we believe that
the CapRock notes and the McLeodUSA notes should be treated as "securities"
for federal income tax purposes.
Assuming that (a) the CapRock notes and the McLeodUSA notes constitute
"securities" for federal income tax purposes, and (b) consistent with the tax
opinion discussed above, the merger qualifies as a "reorganization" under
Section 368(a) of the Code and each of McLeodUSA and CapRock will be parties to
the reorganization within the meaning of Section 368(b) of the Code, the
exchange of outstanding CapRock notes for McLeodUSA notes pursuant to the
exchange offer should qualify as an exchange of securities issued by parties to
a reorganization occurring pursuant to the merger agreement under Section 354 of
the Code. In such case, the exchanging noteholder will not recognize gain or
loss on the exchange because the principal amount of McLeodUSA notes received in
the exchange will equal the principal amount of the CapRock notes exchanged for
such McLeodUSA notes. A CapRock noteholder who participates in the exchange will
generally have a tax basis in the McLeodUSA notes received equal to the
noteholder's adjusted tax basis in the CapRock notes exchanged, and the
exchanging noteholder's holding period for the McLeodUSA notes will include the
holding period for the CapRock notes exchanged. Notwithstanding the foregoing,
an exchanging noteholder will recognize ordinary income attributable to any
consideration received as payment for accrued interest on the CapRock notes that
was not previously included in the noteholder's income.
EXCHANGE AGENT
We have appointed United States Trust Company of New York as exchange agent
for the exchange offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this prospectus or of the Letter of Transmittal should be
directed to the exchange agent as follows:
BY REGISTERED OR CERTIFIED MAIL
United States Trust Company of New York
P.O. Box 112
Bowling Green Station
New York, New York 10274-0112
BY HAND DELIVERY TO 4:30 P.M.
United States Trust Company of New York
30 Broad Street, B-Level
New York, New York 10004-2304
BY OVERNIGHT COURIER AND BY HAND DELIVERY AFTER 4:30 P.M. ON
EXPIRATION DATE
United States Trust Company of New York
30 Broad Street, 14th Floor
New York, New York 10004-2304
BY FACSIMILE
(212) 422-0183 or (646) 458-8111
Confirm by telephone: (800) 548-6565
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
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FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made personally or by
telephone or other means by our officers, directors or employees.
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. We have agreed to pay the exchange
agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses. We will also pay brokerage houses and
other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus and related documents
to the beneficial owners of CapRock notes, and in handling or tendering for
their customers.
Holders who tender their CapRock notes for exchange will not be obligated
to pay any transfer taxes in connection with the tender, except that if
McLeodUSA notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the CapRock notes tendered, or if a
transfer tax is imposed for any reason other than the exchange of CapRock notes
in connection with the exchange offer, then the amount of any such transfer tax,
whether imposed on the registered holder or any other persons, will be payable
by the tendering holder. If satisfactory evidence of payment of such transfer
tax or exemption therefrom is not submitted with the Letter of Transmittal, the
amount of such transfer tax will be billed directly to such tendering holder.
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USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the merger
agreement. We will not receive any cash proceeds from the issuance of the
McLeodUSA notes offered by this prospectus. In consideration for issuing the
McLeodUSA notes as contemplated in this prospectus, we will receive, in
exchange, an equal number of CapRock notes in like principal amount. The CapRock
notes surrendered in exchange for McLeodUSA notes will be retired and canceled
by us and cannot be reissued.
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INFORMATION ABOUT MCLEODUSA
GENERAL
We provide selected telecommunications services to customers nationwide. We
provide integrated communications services, including local services, in many
Midwest and Rocky Mountain states and long distance and advanced data services
in all 50 states. We are a facilities-based telecommunications provider with 361
ATM switches, 37 voice switches, nearly 824,000 local lines and more than 9,000
employees. We expanded our marketplace for advanced data and Internet services
to all 50 states through our March 30, 2000 acquisition of Splitrock Services.
The network acquired in the Splitrock transaction is capable of transmitting
integrated next-generation data, video and voice services, reaching 800 cities
and 90% of the U.S. population. In the next 12 months, we will distribute 30
million telephone directories in 26 states, serving a population of 52 million.
We are a Nasdaq-100 company traded under the symbol "MCLD."
We offer local, long distance, Internet access, data, voice mail and paging
services from a single company on a single bill. We believe we are the first
company in many of our markets to offer one-stop shopping for communications
services tailored to customers' specific needs.
Our core business is providing communications services in competition with
existing local telephone companies, including:
- local and long distance services
- dial and dedicated Internet access
- higher bandwidth Internet access services, such as digital subscriber
line (DSL) and cable modem
- value-added services such as virtual private networks and web hosting
- bandwidth leasing and colocation services
- facilities and services dedicated for a particular customer's use
- telephone and computer sales, leasing, networking, service and
installation
- other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
We also derive revenue from the following services related to our core
business:
- sale of advertising in print and electronic telephone directories
- traditional local telephone company services in east central Illinois
and southeast South Dakota
- telemarketing services
In most of our local service markets, we compete with the existing local
phone company by leasing its lines and switches. In certain limited local
service markets in Illinois, Iowa, Minnesota and South Dakota, we operate our
own lines and switches. We provide long distance services by using our own
facilities and by leasing capacity from others.
We have developed and continue to develop fiber optic communications
networks in many of our target local markets in the Midwest and Rocky Mountain
regions to carry additional communications traffic on our own network. We are
actively developing enhancements to our national network and associated
next-generation services.
We own and operate a broadband access network that is marketed to various
businesses throughout the United States. As part of our ongoing efforts to
enhance our network and data services, we are acquiring indefeasible rights
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to use dark fiber optic strands in a nationwide network that will cover more
than 15,000 route miles. This national network allows us to transmit
integrated next-generation data, video and voice services on both a retail
and wholesale basis.
We want to be the leading and most admired provider of integrated
communications services in our markets. To achieve this goal, we are:
- aggressively capturing customer share and generating revenue using
leased communications network capacity
- concurrently building our own communications network
- migrating customers to our own communications network to provide
enhanced services and reduce operating costs
The principal elements of our business strategy are to:
PROVIDE INTEGRATED COMMUNICATIONS SERVICES. We believe we can rapidly
penetrate our target markets and build customer loyalty by providing an
integrated product offering to business and residential customers.
BUILD CUSTOMER SHARE THROUGH BRANDING. We believe we can create and
strengthen brand awareness in our target markets by branding our communications
services with the trade name McLeodUSA in combination with the distinctive
black-and-yellow motif of our telephone directories.
PROVIDE OUTSTANDING CUSTOMER SERVICE. Our customer service representatives
are available 24 hours a day, seven days a week, to answer customer calls. Our
customer-focused software and systems allow our representatives immediate access
to our customer and network data, enabling a rapid and effective response to
customer requests.
EMPHASIZE SMALL AND MEDIUM SIZED BUSINESSES. We primarily target small and
medium sized businesses because we believe we can rapidly capture customer share
by providing face-to-face business sales and strong service support to these
customers.
EXPAND OUR FIBER OPTIC COMMUNICATIONS NETWORK. We are building a
state-of-the-art fiber optic communications network to deliver multiple services
and reduce operating costs.
EXPAND INTRA-CITY FIBER OPTIC COMMUNICATIONS NETWORK. Within selected
cities, we plan to extend our network directly to our customers' locations. This
will allow us to provide expanded services and reduce the expense of leasing
communications facilities from the local exchange carrier.
EXPLORE ACQUISITIONS AND STRATEGIC ALLIANCES. We plan to pursue
acquisitions, joint ventures and strategic alliances to expand or complement our
business.
LEVERAGE PROVEN MANAGEMENT TEAM. Our executive management team consists of
veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
As of June 30, 2000, we estimated, based on the combined McLeodUSA and
CapRock business plans, capital requirements and growth projections as of that
date, that we would require $1.5 billion through 2002 to fund our planned
capital expenditures and operating expenses. We expect to meet these funding
needs through the existing cash balances of McLeodUSA and CapRock, our existing
lines of credit and income from future operations. Our estimated aggregate
capital requirements include the projected cost of:
- expanding our fiber optic communications network, including national
and intra-city fiber optic communications networks
- adding voice and ATM switches
- expanding operations in existing and new markets
38
<PAGE>
- developing wireless services in limited markets
- funding general corporate purposes
- completing recent acquisitions, including the merger
- constructing, acquiring, developing or improving telecommunications
assets
Our projected funding plan assumes that (a) the indentures governing the
CapRock notes and the CapRock 12% senior notes due 2008 are amended to provide
that the acquisition of CapRock does not constitute a change of control and (b)
such notes will either remain outstanding as amended to remove various covenants
or be exchanged for our notes pursuant to the terms of the exchange offers. We
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 our future capital requirements are subject
to risks and uncertainties and may differ materially from our estimates.
Accordingly, we may need additional capital to continue to expand our markets,
operations, facilities, network and services. See "Risk Factors--Failure to
Raise Necessary Capital Could Restrict Our Ability to Develop Our Network and
Services and Engage in Strategic Acquisitions."
Our principal executive offices are located at McLeodUSA Technology Park,
6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone
number is (319) 790-7800.
ADDITIONAL INFORMATION
A detailed description of our business, executive compensation, various
benefit plans, including stock option plans, voting securities and the principal
holders of these securities, relationships and transactions between us and our
directors, executive officers and principal stockholders, financial statements
and other matters related to us is incorporated by reference or set forth in our
Annual Report on Form 10-K for the year ended December 31, 1999 and our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2000 and June
30, 2000, incorporated by reference into this prospectus. Holders of CapRock
notes desiring copies of these documents may contact us at our address or
telephone number indicated under "Where You Can Find More Information."
39
<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,
1999 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
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, 1999, 1998 and
1997, and for each of the three years in the period ended December 31, 1999 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
Splitrock Services, Inc........................................... March 30, 2000
</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, Splitrock
and CapRock as if they had been acquired at the beginning of the periods
presented and the as adjusted information in the balance sheet data in the table
includes the Ovation, Splitrock and CapRock financial position as of the date
presented. The 1999 pro forma amounts include adjustments to the CapRock 1999
historical financial statements to give effect to the issuance by CapRock in May
1999 of $210 million of its 11 1/2% senior notes as if the note issuance had
occurred at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has outstanding:
<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
Senior Secured Credit Facilities $575 million May 30, 2000
</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 1/8% senior notes, the
Series A, B and C preferred stock and the Senior Secured Credit Facilities as
if they had occurred at the beginning of 1999.
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
40
<PAGE>
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. On February 29, 2000, McLeodUSA
announced that its board of directors had declared a three-for-one stock split
to be effected in the form of a stock dividend. The record date for the stock
split was April 4, 2000. Stockholders of record at the market close on that date
received two additional shares of McLeodUSA Class A common stock for each share
held. Distribution of the additional shares took place on April 24, 2000. All
information in the selected consolidated financial data has been adjusted to
reflect the two-for-one stock split and the three-for-one stock split.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs and
the portion of rental expense that is representative of the interest component
of rental expense (deemed to be one-third of rental expense which management
believes is a reasonable approximation of the interest component). For each of
the years ended December 31, 1995, 1996, 1997, 1998 and 1999, earnings were
insufficient to cover fixed charges by $11.4 million, $22.6 million, $84.4
million, $135.5 million and $243.3 million, respectively. For the six months
ended June 30, 1999 and 2000, earnings were insufficient to cover fixed charges
by $118.5 million and $207.7 million, respectively. On a pro forma basis,
earnings would not have been sufficient to cover fixed charges by $523.3 million
and $313.5 million for the year ended December 31, 1999 and the six months ended
June 30, 2000, respectively.
(TABLE BEGINS ON THE NEXT PAGE)
41
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
PRO FORMA
---------
1995 1996 1997 1998 1999 1999
----------- --------------- ------ --------------------------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue................................. $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 908,792 $1,210,667
---------- ---------- ---------- ----------- ---------- ----------
Operating expenses:
Cost of service....................... 19,667 52,624 151,190 323,208 457,085 699,401
Selling, general and administrative... 18,054 46,044 148,158 260,931 392,687 481,488
Depreciation and amortization......... 1,835 8,485 33,275 89,107 190,695 346,131
Other................................. -- 2,380 4,632 5,575 -- --
---------- ---------- ---------- ----------- ---------- ----------
Total operating expenses ............. 39,556 109,533 337,255 678,821 1,040,467 1,527,020
Operating loss.......................... (10,558) (28,210) (69,369) (74,675) (131,675) (316,353)
Interest income (expense), net.......... (771) 5,369 (11,967) (52,234) (94,244) (191,068)
Other income............................ -- 495 1,426 1,997 5,637 7,163
Income taxes............................ -- -- -- -- -- --
---------- ---------- ---------- ----------- ---------- ----------
Net loss................................ (11,329) (22,346) (79,910) (124,912) (220,282) (500,528)
Preferred stock dividends............... -- -- -- -- (17,727) (54,375)
---------- ---------- ---------- ----------- ---------- ----------
Loss applicable to common stock......... $ (11,329) $ (22,346) $ (79,910) $ (124,912) $ (238,009) $ (554,633)
========== ========== ========== =========== ========== ==========
Loss per common share................... $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
========= ========= ========= ========== ========== ==========
Weighted average common shares
outstanding........................... 168,024 243,036 329,844 376,842 443,130 559,751
========== ========== ========== =========== ========== ==========
Ratio of earnings to fixed charges...... -- -- -- -- -- --
========== ========== ========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
PRO FORMA
---------
1999 2000 2000
----------- ------------- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue $403,771 $ 620,082 $ 769,055
-------- --------- ----------
Operating expenses:
Cost of service......................................................... 205,507 344,426 466,226
Selling, general and administrative..................................... 178,339 256,563 309,973
Depreciation and amortization........................................... 78,708 163,193 213,415
Other................................................................... -- -- 872
-------- --------- ----------
Total operating expenses................................................ 462,554 764,182 990,486
Operating loss............................................................ (58,783) (144,100) (221,431)
Interest income (expense), net............................................ (50,666) (42,077) (70,486)
Other income.............................................................. 562 1,971 1,996
Income taxes.............................................................. -- -- --
-------- --------- ----------
Net loss.................................................................. (108,887) (184,206) (289,921)
Preferred stock dividends................................................. -- (27,204) (27,204)
-------- ----------- ----------
Loss applicable to common stock........................................... $(108,887) $(211,410) $ (317,125)
========= ========= ==========
Loss per common share..................................................... $ (.26) $ (.40) $ (.54)
======= ========= =========
Weighted average common shares outstanding................................ 423,210 529,109 590,221
======== ========= ==========
Ratio of earnings to fixed charges....................................... -- -- --
======== ========= ==========
</TABLE>
42
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 2000
------------ -------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets................... $ 8,507 $224,401 $ 517,869 $ 793,192 $1,569,473 $1,647,070 $1,879,002
Working capital (deficit)........ $(1,208) $185,968 $ 378,617 $ 613,236 $1,272,794 $ 859,997 $ 913,955
Property and equipment, net...... $16,119 $ 92,123 $ 373,804 $ 629,746 $1,270,032 $1,897,962 $2,321,001
Total assets..................... $28,986 $452,994 $1,345,652 $1,925,197 $4,203,147 $7,069,543 $7,791,496
Long-term debt................... $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,763,725 $2,370,370 $2,718,588
Redeemable convertible preferred
stock.......................... $ -- $ -- $ -- $ -- $1,000,000 $1,000,000 $1,000,000
Stockholders' equity............. $14,958 $403,429 $ 559,379 $ 462,806 $1,108,542 $2,878,436 $3,074,207
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
PRO FORMA
---------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment............... $ 6,364 $ 79,845 $179,255 $289,923 $580,003 $ 820,756
Business acquisitions....................... $ 8,333 $ 93,937 $421,882 $ 49,737 $736,626 $3,376,180
EBITDA(1)...................................... $(8,723) $(17,345) $(31,462) $ 20,007 $ 59,020 $ 29,778
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
PRO FORMA
---------
1999 2000 2000
---------- ---------- ----
(UNAUDITED)(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment........................................ $220,390 $ 559,834 $ 804,163
Business acquisitions................................................ $525,161 $2,052,925 $2,415,523
EBITDA(1)............................................................... $ 19,925 $ 19,093 $ (7,144)
</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.
43
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been prepared
to give effect to:
- 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 acquisition of Splitrock Services, Inc. in March 2000
- the completion of the Senior Secured Credit Facilities in May 2000
- the merger
For purposes of this pro forma presentation, the issuance of the 8 1/8%
senior notes is referred to as the "Notes Offering" 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 June
30, 2000.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
include the operations of Ovation Communications, Inc., the operations of
Splitrock Services, Inc., and the operations of CapRock as if the acquisition
of Ovation and Splitrock and the merger with CapRock were consummated on
January 1, 1999 and the related weighted average share amounts have been
adjusted to give effect to the shares issued in the transactions as if they
had been issued on January 1, 1999. The CapRock results have been adjusted to
give effect to the issuance in May 1999 by CapRock of $210 million of its 11
1/2 % senior notes due 2009 as if the issuance was consummated on January 1,
1999. It also assumes that interest related to the Notes Offering and the
Senior Secured Credit Facilities, dividends related to the Preferred Stock
Issuances and the additional depreciation and amortization due to the
increased value of tangible and intangible assets acquired through the
acquisition of Ovation, Splitrock and the merger with CapRock, using the
purchase method of accounting, began January 1, 1999. The unaudited pro forma
financial information is derived from and should be read in conjunction with
the Consolidated Financial Statements of McLeodUSA and the related notes
thereto included in the McLeodUSA Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. The pro forma adjustments for the acquisitions
of Ovation and Splitrock, the Notes Offering and the Preferred Stock
Issuances are incorporated by reference from a Current Report on Form 8-K/A
filed with the SEC on June 13, 2000.
For purposes of allocating the net purchase price among the various
assets to be acquired, McLeodUSA has preliminarily considered the carrying
value of the acquired assets to approximate their fair value, with all of the
excess of the net purchase price being attributed to intangible assets,
primarily goodwill. McLeodUSA intends to more fully evaluate the acquired
assets following consummation of the merger and, as a result, the allocation
of the net purchase price among the acquired tangible and intangible assets
may change.
The 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 1999, nor is it necessarily indicative of future operating
results or financial position.
(TABLE BEGINS ON THE NEXT PAGE)
44
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
ADJUSTMENTS FOR PRO FORMA FOR
CAPROCK CAPROCK
MCLEODUSA CAPROCK TRANSACTION TRANSACTION
--------- ------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 931,318 $ 3,680 $ -- $ 934,998
Other current assets................................. 715,752 245,596 (17,344)(2) 944,004
------------ ---------- ----------- ------------
TOTAL CURRENT ASSETS............................ 1,647,070 249,276 (17,344) 1,879,002
Property and Equipment, net............................... 1,897,962 423,039 -- 2,321,001
Intangible assets......................................... 3,373,029 -- 63,123(1) 3,436,152
Other assets ............................................. 151,482 3,859 -- 155,341
------------ ---------- ---------- ------------
TOTAL ASSETS.................................... $ 7,069,543 $ 676,174 $ 45,779 $ 7,791,496
============ ========== ========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities....................................... $ 787,083 $ 144,964 $ 33,000(3) $ 965,047
Long-term debt, less current maturities................... 2,370,370 348,218 -- 2,718,588
Other long-term liabilities............................... 33,654 5,254 (5,254)(2) 33,654
------------ ---------- ----------- ------------
TOTAL LIABILITIES............................... 3,191,107 498,436 27,746 3,717,289
------------ ---------- ---------- ------------
Redeemable convertible preferred stock.................... 1,000,000 -- -- 1,000,000
------------ ---------- ---------- ------------
STOCKHOLDERS' EQUITY:
Preferred stock...................................... 12 -- -- 12
Common stock......................................... 5,817 387 (237) 5,967
Additional paid-in capital........................... 3,497,346 191,808 3,813 3,692,967
Treasury Stock, at cost.............................. -- (678) 678 --
Retained earnings (deficit).......................... (706,669) (13,570) 13,570 (706,669)
Accumulated other comprehensive income............... 81,930 (209) 209 81,930
------------ ---------- ---------- ------------
TOTAL STOCKHOLDERS' EQUITY...................... 2,878,436 177,738 18,033 3,074,207
------------ ---------- ---------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......
$ 7,069,543 $ 676,174 $ 45,779 $ 7,791,496
============ ========== ========== ============
</TABLE>
(1) The adjustment for the merger reflects the preliminary allocation of the
net purchase price of CapRock to the net assets of CapRock that are to be
acquired, including intangible assets, and records the issuance of
15,023,318 shares of McLeodUSA Class A common stock valued at $13.77 per
share. The value of $13.77 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, October 2, 2000, and ending four days after such announcement.
The net purchase price of approximately $579 million is equal to (1) the
product of (A) the total number of shares of CapRock common stock
attributable to outstanding CapRock common stock and options with exercise
prices below the closing price of $5.063 (totaling 39,001,954) as of
October 2, 2000, MULTIPLIED BY (B) the conversion ratio of 0.3876,
MULTIPLIED BY (C) $13.77, the value of a share of McLeodUSA Class A common
stock (calculated as described above), MINUS (2) the aggregate option
proceeds to be received (approximately $0.3 million) PLUS (3) the principal
amount of outstanding CapRock senior notes ($360 million) and the cost
directly attributable to the merger ($11 million). The allocation of the
net purchase price to the net assets, excluding debt, (approximately $516
million) and debt ($360 million) of CapRock as of June 30, 2000, results in
goodwill of approximately $63 million.
(2) To eliminate CapRock's deferred tax assets and deferred tax liabilities.
McLeodUSA expects to continue to be in a net deferred tax asset position
after the merger and will continue to provide a valuation allowance on the
net deferred tax assets.
(3) Reflects an increase in current liabilities related to banking, legal and
accounting fees, write-off of debt issuance costs and unaccreted discount
on CapRock's senior notes and other matters directly attributable to the
merger under EITF 95-3.
45
<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, 1999
-------------------------------------
PRO FORMA PRO FORMA
FOR PRO FORMA ADJUSTMENTS FOR
SPLITROCK ADJUSTMENT FOR FOR CREDIT CAPROCK FOR CAPROCK CAPROCK
ACQUISITION CREDIT FACILITIES FACILITIES AS ADJUSTED(4) ACQUISITION ACQUISITION
----------- ----------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue............. $1,018,044 $ -- $1,018,044 $ 192,623 $ -- $1,210,667
---------- --------------- ---------- ------------- --------- ----------
Operating expenses:
Cost of service.............. 583,725 -- 583,725 115,676 -- 699,401
Selling, general and 424,953 -- 424,953 56,535 -- 481,488
administrative...................
Depreciation and amortization 333,277 -- 333,277 9,698 3,156(5) 346,131
Other........................ -- -- -- -- -- --
---------- -------------- ---------- ------------- --------- ----------
Total operating expenses.... 1,341,955 -- 1,341,955 181,909 3,156 1,527,020
---------- -------------- ---------- ------------- --------- ----------
Operating income (loss)...... (323,911) -- (323,911) 10,714 (3,156) (316,353)
Interest income (expense), net (127,456) (36,493)(3) (163,949) (27,119) -- (191,068)
Other nonoperating income
(expense)........................ 5,637 -- 5,637 1,526 -- 7,163
Income taxes................. -- -- -- 5,505 (5,505)(6) --
---------- -------------- ---------- ------------- --------- ----------
Net income (loss)............ (445,730) (36,493) (482,223) (9,374) (8,661) (500,258)
Preferred stock dividends.... 54,375 -- (54,375) -- -- (54,375)
---------- -------------- ---------- ------------- --------- ----------
Earnings applicable to common
stock............................ $ (500,105) $ (36,493) $ (536,598) $ (9,374) $ (8,661) $ (554,633)
=========== ============== ========== ============= ======== ==========
Loss per common and common
equivalent share............ $ (0.92) $ (0.99) $ (0.99)
=========== ========== ==========
Weighted average common and
common equivalent shares
outstanding...................... 544,728 544,728 15,023 559,751
=========== ========== ======== ==========
OTHER FINANCIAL DATA:
EBITDA(1)...................... $ 9,366 $ -- $ 9,366 $ 20,412 $ -- $ 29,778
</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.
(2) The "Pro Forma for Splitrock Acquisition" information is derived from the
Pro Forma Financial Statements that were filed by McLeodUSA with the SEC on
a Current Report on Form 8-K/A on June 13, 2000.
(3) McLeodUSA used cash on hand and funds drawn from its Senior Secured Credit
Facilities to retire the outstanding Splitrock 11 3/4% senior notes in July
2000. This adjustment records the pro forma annual interest expense of
approximately $66 million on the Senior Secured Credit Facilities, reduced
by the interest expense on the Splitrock 11 3/4% senior notes as previously
reported in the "Pro Forma for Splitrock Acquisition."
(4) As adjusted financial information gives effect to the issuance by CapRock
of $210 million of its 11 1/2% senior notes due 2009 in May 1999 as if such
issuance had occurred on January 1, 1999. See "CapRock Communications Corp.
- Unaudited Pro Forma Condensed Statements of Operations."
(5) To amortize intangibles acquired in the merger over 20 years.
(6) To eliminate CapRock's income tax benefit.
46
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
-----------------------------------------------------------------------------------------------
ADJUSTMENTS PRO FORMA FOR
FOR SPLITROCK SPLITROCK FOR ADJUSTMENTS FOR PRO FORMA FOR
MCLEODUSA SPLITROCK(2) ACQUISITION ACQUISITION CREDIT FACILITIES CREDIT FACILITIES
--------- ----------- ------------- ------------- ----------------- -----------------
OPERATIONS STATEMENT DATA:
Revenue....................... $620,082 $ 35,037 $ -- $655,119 $ -- $ 655,119
-------- -------- ------- -------- -------- ----------
Operating expenses:
Cost of service............. 344,426 42,580 -- 387,006 -- 387,006
Selling, general and
administrative............ 256,563 10,012 -- 266,575 -- 266,575
Depreciation and
amortization.............. 163,193 12,470 27,097 202,760 -- 202,760
Other....................... -- 872 -- 872 -- 872
-------- -------- -------- -------- -------- ----------
Total operating expenses.. 764,182 65,934 27,097 857,213 -- 857,213
-------- -------- -------- -------- -------- ----------
(202,094) -- (30,897) (27,097) -- (202,094)
Interest income (expense), .
net (42,077) (6,302) -- (48,379) (15,086)(3) (63,465)
Other nonoperating income
(expense)................. 1,971 -- -- 1,971 -- 1,971
Income taxes................ -- -- -- -- -- --
-------- -------- -------- -------- -------- ----------
Net income (loss)........... (184,206) (37,199) (27,097) (248,502) (15,086) (263,588)
Preferred stock dividends... (27,204) -- -- (27,204) -- (27,204)
--------- -------- -------- --------- -------- -----------
Earnings applicable to common
stock..................... $(211,410) $(37,199) $(27,097) $(275,706) $(15,086) $ (290,792)
========== ========= ========= ========== ========= ===========
Loss per common and common
equivalent share......... $(0.40) (0.48) $ (0.51)
========== ========= ============
Weighted average common and
common equivalent shares
outstanding............... 529,109 46,089 575,198 575,198
======== ======== ======== ==========
OTHER FINANCIAL DATA:
EBITDA(1)................... $ 19,093 $(17,555) $ -- $ 1,538 $ -- $ 1,538
<CAPTION>
---------------------------------
ADJUSTMENTS PRO FORMA
FOR CAPROCK FOR CAPROCK
CAPROCK ACQUISITION ACQUISITION
------- ----------- -----------
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue....................... $113,936 $ -- $769,055
-------- -------- --------
Operating expenses:
Cost of service............. 79,220 -- 466,226
Selling, general and
administrative............ 43,398 -- 309,973
Depreciation and
amortization.............. 9,077 1,578(4) 213,415
Other....................... -- 872
-------- -------- --------
Total operating expenses.. 131,695 1,578 990,486
-------- -------- -- -------
(17,759) (1,578) (221,431)
Interest income (expense), .
net (7,021) -- (70,486)
Other nonoperating income
(expense)................. 25 -- 1,996
Income taxes................ 9,118 (9,118)(5) --
-------- --------- -------
Net income (loss)........... (15,637) (10,696) (289,921)
Preferred stock dividends... -- -- (27,204)
-------- -------- ---------
Earnings applicable to common
stock..................... $(15,637) $(10,696) $(317,125)
========= ========= ==========
Loss per common and common
equivalent share......... $ (0.54)
==========
Weighted average common and
common equivalent shares
outstanding............... 15,023 590,221
======== ========
OTHER FINANCIAL DATA:
EBITDA(1)................... $ (8,682) $ -- $ (7,144)
----------
</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.
(2) The "Splitrock" column represents Splitrock's Statement of Operations for
the period of January 1, 2000 through March 30, 2000, the date of the
acquisition of Splitrock by McLeodUSA. The Splitrock financial statements
and the information in the "Adjustments for Splitrock Acquisition" column
are derived from the Pro Forma Financial Statements that were filed by
McLeodUSA with the SEC on a Current Report on Form 8-K/A on June 13, 2000.
(3) McLeodUSA used cash on hand and funds drawn from the Senior Secured Credit
Facilities to retire its outstanding Splitrock 11 3/4% senior notes in July
2000. This adjustment records the pro forma interest expense on the Senior
Secured Credit Facilities reduced by the interest expense on the Splitrock
11 3/4% senior notes as previously reported in the "Pro Forma for Splitrock
Acquisition" column.
(4) To amortize intangibles acquired in the merger over 20 years.
(5) To eliminate CapRock's income tax benefit.
47
<PAGE>
CAPROCK COMMUNICATIONS CORP.
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 CapRock of $210 million of its 11
1/2% senior notes due 2009 in May 1999 as if such issuance had occurred on
January 1, 1999. The unaudited pro forma financial information is derived from
and should be read in conjunction with the financial statements of CapRock and
the related notes thereto included in the CapRock Annual Report on Form 10-K for
the fiscal year ended December 31, 1999, which is incorporated by reference into
this prospectus. The pro forma adjustments are based upon available information
and assumptions that management believes to be reasonable.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1999
-------------------------------------
ADJUSTMENTS PRO FORMA
----------- ---------
CAPROCK FOR MAY 1999 NOTES FOR MAY 1999 NOTES
------- ------------------ ------------------
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue $ 192,623 $ -- $ 192,623
---------- --------- ----------
Operating expenses:
Cost of service 115,676 -- 115,676
Selling, general and administrative 56,535 -- 56,535
Depreciation and amortization 9,698 -- 9,698
Other -- -- --
---------- --------- ----------
Total operating expenses 181,909 -- 181,909
Operating income (loss) 10,714 -- 10,714
Interest income (expense), net (17,861) (9,258) (27,119)
Other nonoperating income (expense) 1,526 -- 1,526
Income tax benefit (expense) 2,080 3,425 5,505
---------- ------------ ----------
Net income (loss) (3,541) (5,833) (9,374)
Preferred stock dividends -- -- --
---------- --------- ----------
Earnings applicable to common stock $ (3,541) $(5,833) $ (9,374)
========= ======= ==========
Loss per common and common equivalent
share $ (0.11) $ (0.30)
========= ==========
Weighted average common and common
equivalent shares outstanding 31,727 31,727
========= ==========
</TABLE>
48
<PAGE>
DESCRIPTION OF THE MCLEODUSA NOTES
GENERAL
The McLeodUSA notes will be issued under an indenture between
McLeodUSA and United States Trust Company of New York, as trustee, which we
refer to as the McLeodUSA indenture. For purposes of this description of the
McLeodUSA notes, references to "McLeodUSA," "we," "our" or "us" refers to
McLeodUSA Incorporated and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the McLeodUSA notes include those stated in the
McLeodUSA indenture and those made a part of the McLeodUSA indenture by
reference to the Trust Indenture of 1939 as in effect on the date of the
McLeodUSA indenture. The McLeodUSA notes are subject to all of those terms,
and holders of the McLeodUSA notes should refer to the McLeodUSA indenture and
the Trust Indenture Act for a complete statement of the applicable terms. A
copy of the McLeodUSA indenture is available from McLeodUSA on request. The
statements and definitions of terms under this caption relating to the
McLeodUSA notes and the McLeodUSA indenture are summaries and do not purport
to be complete. These summaries make use of terms defined in the McLeodUSA
indenture and are qualified in their entirety by express reference to the
McLeodUSA indenture. Some of the terms used in this description are defined
below under "--Definitions."
The McLeodUSA notes will rank equal in right of payment with our 10
1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2%
senior notes, 8 1/8% senior notes, any of our notes to be issued pursuant to
the Concurrent Exchange Offer and all other existing and future senior
unsecured indebtedness of McLeodUSA and will rank senior in right of payment
to all existing and future subordinated indebtedness of McLeodUSA. As of June
30, 2000, McLeodUSA had no outstanding subordinated indebtedness and, other
than our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8 senior
notes, 9 1/2% senior notes and 8 1/8% senior notes, had no outstanding
indebtedness that would rank equal with the McLeodUSA notes. The McLeodUSA
notes will not be secured by any assets and will be effectively subordinated
to any existing and future secured indebtedness of McLeodUSA and its
subsidiaries, including the Senior Secured Credit Facilities (as defined in
"Other McLeodUSA Indebtedness"), and any other Senior Credit Facility or
Qualified Receivable Facility we enter into, to the extent of the value of
the assets securing such indebtedness. As of June 30, 2000, the total secured
indebtedness of McLeodUSA and its subsidiaries was approximately $631.7
million. For a description of these notes and other outstanding indebtedness
of McLeodUSA, see "Other McLeodUSA Indebtedness."
The operations of McLeodUSA are conducted through its subsidiaries
and, therefore, McLeodUSA depends upon cash flow from those entities to meet
its obligations. McLeodUSA's subsidiaries will have no direct obligation to
pay amounts due on the McLeodUSA notes and will not guarantee the McLeodUSA
notes. As a result, the McLeodUSA notes will be effectively subordinated to
all existing and future third-party indebtedness, including the Senior Secured
Credit Facilities, any other Senior Credit Facility or any applicable
Qualified Receivable Facility we enter into, and other liabilities of
McLeodUSA's subsidiaries, including trade payables. As of June 30, 2000, the
total liabilities of McLeodUSA's subsidiaries, after the elimination of loans
and advances by McLeodUSA to its subsidiaries, were approximately $700.9
million. In addition, the McLeodUSA notes will be effectively subordinated in
certain respects to any CapRock notes and any CapRock 12% senior notes due
2008 that remain outstanding after this exchange offer and the Concurrent
Exchange Offer for which CapRock will remain the obligor. Any rights of
McLeodUSA and its creditors, including the holders of McLeodUSA notes, to
participate in the assets of any of McLeodUSA's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
PRINCIPAL, MATURITY AND INTEREST
The McLeodUSA notes will be limited in principal amount to $210
million and will mature on May 1, 2009. Interest on the McLeodUSA notes will
accrue at the rate of 11 1/2% per annum and will be payable in cash
49
<PAGE>
semi-annually in arrears on May 1 and November 1 of each year, commencing May
1, 2001. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Interest on the McLeodUSA notes will be deemed to accrue
from November 1, 2000.
Principal and interest will be payable at the office of the Paying
Agent but, at the option of McLeodUSA, interest may be paid by check mailed to
the registered holders at their registered addresses. The McLeodUSA notes will
be issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and any integral multiples of $1,000 in excess
thereof. Unless otherwise designated by McLeodUSA, McLeodUSA's office or
agency in New York will be the office of the trustee maintained for such
purpose.
BOOK-ENTRY SYSTEM
The McLeodUSA notes will initially be issued in the form of one or
more Global Securities, as defined in the McLeodUSA indenture, held in
book-entry form. The McLeodUSA notes will be deposited with the trustee as
custodian for the Depository, and the Depository or its nominee will initially
be the sole registered holder of the McLeodUSA notes for all purposes under
the McLeodUSA indenture. Except as set forth below, a Global Security may not
be transferred except as a whole by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository.
The McLeodUSA notes that are issued as described below under
"--Certificated Notes" will be issued in definitive form.
Upon the transfer of a McLeodUSA note in definitive form, such
McLeodUSA note will, unless the Global Security has previously been exchanged
for McLeodUSA notes in definitive form, be exchanged for an interest in the
Global Security representing the principal amount McLeodUSA notes being
transferred.
Upon the issuance of a Global Security, the Depository or its nominee
will credit, on its internal system, the accounts of persons holding through
it with the individual beneficial interests in such Global Security
representing the respective principal amounts of the McLeodUSA notes held by
such persons. Ownership of beneficial interests in a Global Security will be
limited to persons that have accounts with the Depository ("participants") or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in a Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depository or its nominee for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
some purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal of, premium, if any, on and interest on
McLeodUSA notes represented by any such Global Security will be made to the
Depository or its nominee, as the case may be, as the sole registered owner
and the sole holder of the McLeodUSA notes represented thereby for all
purposes under the McLeodUSA indenture. None of McLeodUSA, the trustee or any
agent of McLeodUSA will have any responsibility or liability for:
1. any aspect of the Depository's reports relating to or payments
made on account of beneficial ownership interests in a Global
Security representing any McLeodUSA notes or for maintaining,
supervising or reviewing any of the Depository's records
relating to such beneficial ownership interests or
2. any other matter relating to the actions and practices of the
Depository or any of its participants.
McLeodUSA has been advised by the Depository that upon receipt of any
payment of principal of, premium, if any, on or interest on any Global
Security, the Depository will immediately credit, on its book-entry
registration and transfer system, the accounts of participants with payments
in amounts proportionate to their
50
<PAGE>
respective beneficial interests in the principal or face amount of such Global
Security, as shown on the records of the Depository. McLeodUSA expects that
payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held
for customer accounts registered in "street name" and will be the sole
responsibility of such participants.
So long as the Depository or its nominee is the registered owner or
holder of such Global Security, the Depository or such nominee, as the case
may be, will be considered the sole owner or holder of the McLeodUSA notes
represented by such Global Security for the purposes of receiving payment on
the McLeodUSA notes, receiving notices and for all other purposes under the
McLeodUSA indenture and the McLeodUSA notes. Beneficial interests in McLeodUSA
notes will be evidenced only by, and transfers thereof will be effected only
through, records maintained by the Depository and its participants. Except as
provided above, owners of beneficial interests in a Global Security will not
be entitled to, and will not be considered the holders of, such Global
Security for any purposes under the McLeodUSA indenture. Accordingly, each
person owning a beneficial interest in a Global Security must rely on the
procedures of the Depository and, if such person is not a participant, on the
procedures of the participant through which such person owns its interest, to
exercise any rights of a holder under the McLeodUSA indenture. McLeodUSA
understands that, under existing industry practices, in the event that
McLeodUSA requests any action of holders or that an owner of a beneficial
interest in a Global Security desires to give or take any action that a holder
is entitled to give or take under the McLeodUSA indenture, the Depository
would authorize the participants holding the relevant beneficial interest to
give or take such action, and such participants would authorize beneficial
owners owning through such participants to give or take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
The Depository has advised McLeodUSA that it will take any action
permitted to be taken by a holder of McLeodUSA notes, including the
presentation of McLeodUSA notes for exchange as described below, only at the
direction of one or more participants to whose account with the Depository
interests in the Global Security are credited and only in respect of such
portion of the aggregate principal amount of the McLeodUSA notes as to which
such participant or participants has or have given such direction.
The Depository has advised McLeodUSA that the Depository is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a "banking organization" within the meaning of New York Banking Law,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the Securities Exchange Act. The Depository was created to
hold the securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of securities
certificates. The Depository's participants include securities brokers and
dealers including banks, trust companies, clearing corporations and various
other organizations some of whom, and/or their representatives, own the
Depository. Access to the Depository's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly, and dealers including banks, trust companies, clearing
corporations and various other organizations some of whom, and/or their
representatives, own the Depository. Access to the Depository's book-entry
system is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that McLeodUSA
believes to be reliable, but McLeodUSA takes no responsibility for the
accuracy thereof.
51
<PAGE>
CERTIFICATED NOTES
The McLeodUSA notes represented by a Global Security are exchangeable
for certificated McLeodUSA notes only if:
- the Depository notifies McLeodUSA that it is unwilling or unable
to continue as a depository for such Global Security or if at any
time the Depository ceases to be a clearing agency registered
under the Securities Exchange Act, and a successor depository is
not appointed by McLeodUSA within 90 days,
- McLeodUSA executes and delivers to the trustee a notice that such
Global Security shall be so transferable, registrable and
exchangeable, and such transfer shall be registrable or
- there shall have occurred and be continuing an Event of Default
with respect to the McLeodUSA notes represented by such Global
Security.
Any Global Security that is exchangeable for certificated McLeodUSA notes
pursuant to the preceding sentence will be transferred to, and registered and
exchanged for, certificated McLeodUSA notes in authorized denominations and
registered in such names as the Depository or its nominee holding such Global
Security may direct. Subject to the foregoing, a Global Security is not
exchangeable, except for a Global Security of like denomination to be
registered in the name of the Depository or its nominee. In the event that a
Global Security becomes exchangeable for certificated McLeodUSA notes:
- certificated McLeodUSA notes will be issued only in fully
registered form in denominations of $1,000 or integral multiples
thereof,
- payment of principal, any repurchase price, and interest on the
certificated McLeodUSA notes will be payable, and the transfer of
the certificated McLeodUSA notes will be registrable, at the
office or agency of McLeodUSA maintained for such purposes, and
- no service charge will be made for any issuance of the
certificated McLeodUSA notes, although McLeodUSA may require
payment of a sum sufficient to cover any tax or governmental
charge imposed in connection therewith.
OPTIONAL REDEMPTION
The McLeodUSA notes will be subject to redemption at the option of
McLeodUSA, in whole or in part, at any time on or after May 1, 2004 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice, in
amounts of $1,000 or an integral multiple of $1,000, at the redemption prices,
expressed as percentages of principal amount, set forth below, plus accrued
and unpaid interest thereon, if any, if redeemed during the twelve month
periods beginning May 1 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2004.............................................................. 105.750%
2005.............................................................. 103.834%
2006.............................................................. 101.917%
2007 and after.................................................... 100.000%
</TABLE>
In addition, at any time prior to May 1, 2002, McLeodUSA may, other
than in any circumstances resulting in a Change of Control, redeem, at its
option, up to 35% of the aggregate principal amount of the McLeodUSA notes
with the proceeds of one or more additional Public Equity Offerings or
Strategic Equity Investments resulting in aggregate gross proceeds to
McLeodUSA of at least $25 million, at any time or from time to time in part,
at a redemption price (expressed as a percentage of principal amount) of
111.50%, plus accrued and unpaid interest to the redemption date provided that
at least 65% of the aggregate principal amount of the McLeodUSA notes
originally issued remain outstanding after each such redemption. Any such
redemption shall be made within 60 days
52
<PAGE>
after the consummation of such Public Equity Offering or Strategic Equity
Investment upon not less than 30 nor more than 60 days' prior notice.
If less than all of the McLeodUSA notes are to be redeemed at any
time, the trustee will select the McLeodUSA notes, or portions thereof, for
redemption on a pro rata basis, by lot or by such other method as the trustee
in its sole discretion shall deem to be fair and appropriate; provided that no
McLeodUSA note of $1,000 in principal amount or less shall be redeemed in
part. If any McLeodUSA note is to be redeemed in part only, the notice of
redemption relating to such McLeodUSA note shall state the portion of the
principal amount thereof to be redeemed. A new McLeodUSA note in principal
amount equal to the unredeemed portion thereof will be issued in the name of
the holder thereof upon cancellation of the original McLeodUSA note.
MANDATORY REDEMPTION
Except as set forth under "--Repurchase at the Option of Holders upon
a Change of Control" and "--Asset Sales," McLeodUSA is not required to make
mandatory redemption payments or sinking fund payments with respect to the
McLeodUSA notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder shall have
the right to require McLeodUSA to repurchase all or any part, equal to $1,000
principal amount or an integral multiple thereof, of such holder's McLeodUSA
notes pursuant to the offer described below (the "Change of Control Offer") at
a purchase price (the "Change of Control Purchase Price") in cash equal to
101% of the principal amount of the McLeodUSA notes plus accrued and unpaid
interest, if any, to any Change of Control Payment Date.
Within 30 days following any Change of Control, McLeodUSA or the
trustee, at the request and expense of McLeodUSA, shall mail a notice to each
holder stating:
- that a Change of Control Offer is being made pursuant to the
covenant described under "--Repurchase at the Option of Holders
upon a Change of Control" and that all McLeodUSA notes timely
tendered will be accepted for payment;
- the Change of Control Purchase Price and the purchase date (the
"Change of Control Payment Date"), which shall be no earlier than
30 days nor later than 60 days from the date such notice is
mailed;
- that any McLeodUSA notes or portions thereof not tendered or
accepted for payment will continue to accrue interest;
- that, unless McLeodUSA defaults in the payment of the Change of
Control Purchase Price, all McLeodUSA notes or portions thereof
accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest from and after the Change of Control
Payment Date;
- that holders electing to have any McLeodUSA notes or portions
thereof purchased under a Change of Control Offer will be required
to surrender their McLeodUSA notes before the close of business on
the third Business Day preceding the Change of Control Payment
Date;
- that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date,
a telegram, telex, facsimile transmission or letter setting forth
the name of the holder, the principal amount of McLeodUSA notes
delivered for purchase, and a statement that such holder is
withdrawing its election to have such McLeodUSA notes or portions
thereof purchased;
- that holders electing to have McLeodUSA notes purchased under the
Change of Control Offer must specify the principal amount that is
being tendered for purchase, which principal amount must be $1,000
or an integral multiple thereof;
- that holders whose McLeodUSA notes are being purchased only in
part will be issued new McLeodUSA notes equal in principal amount
to the unpurchased portion of the McLeodUSA note or
53
<PAGE>
McLeodUSA notes surrendered, which unpurchased portion must be
equal to $1,000 in principal amount or an integral multiple
thereof; and
- any other information necessary to enable any holder to tender
McLeodUSA notes and to have such McLeodUSA notes purchased
pursuant to the McLeodUSA indenture.
McLeodUSA will comply with the requirements of Section 14(e) under
the Securities Exchange Act and any other securities laws or regulations, to
the extent such laws and regulations are applicable, in connection with the
repurchase of McLeodUSA notes under a Change of Control Offer.
On the Change of Control Payment Date, McLeodUSA will:
- accept for payment McLeodUSA notes or portions thereof properly
tendered under the Change of Control Offer;
- irrevocably deposit with the Paying Agent in immediately available
funds an amount equal to the Change of Control Purchase Price in
respect of all McLeodUSA notes or portions thereof so accepted;
and
- deliver, or cause to be delivered, to the trustee the McLeodUSA
notes so accepted together with an Officers' Certificate listing
the McLeodUSA notes or portions thereof tendered to McLeodUSA and
accepted for payment.
The Paying Agent shall promptly mail to each holder of McLeodUSA notes so
accepted payment in an amount equal to the Change of Control Purchase Price
for such McLeodUSA notes, and the trustee shall promptly authenticate and mail
to each holder a new McLeodUSA note equal in principal amount to any
unpurchased portion of the McLeodUSA notes surrendered, if any; provided that
each such new McLeodUSA note shall be in a principal amount of $1,000 or any
integral multiple thereof.
The existence of the holders' right to require, subject to several
conditions, McLeodUSA to repurchase McLeodUSA notes upon a Change of Control
may deter a third party from acquiring McLeodUSA in a transaction that
constitutes a Change of Control. If a Change of Control Offer is made, there
can be no assurance that McLeodUSA will have sufficient funds to pay the
Change of Control Purchase Price for all McLeodUSA notes tendered by holders
seeking to accept the Change of Control Offer. In addition, the Senior Secured
Credit Facilities of McLeodUSA prohibit and the instruments governing other
indebtedness of McLeodUSA may prohibit McLeodUSA from purchasing any McLeodUSA
notes prior to their Stated Maturity, including under a Change of Control
Offer. In the event that a Change of Control Offer occurs at a time when
McLeodUSA does not have sufficient available funds to pay the Change of
Control Purchase Price for all McLeodUSA notes tendered pursuant to such offer
or at a time when McLeodUSA is prohibited from purchasing the McLeodUSA notes,
and McLeodUSA is unable either to obtain the consent of the holders of the
relevant indebtedness or to repay such indebtedness, an Event of Default would
occur under the McLeodUSA indenture. In addition, one of the events that
constitutes a Change of Control under the McLeodUSA indenture is a sale,
conveyance, transfer or lease of all or substantially all of the property of
McLeodUSA. The McLeodUSA indenture is governed by New York law, and there is
no established definition under New York law of "substantially all" of the
assets of a corporation. Accordingly, if McLeodUSA were to engage in a
transaction in which it disposed of less than all of its assets, a question of
interpretation could arise as to whether such disposition was of
"substantially all" of its assets and whether McLeodUSA was required to make a
Change of Control Offer.
Except as described herein with respect to a Change of Control, the
McLeodUSA indenture does not contain any other provisions that permit holders
of McLeodUSA notes to require that McLeodUSA repurchase or redeem McLeodUSA
notes in the event of a takeover, recapitalization or similar restructuring.
ASSET SALES
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless:
54
<PAGE>
- McLeodUSA or such Restricted Subsidiary, as the case may be,
receives consideration for such Asset Sale at least equal to the
Fair Market Value, as evidenced by a Board Resolution delivered to
the trustee, of the Property or assets sold or otherwise disposed
of;
- at least 75% of the consideration received by McLeodUSA or such
Restricted Subsidiary for such Property or assets consists of (a)
cash, readily-marketable cash equivalents, or Telecommunications
Assets; (b) shares of publicly-traded Voting Stock of any Person
engaged in the Telecommunications Business in the United States;
or (c) the assumption of Indebtedness of McLeodUSA or such
Restricted Subsidiary, other than Indebtedness that is
subordinated to the McLeodUSA notes, and the release of McLeodUSA
or the Restricted Subsidiary, as the case may be, from all
liability on the Indebtedness assumed; and
- McLeodUSA or such Restricted Subsidiary, as the case may be, uses
the Net Cash Proceeds from such Asset Sale in the manner set forth
in the next paragraph.
Within 360 days after any Asset Sale, McLeodUSA or such Restricted
Subsidiary, as the case may be, may at its option:
- reinvest an amount equal to the Net Cash Proceeds, or any portion
thereof from such Asset Sale in Telecommunications Assets or in
Capital Stock of any Person engaged in the Telecommunications
Business and/or
- apply an amount equal to such Net Cash Proceeds, or remaining Net
Cash Proceeds, to the permanent reduction of Indebtedness of
McLeodUSA, other than Indebtedness to a Restricted Subsidiary,
that is senior to or PARI PASSU with the McLeodUSA notes or to the
permanent reduction of Indebtedness or preferred stock of any
Restricted Subsidiary, other than Indebtedness to, or preferred
stock owned by, McLeodUSA or another Restricted Subsidiary.
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or to reduce senior or PARI PASSU Indebtedness
of McLeodUSA or Indebtedness or preferred stock of its Restricted Subsidiaries
shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds calculated as
of such date exceeds $25 million, McLeodUSA shall, within 30 days, use such
Excess Proceeds to make an offer to purchase (an "Asset Sale Offer") on a pro
rata basis, from all holders, McLeodUSA notes in an aggregate principal amount
equal to the maximum principal amount that may be purchased out of Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal
to 100% of the principal amount thereof plus accrued and unpaid interest, if
any, to the purchase date, in accordance with the procedures set forth in the
McLeodUSA indenture. Upon completion of an Asset Sale Offer, including payment
of the Asset Sale Purchase Price, any surplus Excess Proceeds that were the
subject of such offer shall cease to be Excess Proceeds, and McLeodUSA may
then use such amounts for general corporate purposes.
McLeodUSA will comply with the requirements of Section 14(e) under
the Securities Exchange Act and any other securities laws or regulations, to
the extent such laws and regulations are applicable, in connection with the
repurchase of McLeodUSA notes pursuant to an Asset Sale Offer.
COVENANTS
Set forth below are several covenants that are contained in the
McLeodUSA indenture:
LIMITATION ON CONSOLIDATED INDEBTEDNESS
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McLeodUSA will not, and will not permit any Restricted Subsidiary to,
Incur any Indebtedness after the Issue Date unless either:
1. the ratio of:
- the aggregate consolidated principal amount of
Indebtedness of McLeodUSA outstanding as of the most
recent available quarterly or annual balance sheet, after
giving pro forma effect to the Incurrence of such
Indebtedness and any other Indebtedness Incurred since
such balance sheet date and the receipt and application of
the proceeds thereof, to
- Consolidated Cash Flow Available for Fixed Charges for the
four full fiscal quarters immediately preceding the
Incurrence of such Indebtedness for which consolidated
financial statements of McLeodUSA have been filed with the
SEC or have otherwise become publicly available,
determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof
had been applied at the beginning of such four fiscal
quarters
would be less than 5.5 to 1.0 for such four-quarter periods
ending prior to December 31, 2000 and 5.0 to 1.0 for such
periods ending thereafter, or
2. McLeodUSA's Consolidated Capital Ratio as of the most recent
quarterly or annual balance sheet of McLeodUSA that has been filed with the
SEC or has otherwise become publicly available, after giving pro forma effect
to:
- the Incurrence of such Indebtedness and any other
Indebtedness Incurred since such balance sheet date, and
- paid-in capital received since such balance sheet date or
concurrently with the Incurrence of such Indebtedness, and
in each case the receipt and application of the proceeds
thereof,
is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, McLeodUSA and any
Restricted Subsidiary may Incur each and all of the following:
1. Indebtedness under Senior Credit Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed $100
million, and any renewal, extension, refinancing or refunding thereof in an
amount which, together with any principal amount remaining outstanding or
available under all Senior Credit Facilities, does not exceed the aggregate
principal amount outstanding or available under all Senior Credit Facilities
immediately before such renewal, extension, refinancing or refunding;
2. Indebtedness under Qualified Receivable Facilities in an
aggregate principal amount outstanding or available at any one time not to
exceed the greater of (x) $150 million or (y) an amount equal to 85% of net
Receivables determined in accordance with GAAP, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available under all Qualified
Receivable Facilities, does not exceed the aggregate principal amount
outstanding or available under all Qualified Receivable Facilities immediately
before such renewal, extension, refinancing or refunding;
3. Purchase Money Indebtedness, provided that the amount of
such Purchase Money Indebtedness does not exceed 90% of the cost of the
construction, acquisition or improvement of the applicable Telecommunications
Assets;
4. Indebtedness owed by McLeodUSA to any Wholly-Owned
Restricted Subsidiary of McLeodUSA or Indebtedness owed by a Restricted
Subsidiary of McLeodUSA to McLeodUSA or a Wholly-Owned Restricted Subsidiary
of McLeodUSA; provided that upon either (x) the transfer or other disposition
by such Wholly-Owned Restricted Subsidiary or McLeodUSA of any Indebtedness so
permitted to a Person other than McLeodUSA or
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another Wholly-Owned Restricted Subsidiary of McLeodUSA or (y) the issuance,
other than directors' qualifying share, sale, lease, transfer or other
disposition of shares of Capital Stock, including by consolidation or merger,
of such Wholly-Owned Restricted Subsidiary to a Person other than McLeodUSA or
another such Wholly-Owned Restricted Subsidiary, the provisions of this clause
4 shall no longer be applicable to such Indebtedness and such Indebtedness
shall be deemed to have been Incurred at the time of such transfer or other
disposition;
5. Indebtedness Incurred to renew, extend, refinance or refund
(each, a "refinancing") the McLeodUSA notes or Indebtedness outstanding at the
date of the McLeodUSA indenture or Purchase Money Indebtedness Incurred
pursuant to clause 3 above in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Indebtedness so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Indebtedness so refinanced
or the amount of any premium reasonably determined by McLeodUSA as necessary
to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of McLeodUSA incurred in connection
with such refinancing; provided that Indebtedness the proceeds of which are
used to refinance the McLeodUSA notes or Indebtedness which is PARI PASSU to
the McLeodUSA notes or Indebtedness which is subordinate in right of payment
to the McLeodUSA notes shall only be permitted under this clause 5 if (A) in
the case of any refinancing of the McLeodUSA notes or Indebtedness which is
PARI PASSU to the McLeodUSA notes, the refinancing Indebtedness is made PARI
PASSU to the McLeodUSA notes or constitutes Subordinated Indebtedness, and, in
the case of any refinancing of Subordinated Indebtedness, the refinancing
Indebtedness constitutes Subordinated Indebtedness and (B) in any case, the
refinancing Indebtedness by its terms, or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, (x) does not provide
for payments of principal of such Indebtedness at stated maturity or by way of
a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by McLeodUSA, including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of the
acceleration of any payment with respect to such Indebtedness upon any event
of default thereunder, in each case prior to the time the same are required by
the terms of the Indebtedness being refinanced and (y) does not permit
redemption or other retirement, including pursuant to an offer to purchase
made by McLeodUSA, of such Indebtedness at the option of the holder thereof
prior to the time the same are required by the terms of the Indebtedness being
refinanced, other than a redemption or other retirement at the option of the
holder of such Indebtedness, including pursuant to an offer to purchase made
by McLeodUSA, which is conditioned upon a change of control pursuant to
provisions substantially similar to those described under "--Repurchase at the
Option of Holders upon a Change of Control;"
6. Indebtedness consisting of Permitted Interest Rate and
Currency Protection Agreements;
7. Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of McLeodUSA or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of McLeodUSA, other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Restricted
Subsidiary of McLeodUSA for the purpose of financing such acquisition, and in
an aggregate principal amount not to exceed the gross proceeds actually
received by McLeodUSA or any Restricted Subsidiary in connection with such
disposition; and
8. Indebtedness not otherwise permitted to be Incurred pursuant
to clauses 1 through 7 above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause 8, has an aggregate principal
amount not in excess of $10 million at any time outstanding.
Notwithstanding any other provision of this "--Covenants--Limitation
on Consolidated Indebtedness" covenant, the maximum amount of Indebtedness
that McLeodUSA or a Restricted Subsidiary may Incur pursuant to this
"--Covenants--Limitation on Consolidated Indebtedness" covenant shall not be
deemed to be exceeded due solely as the result of fluctuations in the exchange
rates of currencies.
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For purposes of determining any particular amount of Indebtedness
under this "--Covenants--Limitation on Consolidated Indebtedness" covenant:
1. Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and
2. any Liens granted pursuant to the equal and ratable
provisions referred to in the "--Covenants--Limitation on Liens" covenant
described below shall not be treated as Indebtedness.
For purposes of determining compliance with this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, McLeodUSA, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES
McLeodUSA will not permit any Restricted Subsidiary of McLeodUSA to
Incur any Indebtedness or issue any Preferred Stock except:
1. Indebtedness or Preferred Stock outstanding on the date of
the McLeodUSA indenture after giving effect to the application of the proceeds
of the McLeodUSA notes;
2. Indebtedness Incurred or Preferred Stock issued to and held
by McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA, provided
that such Indebtedness or Preferred Stock is at all times held by McLeodUSA or
a Wholly-Owned Restricted Subsidiary of McLeodUSA;
3. Indebtedness Incurred or Preferred Stock issued by a Person
prior to the time (A) such Person became a Restricted Subsidiary of McLeodUSA,
(B) such Person merges into or consolidates with a Restricted Subsidiary of
McLeodUSA or (C) another Restricted Subsidiary of McLeodUSA merges into or
consolidates with such Person in a transaction in which such Person becomes a
Restricted Subsidiary of McLeodUSA, which Indebtedness or Preferred Stock was
not Incurred or issued in anticipation of such transaction and was outstanding
prior to such transaction;
4. Indebtedness under a Senior Credit Facility which is
permitted to be outstanding under clause 1 of the second paragraph of
"--Covenants--Limitation on Consolidated Indebtedness;"
5. in the case of a Restricted Subsidiary that is a Qualified
Receivable Subsidiary, Indebtedness under a Qualified Receivable Facility
which is permitted to be outstanding under clause 2 of the second paragraph of
"--Covenants--Limitation on Consolidated Indebtedness;"
6. Indebtedness consisting of Permitted Interest Rate and
Currency Protection Agreements;
7. Indebtedness (A) in respect of performance, surety and
appeal bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligation of such Restricted Subsidiary
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary of such
Restricted Subsidiary, other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such acquisition, and in an aggregate
principal amount not to exceed the gross proceeds actually received by such
Restricted Subsidiary in connection with such disposition;
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8. Indebtedness or Preferred Stock which is exchanged for, or
the proceeds of which are used to refinance, refund or redeem, any
Indebtedness or Preferred Stock permitted to be outstanding pursuant to
clauses 1 and 3 above or any extension or renewal thereof (for purposes
hereof, a "refinancing"), in an aggregate principal amount, in the case of
Indebtedness, or with an aggregate liquidation preference in the case of
Preferred Stock, not to exceed the aggregate principal amount of the
Indebtedness so refinanced or the aggregate liquidation preference of the
Preferred Stock so refinanced, plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness or Preferred Stock so refinanced or the amount of any premium
reasonably determined by McLeodUSA as necessary to accomplish such refinancing
by means of a tender offer or privately negotiated repurchase, plus the amount
of expenses of McLeodUSA and the applicable Restricted Subsidiary Incurred in
connection therewith and provided the Indebtedness or Preferred Stock Incurred
or issued upon such refinancing by its terms, or by the terms of any agreement
or instrument pursuant to which such Indebtedness or Preferred Stock is
Incurred or issued, (x) does not provide for payments of principal or
liquidation value at the stated maturity of such Indebtedness or Preferred
Stock or by way of a sinking fund applicable to such Indebtedness or Preferred
Stock or by way of any mandatory redemption, defeasance, retirement or
repurchase of such Indebtedness or Preferred Stock by McLeodUSA or any
Restricted Subsidiary of McLeodUSA, including any redemption, retirement or
repurchase which is contingent upon events or circumstances, but excluding any
retirement required by virtue of acceleration of such Indebtedness upon an
event of default thereunder, in each case prior to the time the same are
required by the terms of the Indebtedness or Preferred Stock being refinanced
and (y) does not permit redemption or other retirement, including under an
offer to purchase made by McLeodUSA or a Restricted Subsidiary of McLeodUSA,
of such Indebtedness or Preferred Stock at the option of the holder thereof
prior to the stated maturity of the Indebtedness or Preferred Stock being
refinanced, other than a redemption or other retirement at the option of the
holder of such Indebtedness or Preferred Stock, including pursuant to an offer
to purchase made by McLeodUSA or a Restricted Subsidiary of McLeodUSA, which
is conditioned upon the change of control of McLeodUSA pursuant to provisions
substantially similar to those described under "--Repurchase at the Option of
Holders upon a Change of Control" and provided, further, that in the case of
any exchange or redemption of Preferred Stock of a Restricted Subsidiary of
McLeodUSA, such Preferred Stock may only be exchanged for or redeemed with
Preferred Stock of such Restricted Subsidiary; and
9. Indebtedness Incurred or Preferred Stock issued by a
Restricted Subsidiary, provided that the Fair Market Value of McLeodUSA's
Investment in all Restricted Subsidiaries which Incur Indebtedness or issue
Preferred Stock pursuant to this clause 9 shall not exceed, at any time, $30
million in the aggregate, provided further, that such Indebtedness Incurred is
otherwise permitted pursuant to the covenant described under
"--Covenants--Limitation on Consolidated Indebtedness."
LIMITATION ON RESTRICTED PAYMENTS
McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless,
at the time of and after giving effect to such proposed Restricted Payment:
- no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
- after giving effect, on a pro forma basis, to such Restricted
Payment and the incurrence of any Indebtedness the net proceeds of
which are used to finance such Restricted Payment, McLeodUSA could
incur at least $1.00 of additional Indebtedness pursuant to the
first paragraph of "--Covenants--Limitation on Consolidated
Indebtedness"; and
- after giving effect to such Restricted Payment on a pro forma
basis, the aggregate amount expended (the amount so expended, if
other than cash, to be determined in good faith by a majority of
the disinterested members of the board of directors, whose
determination shall be conclusive and evidenced by a resolution
thereof) or declared for all Restricted Payments after February
22, 1999 does not exceed the sum of (A) 50% of the Consolidated
Net Income of McLeodUSA (or, if Consolidated Net Income shall be a
deficit, minus 100% of such deficit) for the period (taken as one
accounting period) beginning on the last day of the fiscal quarter
immediately preceding February 22, 1999 and
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ending on the last day of the fiscal quarter for which
McLeodUSA's financial statements have been filed with the SEC or
otherwise become publicly available immediately preceding the
date of such Restricted Payment, plus (B) 100% of the net
reduction in Investments, subsequent to February 22, 1999, in
any Person, resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers
of Property (but only to the extent such interest, dividends,
repayments or other transfers of Property are not included in
the calculation of Consolidated Net Income), in each case to
McLeodUSA or any Restricted Subsidiary from any Person
(including, without limitation, from Unrestricted Subsidiaries)
or from redesignations of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to
February 22, 1999 by McLeodUSA or any Restricted Subsidiary in
such Person and which was treated as a Restricted Payment;
provided that McLeodUSA or a Restricted Subsidiary of McLeodUSA
may make any Restricted Payment with the aggregate net proceeds
received after February 22, 1999, including the fair value of
property other than cash (determined in good faith by the board
of directors as evidenced by a resolution of the board of
directors filed with the trustee),
(x) as capital contributions to McLeodUSA,
(y) from the issuance (other than to a Restricted
Subsidiary) of Capital Stock (other than Disqualified
Stock) of McLeodUSA and warrants, rights or options
on Capital Stock (other than Disqualified Stock) of
McLeodUSA, or
(z) from the conversion of Indebtedness of McLeodUSA into
Capital Stock (other than Disqualified Stock and
other than by a Restricted Subsidiary) of McLeodUSA
after February 22, 1999.
The foregoing limitations shall not prevent McLeodUSA from:
1. paying a dividend on its Capital Stock at any time within 60
days after the declaration thereof if, on the declaration date, McLeodUSA
could have paid such dividend in compliance with the preceding paragraph;
2. retiring (A) any Capital Stock of McLeodUSA or any
Restricted Subsidiary of McLeodUSA, (B) Indebtedness of McLeodUSA that is
subordinate to the McLeodUSA notes, or (C) Indebtedness of a Restricted
Subsidiary of McLeodUSA, in exchange for, or out of the proceeds of the
substantially concurrent sale of Qualified Stock of McLeodUSA;
3. retiring any Indebtedness of McLeodUSA subordinated in right
of payment to the McLeodUSA notes in exchange for, or out of the proceeds of,
the substantially concurrent incurrence of Indebtedness of McLeodUSA (other
than Indebtedness to a Subsidiary of McLeodUSA), provided that such new
Indebtedness (A) is subordinated in right of payment to the McLeodUSA notes at
least to the same extent as, (B) has an Average Life at least as long as, and
(C) has no scheduled principal payments due in any amount earlier than, any
equivalent amount of principal under the Indebtedness so retired;
4. retiring any Indebtedness of a Restricted Subsidiary of
McLeodUSA in exchange for, or out of the proceeds of, the substantially
concurrent incurrence of Indebtedness of McLeodUSA or any Restricted
Subsidiary that is permitted under the covenant described under "--Covenants--
Limitation on Consolidated Indebtedness" (in the case of Indebtedness of
McLeodUSA) and "--Covenants--Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries" (in the case of Indebtedness of Restricted
Subsidiaries) and that (A) is not secured by any assets of McLeodUSA or any
Restricted Subsidiary to a greater extent than the retired Indebtedness was so
secured, (B) has an Average Life at least as long as the retired Indebtedness,
and (C) is subordinated in right of payment to the McLeodUSA notes at least to
the same extent as the retired Indebtedness;
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5. retiring any Capital Stock or options to acquire Capital Stock of
McLeodUSA or any Restricted Subsidiary of McLeodUSA held by any directors,
officers or employees of McLeodUSA or any Restricted Subsidiary, provided that
the aggregate price paid for all such retired Capital Stock shall not exceed,
in the aggregate, the sum of $2 million plus the aggregate cash proceeds
received by McLeodUSA subsequent to the Issue Date from issuances of Capital
Stock or options to acquire Capital Stock by McLeodUSA to directors, officers
or employees of McLeodUSA and its Subsidiaries;
6. making payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger or
transfer of assets permitted under "--Consolidation, Merger, Conveyance, Lease
or Transfer;"
7. retiring any Capital Stock of McLeodUSA to the extent necessary
(as determined in good faith by a majority of the disinterested members of the
board of directors, whose determination shall be conclusive and evidenced by a
resolution thereof) to prevent the loss, or to secure the renewal or
reinstatement, of any license or franchise held by McLeodUSA or any Restricted
Subsidiary from any governmental agency;
8. making Investments in any Person primarily engaged in the
Telecommunications Business; provided, that the aggregate amount of such
Investments does not exceed at any time the sum of (A) $30 million plus (B)
the amount of Net Cash Proceeds received by McLeodUSA after February 22, 1999
as a capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of McLeodUSA, except
to the extent such Net Cash Proceeds are used to make Restricted Payments
permitted pursuant to clauses (x), (y) and (z) of the first paragraph, or
clause 2 above or this clause 8, of this "Limitation on Restricted Payments"
covenant, plus (C) the net reduction in Investments made pursuant to this
clause 8 resulting from distributions on or repayments of such Investments or
from the Net Cash Proceeds from the sale of any such Investment (except in
each case to the extent any such payment or proceeds are included in the
calculation of Consolidated Net Income) or from such Person becoming a
Restricted Subsidiary (valued in each case as provided in the definition of
"Investment"), provided that the net reduction in any Investment shall not
exceed the amount of such Investment; and
9. making Investments not otherwise permitted in an aggregate amount
not to exceed $15 million at any time outstanding.
In determining the amount of Restricted Payments permissible under
this covenant, amounts expended pursuant to clauses 2, 3 and 4 above shall not
be included as Restricted Payments. Not later than the date of making any
Restricted Payment (including any Restricted Payment permitted to be made
pursuant to the two previous paragraphs), McLeodUSA shall deliver to the
trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the required calculations
were computed, which calculations may be based upon McLeodUSA's latest
available financial statements.
LIMITATION ON LIENS
McLeodUSA may not, and may not permit any Restricted Subsidiary of
McLeodUSA to, Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or hereafter acquired to secure any Indebtedness
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the McLeodUSA notes (x) equally and ratably with such
Indebtedness as to such property for so long as such Indebtedness will be so
secured or (y) in the event such Indebtedness is Indebtedness of McLeodUSA
which is subordinate in right of payment to the McLeodUSA notes, prior to such
Indebtedness as to such property for so long as such Indebtedness will be so
secured.
The foregoing restrictions shall not apply to:
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1. Liens existing on the date of the McLeodUSA indenture and securing
Indebtedness outstanding on the date of the McLeodUSA indenture or Incurred on
or after the Issue Date pursuant to any Senior Credit Facility or Qualified
Receivable Facility;
2. Liens securing Indebtedness in an amount which, together with the
aggregate amount of Indebtedness then outstanding or available under all
Senior Credit Facilities (or under refinancings or amendments of such Senior
Credit Facilities), does not exceed 1.5 times McLeodUSA's Consolidated Cash
Flow Available for Fixed Charges for the four full fiscal quarters preceding
the Incurrence of such Lien for which McLeodUSA's consolidated financial
statements have been filed with the SEC or become publicly available,
determined on a pro forma basis as if such Indebtedness had been Incurred and
the proceeds thereof had been applied at the beginning of such four fiscal
quarters;
3. Liens in favor of McLeodUSA or any Wholly-Owned Restricted
Subsidiary of McLeodUSA;
4. Liens on Property of McLeodUSA or a Restricted Subsidiary
acquired, constructed or constituting improvements made after the Issue Date
of the McLeodUSA notes to secure Purchase Money Indebtedness which is
otherwise permitted under the McLeodUSA indenture, provided that (a) the
principal amount of any Indebtedness secured by any such Lien does not exceed
100% of such purchase price or cost of construction or improvement of the
Property subject to such Lien, (b) such Lien attaches to such property prior
to, at the time of or within 180 days after the acquisition, completion of
construction or commencement of operation of such Property and (c) such Lien
does not extend to or cover any Property other than the specific item of
Property (or portion thereof) acquired, constructed or constituting the
improvements made with the proceeds of such Purchase Money Indebtedness;
5. Liens to secure Acquired Indebtedness, provided that (a) such Lien
attaches to the acquired asset prior to the time of the acquisition of such
asset and (b) such Lien does not extend to or cover any other Property;
6. Liens to secure Indebtedness Incurred to extend, renew, refinance
or refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Indebtedness secured by any Lien referred to in the
foregoing clauses 1, 2, 4 and 5 so long as such Lien does not extend to any
other Property and the principal amount of Indebtedness so secured is not
increased except as otherwise permitted under clause 5 of the second paragraph
of "--Covenants--Limitation on Consolidated Indebtedness" (in the case of
Indebtedness of McLeodUSA) or clause 8 of "--Covenants--Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries" (in the case of
Indebtedness of Restricted Subsidiaries);
7. Liens not otherwise permitted by the foregoing clauses 1 through 6
in an aggregate amount not to exceed 5% of McLeodUSA's Consolidated Tangible
Assets;
8. Liens granted after the Issue Date pursuant to the immediately
preceding paragraph to secure the McLeodUSA notes; and
9. Permitted Liens.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction
(other than a Sale and Leaseback Transaction between McLeodUSA or a Restricted
Subsidiary on the one hand and a Restricted Subsidiary or McLeodUSA on the
other hand), unless
1. McLeodUSA or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value, as evidenced by a Board Resolution
delivered to the trustee, of the Property subject to such transaction;
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2. the Attributable Indebtedness of McLeodUSA or such Restricted
Subsidiary with respect thereto is included as Indebtedness and would be
permitted by the covenant described under "--Covenants--Limitation on
Consolidated Indebtedness" or "--Covenants--Limitation on Indebtedness and
Preferred Stock of Restricted Subsidiaries," as the case may be;
3. McLeodUSA or such Restricted Subsidiary would be permitted to
create a Lien on such Property without securing the McLeodUSA notes by the
covenant described under "--Covenants--Limitation on Liens"; and
4. the Net Cash Proceeds from such transaction are applied in
accordance with the covenant described under "--Asset Sales";
provided that McLeodUSA shall be permitted to enter into Sale and Leaseback
Transactions for up to $30 million with respect to construction of McLeodUSA's
headquarters buildings located in Cedar Rapids, Iowa, provided that any such
transaction is entered into within 180 days of the earlier of (x) substantial
completion or (y) occupation of the applicable phase of such headquarters
building.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction, other than by law or regulation, on the
ability of any Restricted Subsidiary to:
1. pay dividends or make any other distributions in respect of its
Capital Stock or pay any Indebtedness or other obligation owed to McLeodUSA or
any Restricted Subsidiary;
2. make loans or advances to McLeodUSA or any Restricted Subsidiary;
or
3. transfer any of its Property to McLeodUSA or any other Restricted
Subsidiary,
except:
(a) any encumbrance or restriction existing as of the Issue Date
under the McLeodUSA indenture or any other agreement relating to any Existing
Indebtedness or any Indebtedness under a Qualified Receivable Facility
otherwise permitted under the McLeodUSA indenture;
(b) any encumbrance or restriction under an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in any
such agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of
any Restricted Subsidiary existing on the date on which such Restricted
Subsidiary is acquired by McLeodUSA or another Restricted Subsidiary (other
than any such Indebtedness Incurred by such Restricted Subsidiary in
connection with or in anticipation of such acquisition);
(d) any encumbrance or restriction under an agreement effecting a
permitted refinancing of Indebtedness issued under an agreement referred to in
the foregoing clauses (a) through (c), so long as the encumbrances and
restrictions contained in any such refinancing agreement are not materially
more restrictive than the encumbrances and restrictions contained in such
agreements;
(e) customary provisions (A) that restrict the subletting, assignment
or transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset; (B) existing by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of McLeodUSA or any Restricted Subsidiary not otherwise
prohibited by the McLeodUSA indenture or (C) arising or agreed to in
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the ordinary course of business, not relating to any Indebtedness, and that do
not, individually or in the aggregate, detract from the value of property or
assets of McLeodUSA or any Restricted Subsidiary in any manner material to
McLeodUSA or any Restricted Subsidiary;
(f) in the case of clause (3) above, restrictions contained in any
security agreement, including a Capital Lease Obligation, securing
Indebtedness of McLeodUSA or a Restricted Subsidiary otherwise permitted under
the McLeodUSA indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement; and
(g) any restriction with respect to a Restricted Subsidiary of
McLeodUSA imposed by an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary, provided that the consummation of such transaction
would not result in an Event of Default or an event that, with the passing of
time or the giving of notice or both, would constitute an Event of Default,
that such restriction terminates if such transaction is not consummated and
that the consummation or abandonment of such transaction occurs within one
year of the date such agreement was entered into.
Nothing contained in this "--Covenants--Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant shall
prevent McLeodUSA or any Restricted Subsidiary from (1) creating, incurring,
assuming or suffering to exist any Liens otherwise permitted under the
"--Covenants--Limitation on Liens" covenant or (2) restricting the sale or
other disposition of property or assets of McLeodUSA or any of its Restricted
Subsidiaries that secure Indebtedness of McLeodUSA or any of its Restricted
Subsidiaries otherwise permitted under "--Covenants--Limitation on
Consolidated Indebtedness" or "--Covenants--Limitations on Indebtedness and
Preferred Stock of Restricted Subsidiaries," as the case may be.
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES
McLeodUSA (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to McLeodUSA or a Wholly-Owned Restricted Subsidiary
unless immediately after giving effect thereto such Restricted Subsidiary
would no longer constitute a Restricted Subsidiary and any Investment of
McLeodUSA or any other Restricted Subsidiary in such Restricted Subsidiary
would have been permitted under "--Covenants--Limitation on Restricted
Payments" if made on the date of such issuance and (ii) shall not permit any
Person other than McLeodUSA or a Wholly-Owned Restricted Subsidiary to own any
Capital Stock of any Restricted Subsidiary, other than directors' qualifying
shares and except for:
(a) a sale of 100% of the Capital Stock of a Restricted Subsidiary
sold in a transaction not prohibited by the covenant described under "--Asset
Sales";
(b) a sale of the Capital Stock of a Restricted Subsidiary sold in a
transaction not prohibited by the covenant described under "--Asset Sales" if,
after giving effect thereto, greater than 50% of the Capital Stock of such
Restricted Subsidiary is owned by McLeodUSA or by a Wholly-Owned Restricted
Subsidiary;
(c) Capital Stock of a Restricted Subsidiary issued and outstanding
on the Issue Date and held by Persons other than McLeodUSA or any Restricted
Subsidiary;
(d) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long as
such Capital Stock was not issued in anticipation or contemplation of such
Person's becoming a Restricted Subsidiary or otherwise being acquired by
McLeodUSA;
(e) any Preferred Stock permitted to be issued under
"--Covenants--Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries"; and
(f) ownership by any Person other than McLeodUSA or a Subsidiary of
less than 50% of the Capital Stock of a Person (A) in which McLeodUSA or a
Restricted Subsidiary has made a Permitted Investment pursuant
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to clause (3) of the definition of "Permitted Investments," (B) of which more
than 50% of such Person's Capital Stock is owned, directly or indirectly, by
McLeodUSA and (C) as to which McLeodUSA has the power to direct the policies,
management and affairs.
TRANSACTIONS WITH AFFILIATES
McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of, any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan,
advance or Guarantee with or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions is
on terms that are no less favorable to McLeodUSA or such Restricted Subsidiary
than those that would have been obtained in a comparable arm's-length
transaction by McLeodUSA or such Restricted Subsidiary with a Person that is
not an Affiliate (or, in the event that there are no comparable transactions
involving Persons who are not Affiliates of McLeodUSA or the relevant
Restricted Subsidiary to apply for comparative purposes, is otherwise on terms
that, taken as a whole, McLeodUSA has determined to be fair to McLeodUSA or
the relevant Restricted Subsidiary) and
(b) McLeodUSA delivers to the trustee (i) with respect to any
Affiliate Transaction involving aggregate payments in excess of $1 million, a
certificate of the chief executive, operating or financial officer of
McLeodUSA evidencing such officer's determination that such Affiliate
Transaction or series of Affiliate Transactions complies with clause (a) above
and is in the best interests of McLeodUSA or such Restricted Subsidiary and
(ii) with respect to any Affiliate Transaction or series of Affiliate
Transactions involving aggregate payments in excess of $5 million, a Board
Resolution certifying that such Affiliate Transaction or series of Affiliate
Transactions complies with clause (a) above and that such Affiliate
Transaction or series of Affiliate Transactions has been approved by a
majority of the disinterested members of the board of directors who have
determined that such Affiliate Transaction or series of Affiliate Transactions
is in the best interest of McLeodUSA or such Restricted Subsidiary;
provided that the following shall not be deemed Affiliate Transactions:
1. any employment agreement entered into by McLeodUSA or any of its
Restricted Subsidiaries in the ordinary course of business and consistent with
industry practice;
2. any agreement or arrangement with respect to the compensation of a
director or officer of McLeodUSA or any Restricted Subsidiary approved by a
majority of the disinterested members of the board of directors and consistent
with industry practice;
3. transactions between or among McLeodUSA and its Restricted
Subsidiaries;
4. transactions permitted by the covenant described under
"--Covenants--Limitation on Restricted Payments;"
5. transactions pursuant to any agreement or arrangement existing on
the Issue Date; and
6. transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiber optic lines,
equipment, rights-of-way or other access rights, between McLeodUSA or any
Restricted Subsidiary and any other Person; provided, in any case, that such
transaction is on terms that are no less favorable, taken as a whole, to
McLeodUSA or the relevant Restricted Subsidiary than those that could have
been obtained in a comparable transaction by McLeodUSA or such Restricted
Subsidiary with Persons who are not Affiliates of McLeodUSA or the relevant
Restricted Subsidiary, or, in the event that there are no comparable
transactions involving Persons who are not Affiliates of McLeodUSA or the
relevant Restricted Subsidiary to apply
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for comparative purposes, is otherwise on terms that, taken as a whole,
McLeodUSA has determined to be fair to McLeodUSA or the relevant Restricted
Subsidiary.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
(a) McLeodUSA may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of McLeodUSA or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of
McLeodUSA or a Restricted Subsidiary (other than Indebtedness to McLeodUSA or
a Wholly-Owned Restricted Subsidiary), and (i) such Subsidiary has total
assets of $1,000 or less, (ii) such Subsidiary has assets of more than $1,000
and an Investment in such Subsidiary in an amount equal to the Fair Market
Value of such Subsidiary would then be permitted under the first paragraph of
"--Covenants--Limitation on Restricted Payments" or (iii) such designation is
effective immediately upon such Person becoming a Subsidiary. Unless so
designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary
of McLeodUSA or any of its Restricted Subsidiaries shall be classified as a
Restricted Subsidiary thereof.
(b) McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness to
McLeodUSA or a Restricted Subsidiary) at the date of determination) becoming a
Restricted Subsidiary (whether through an acquisition, the redesignation of an
Unrestricted Subsidiary or otherwise) unless, after giving effect to such
action, transaction or series of transactions, on a pro forma basis, (i)
McLeodUSA could incur at least $1.00 of additional Indebtedness pursuant to
the first paragraph of "--Covenants--Limitation on Consolidated Indebtedness"
and (ii) no Default or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be
redesignated as a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary in compliance with clause (b) shall be made by the board
of directors pursuant to a Board Resolution delivered to the trustee and shall
be effective as of the date specified in such Board Resolution, which shall
not be prior to the date such Board Resolution is delivered to the trustee.
REPORTS
McLeodUSA will file with the trustee within 15 days after it files
them with the SEC copies of the annual and quarterly reports and the
information, documents, and other reports that McLeodUSA is required to file
with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
("SEC Reports"). In the event McLeodUSA shall cease to be required to file SEC
Reports pursuant to the Securities Exchange Act, McLeodUSA will nevertheless
continue to file such reports with the SEC, unless the SEC will not accept
such a filing, and the trustee. McLeodUSA will furnish copies of the SEC
Reports to the holders of McLeodUSA notes at the time McLeodUSA is required to
file the same with the trustee and will make such information available to
investors who request it in writing.
CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
McLeodUSA will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person or permit any other
Person to merge with or into McLeodUSA, other than a merger of a Restricted
Subsidiary into McLeodUSA in which McLeodUSA is the continuing corporation, or
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the Property and assets of McLeodUSA and the Restricted
Subsidiaries taken as a whole to any other Person, unless:
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(i) either (a) McLeodUSA shall be the continuing corporation or (b)
the corporation, if other than McLeodUSA, formed by such consolidation or into
which McLeodUSA is merged, or the Person which acquires, by sale, assignment,
conveyance, transfer, lease or disposition, all or substantially all of the
Property and assets of McLeodUSA and the Restricted Subsidiaries taken as a
whole (such corporation or Person, the "Surviving Entity"), shall be a
corporation organized and validly existing under the laws of the United States
of America, any political subdivision thereof, any state thereof or the
District of Columbia, and shall expressly assume, by a supplemental indenture,
the due and punctual payment of the principal of (and premium, if any) and
interest on all the McLeodUSA notes and the performance of McLeodUSA's
covenants and obligations under the McLeodUSA indenture;
(ii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions, no Event of Default or
Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions, McLeodUSA (or the
Surviving Entity, if McLeodUSA is not continuing) would (A) be permitted to
Incur at least $1.00 of additional Indebtedness pursuant to the first
paragraph of "--Covenants--Limitation on Consolidated Indebtedness" and (B)
have a Consolidated Net Worth that is not less than the Consolidated Net Worth
of McLeodUSA immediately before such transaction or series of transactions; and
(iv) if, as a result of any such transaction, Property of McLeodUSA
would become subject to a Lien prohibited by the provisions of the McLeodUSA
indenture described under "--Covenants --Limitation on Liens" above,
McLeodUSA or the successor entity to McLeodUSA shall have secured the
McLeodUSA notes as required thereby.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the McLeodUSA
indenture:
(a) default in the payment of interest on any McLeodUSA note when the
same becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any,
on) any McLeodUSA note at its maturity, upon optional redemption, required
repurchase (including pursuant to a Change of Control Offer or an Asset Sale
Offer) or otherwise or the failure to make an offer to purchase any McLeodUSA
note as required;
(c) failure by McLeodUSA to comply with any of its covenants or
agreements described under "--Repurchase at the Option of the Holders upon a
Change of Control," "--Asset Sales" or "--Consolidation, Merger, Conveyance,
Lease or Transfer;"
(d) default in the performance, or breach, of any covenant or
warranty of McLeodUSA in the McLeodUSA indenture (other than a covenant or
warranty addressed in (a), (b) or (c) above) and continuance of such Default
or breach for a period of 60 days after written notice thereof has been given
to McLeodUSA by the trustee or to McLeodUSA and the trustee by holders of at
least 25% of the aggregate principal amount of the outstanding McLeodUSA notes;
(e) Indebtedness of McLeodUSA or any Restricted Subsidiary is not
paid when due within the applicable grace period, if any, or is accelerated by
the holders thereof and, in either case, the principal amount of such unpaid
or accelerated Indebtedness exceeds $10 million;
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(f) the entry by a court of competent jurisdiction of one or more
final judgments against McLeodUSA or any Restricted Subsidiary in an uninsured
or unindemnified aggregate amount in excess of $10 million which is not
discharged, waived, appealed, stayed, bonded or satisfied for a period of 45
consecutive days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of McLeodUSA or any Restricted
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy laws, as
now or hereafter constituted, or any other applicable Federal, state, or
foreign bankruptcy, insolvency, or other similar law or (ii) a decree or order
adjudging McLeodUSA or any Restricted Subsidiary bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of McLeodUSA or any Restricted
Subsidiary under U.S. bankruptcy laws, as now or hereafter constituted, or any
other applicable Federal, state or foreign bankruptcy, insolvency or similar
law, or appointing a custodian, receiver, liquidator, assignee, trustee,
sequestrator or other similar official of McLeodUSA or any Restricted
Subsidiary or of any substantial part of the Property or assets of McLeodUSA
or any Restricted Subsidiary, or ordering the winding up or liquidation of the
affairs of McLeodUSA or any Restricted Subsidiary, and the continuance of any
such decree or order for relief or any such other decree or order unstayed and
in effect for a period of 60 consecutive days; or
(h)(i) the commencement by McLeodUSA or any Restricted Subsidiary of
a voluntary case or proceeding under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent; or (ii) the consent by McLeodUSA or any
Restricted Subsidiary to the entry of a decree or order for relief in respect
of McLeodUSA or any Restricted Subsidiary in an involuntary case or proceeding
under U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency or other similar
law or to the commencement of any bankruptcy or insolvency case or proceeding
against McLeodUSA or any Restricted Subsidiary; or (iii) the filing by
McLeodUSA or any Restricted Subsidiary of a petition or answer or consent
seeking reorganization or relief under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state or foreign
bankruptcy, insolvency or other similar law; or (iv) the consent by McLeodUSA
or any Restricted Subsidiary to the filing of such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee, sequestrator or similar official of McLeodUSA or any
Restricted Subsidiary or of any substantial part of the Property or assets of
McLeodUSA or any Restricted Subsidiary, or the making by McLeodUSA or any
Restricted Subsidiary of an assignment for the benefit of creditors; or (v)
the admission by McLeodUSA or any Restricted Subsidiary in writing of its
inability to pay its debts generally as they become due; or (vi) the taking of
corporate action by McLeodUSA or any Restricted Subsidiary in furtherance of
any such action.
If any Event of Default (other than an Event of Default specified in
clause (g) or (h) above) occurs and is continuing, then and in every such case
the trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of McLeodUSA notes may declare the Default Amount (as defined
herein) and any accrued and unpaid interest on all McLeodUSA notes then
outstanding to be immediately due and payable by a notice in writing to
McLeodUSA (and to the trustee if given by holders of the McLeodUSA notes), and
upon any such declaration, such Default Amount and any accrued interest will
become and be immediately due and payable. If any Event of Default specified
in clause (g) or (h) above occurs, the Default Amount and any accrued and
unpaid interest on the McLeodUSA notes then outstanding shall become
immediately due and payable without any declaration or other act on the part
of the trustee or any holder of McLeodUSA notes. In the event of a declaration
of acceleration because an Event of Default set forth in clause (e) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied, or cured or waived
by the holders of the relevant Indebtedness, within 60 days after such event
of default, provided that no judgment or decree for the payment of money due
on the McLeodUSA notes has been obtained by the trustee. The Default Amount
shall equal 100% of the principal amount of the McLeodUSA notes. Under
specified circumstances, the holders of a majority in principal amount of the
outstanding McLeodUSA notes by notice to McLeodUSA and the trustee may rescind
an acceleration and its consequences.
McLeodUSA will be required to deliver to the trustee annually a
statement regarding compliance with the McLeodUSA indenture, and McLeodUSA is
required within 30 days after becoming aware of any Default or Event
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of Default, to deliver to the trustee a statement describing such Default or
Event of Default, its status and what action McLeodUSA is taking or proposes
to take with respect thereto. The trustee may withhold from holders of the
McLeodUSA notes notice of any continuing Default or Event of Default, other
than relating to the payment of principal or interest, if the trustee
determines that withholding such notice is in the holders' interest.
AMENDMENT, SUPPLEMENT AND WAIVER
McLeodUSA and the trustee may, at any time and from time to time,
without notice to or consent of any holder of McLeodUSA notes, enter into one
or more indentures supplemental to the McLeodUSA indenture:
(1) to evidence the succession of another Person to McLeodUSA and the
assumption by such successor of the covenants of McLeodUSA in the McLeodUSA
indenture and the McLeodUSA notes;
(2) to add to the covenants of McLeodUSA, for the benefit of the
holders, or to surrender any right or power conferred upon McLeodUSA by the
McLeodUSA indenture;
(3) to add any additional Events of Default;
(4) to provide for uncertificated McLeodUSA notes in addition to or
in place of certificated McLeodUSA notes;
(5) to evidence and provide for the acceptance of appointment under
the McLeodUSA indenture of a successor trustee;
(6) to secure the McLeodUSA notes;
(7) to cure any ambiguity in the McLeodUSA indenture, to correct or
supplement any provision in the McLeodUSA indenture which may be inconsistent
with any other provision therein or to add any other provisions with respect
to matters or questions arising under the McLeodUSA indenture; provided such
actions shall not adversely affect the interests of the holders in any
material respect; or
(8) to comply with the requirements of the SEC in order to effect or
maintain the qualification of the McLeodUSA indenture under the Trust
Indenture Act.
With the consent of the holders of not less than a majority in
principal amount of the outstanding McLeodUSA notes, McLeodUSA and the trustee
may enter into one or more indentures supplemental to the McLeodUSA indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the McLeodUSA indenture or modifying in
any manner the rights of the holders; provided that no such supplemental
indenture shall, without the consent of the holder of each outstanding
McLeodUSA note:
(1) change the Stated Maturity of the principal of, or any
installment of interest on, any McLeodUSA note, or alter the redemption
provisions thereof, or reduce the principal amount thereof (or premium, if
any), or the interest thereon that would be due and payable upon Maturity
thereof, or change the place of payment where, or the coin or currency in
which, any McLeodUSA note or any premium or interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment on
or after the maturity thereof;
(2) reduce the percentage in principal amount of the outstanding
McLeodUSA notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with several
provisions of the McLeodUSA indenture or several Defaults thereunder;
(3) subordinate in right of payment, or otherwise subordinate, the
McLeodUSA notes to any other Indebtedness; or
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(4) modify any provision of this paragraph, except to increase any
percentage set forth herein.
The holders of not less than a majority in principal amount of the
outstanding McLeodUSA notes may, on behalf of the holders of all the McLeodUSA
notes, waive any past Default under the McLeodUSA indenture and its
consequences, except a Default (1) in the payment of the principal of (or
premium, if any) or interest on any McLeodUSA note, or (2) in respect of a
covenant or provision hereof which under the proviso to the prior paragraph
cannot be modified or amended without the consent of the holder of each
outstanding McLeodUSA note affected.
SATISFACTION AND DISCHARGE OF THE MCLEODUSA INDENTURE; DEFEASANCE
McLeodUSA may terminate its obligations under the McLeodUSA indenture
when:
(i) either (A) all outstanding McLeodUSA notes have been delivered
to the trustee for cancellation or (B) all such McLeodUSA notes not
theretofore delivered to the trustee for cancellation have become due and
payable, will become due and payable within one year or are to be called for
redemption within one year under irrevocable arrangements satisfactory to the
trustee for the giving of notice of redemption by the trustee in the name and
at the expense of McLeodUSA, and McLeodUSA has irrevocably deposited or caused
to be deposited with the trustee funds in an amount sufficient to pay and
discharge the entire indebtedness on the McLeodUSA notes not theretofore
delivered to the trustee for cancellation, for principal of (or premium, if
any, on) and interest to the date of deposit or maturity or date of redemption;
(ii) McLeodUSA has paid or caused to be paid all sums payable by
McLeodUSA under the McLeodUSA indenture; and
(iii) McLeodUSA has delivered to the trustee an Officers' Certificate
and an Opinion of Counsel relating to compliance with the conditions set forth
in the McLeodUSA indenture.
McLeodUSA, at its election, shall:
(a) be deemed to have paid and discharged its debt on the McLeodUSA
notes and the McLeodUSA indenture shall cease to be of further effect as to
all outstanding McLeodUSA notes, except as to (i) rights of registration of
transfer, substitution and exchange of McLeodUSA notes and McLeodUSA's right
of optional redemption, (ii) rights of holders to receive payments of
principal of, premium, if any, and interest on the McLeodUSA notes (but not
the Change of Control Purchase Price or the Offer Purchase Price) and any
rights the holders with respect to such amounts, (iii) the rights, obligations
and immunities of the trustee under the McLeodUSA indenture and (iv) several
other specified provisions in the McLeodUSA indenture, or
(b) cease to be under any obligation to comply with specified
restrictive covenants, including those described under "--Covenants," after
the irrevocable deposit by McLeodUSA with the trustee, in trust for the
benefit of the holders, at any time prior to the maturity of the McLeodUSA
notes, of (A) money in an amount, (B) U.S. Government Obligations which
through the payment of interest and principal will provide, not later than one
day before the due date of payment in respect of the McLeodUSA notes, money in
an amount, or (C) a combination thereof, sufficient to pay and discharge the
principal of, and interest on, the McLeodUSA notes then outstanding on the
dates on which any such payments are due in accordance with the terms of the
McLeodUSA indenture and of the McLeodUSA notes.
Such defeasance or covenant defeasance shall be deemed to occur only if
specified conditions are satisfied, including, among other things, delivery by
McLeodUSA to the trustee of an opinion of counsel reasonably acceptable to the
trustee to the effect that (i) such deposit, defeasance and discharge will not
be deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) McLeodUSA's deposit will not result in the
Trust or the trustee being subject to regulation under the Investment Company
Act of 1940.
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THE TRUSTEE
United States Trust Company of New York is the trustee under the
McLeodUSA indenture and its current address is 114 West 47th Street, New York,
New York 10036.
The holders of not less than a majority in principal amount of the
outstanding McLeodUSA notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee, subject to several exceptions. Except during the continuance of an
Event of Default, the trustee will perform only such duties as are
specifically set forth in the McLeodUSA indenture. The McLeodUSA indenture
provides that in case an Event of Default shall occur (which shall not be
cured or waived), the trustee will be required, in the exercise of its rights
and powers under the McLeodUSA indenture, to use the degree of care of a
prudent person in the conduct of such person's own affairs. Subject to such
provisions, the trustee will be under no obligation to exercise any of its
rights or powers under the McLeodUSA indenture at the request of any of the
holders of the McLeodUSA notes, unless such holders shall have offered to the
trustee indemnity satisfactory to it against any loss, liability or expense.
NO PERSONAL LIABILITY OF CONTROLLING PERSONS, DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No controlling Person, director, officer, employee, incorporator or
stockholder of McLeodUSA, as such, shall have any liability for any covenant,
agreement or other obligations of McLeodUSA under the McLeodUSA notes or the
McLeodUSA indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation, solely by reason of its past, present or
future status as a controlling Person, director, officer, employee,
incorporator or stockholder of McLeodUSA. By accepting a McLeodUSA note each
holder waives and releases all such liability (but only such liability). The
waiver and release are part of the consideration for issuance of the McLeodUSA
notes. Nonetheless, such waiver may not be effective to waive liabilities
under the federal securities laws and it has been the view of the SEC that
such a waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange McLeodUSA notes in accordance with
the McLeodUSA indenture. McLeodUSA, the Registrar and the trustee may require
a holder, among other things, to furnish appropriate endorsements and transfer
documents and McLeodUSA may require a holder to pay any taxes and fees
required by law or permitted by the McLeodUSA indenture.
DEFINITIONS
Set forth below is a summary of several of the defined terms used in
the McLeodUSA indenture. Reference is made to the McLeodUSA indenture for the
full definition of all such terms, as well as any capitalized terms used
herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that
such Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding Indebtedness which is
extinguished, retired or repaid in connection with such other Person merging
with or into or becoming a Subsidiary of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly
or indirectly controls, or is under common control with, or is controlled by,
such Person; provided that each Unrestricted Subsidiary shall be deemed to be
an Affiliate of McLeodUSA and of each other Subsidiary of McLeodUSA; provided,
further, that neither McLeodUSA nor any of its Restricted Subsidiaries shall
be deemed to be Affiliates of each other. For purposes of
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this definition, "control" (including, with correlative meanings, the terms
"controlling," "under common control with" and "controlled by"), as used with
respect to any Person, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of
such Person, whether through the ownership of Voting Stock, by agreement or
otherwise.
"Asset Sale" by any Person means any transfer, conveyance, sale,
lease or other disposition by such Person or any of its Restricted
Subsidiaries (including a consolidation or merger or other sale of any such
Restricted Subsidiary with, into or to another Person in a transaction in
which such Restricted Subsidiary ceases to be a Restricted Subsidiary of the
specified Person, but excluding a disposition by a Restricted Subsidiary of
such Person to such Person or a Wholly-Owned Restricted Subsidiary of such
Person or by such Person to a Wholly-Owned Restricted Subsidiary of such
Person) of (i) shares of Capital Stock or other ownership interests of a
Restricted Subsidiary of such Person (other than as permitted by the
provisions of the McLeodUSA indenture described above under
"--Covenants--Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries"), (ii) substantially all of the assets of such Person or any of
its Restricted Subsidiaries representing a division or line of business (other
than as part of a Permitted Investment) or (iii) other assets or rights of
such Person or any of its Restricted Subsidiaries outside of the ordinary
course of business and, in each case, that is not governed by the provisions
of the McLeodUSA indenture applicable to consolidations, mergers, and
transfers of all or substantially all of the assets of the McLeodUSA; provided
that "Asset Sale" shall not include (i) sales or other dispositions of
inventory, receivables and other current assets in the ordinary course of
business, (ii) simultaneous exchanges by McLeodUSA or any Restricted
Subsidiary of Telecommunications Assets for other Telecommunications Assets in
the ordinary course of business; provided that the applicable
Telecommunications Assets received by McLeodUSA or such Restricted Subsidiary
have at least substantially equal Fair Market Value to McLeodUSA or such
Restricted Subsidiary (as determined by the board of directors whose good
faith determination shall be conclusive and evidenced by a Board Resolution),
and (iii) sales or other dispositions of assets with a Fair Market Value (as
certified in an Officers' Certificate) not in excess of $1 million.
"Attributable Indebtedness" means, with respect to any Sale and
Leaseback Transaction of any Person, as at the time of determination, the
greater of (i) the capitalized amount in respect of such transaction that
would appear on the balance sheet of such Person in accordance with GAAP and
(ii) the present value (discounted at a rate consistent with accounting
guidelines, as determined in good faith by the responsible accounting officer
of such Person) of the payments during the remaining term of the lease
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended) or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of a penalty
(in which case the rental payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt
security or Disqualified Stock, the quotient obtained by dividing (i) the sum
of the products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund
or mandatory redemption payment requirements) of such debt security or
Disqualified Stock multiplied in each case by (y) the amount of such principal
or redemption payment, by (ii) the sum of all such principal or redemption
payments.
"board of directors" means the board of directors of McLeodUSA or any
committee thereof duly authorized to act on behalf of the board of directors,
unless the context suggests otherwise.
"Board Resolution" means a duly adopted resolution of the board of
directors in full force and effect at the time of determination.
"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Indebtedness
arrangement conveying the right to use) real or personal property of such
Person which is required to be classified and accounted for as a capital lease
or a liability on the face of a balance sheet of such Person prepared in
accordance with GAAP, and the stated maturity thereof shall be the date of the
last payment of rent or any amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of
a penalty.
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"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however
designated) in such Person and any rights (other than Indebtedness convertible
into an equity interest), warrants or options to subscribe for or acquire an
equity interest in such Person.
"Change of Control" shall be deemed to occur if (i) the sale,
conveyance, transfer or lease of all or substantially all of the assets of
McLeodUSA to any "Person" or "group" (within the meaning of Sections 13(d)(3)
and 14(d)(2) of the Securities Exchange Act or any successor provision to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of Rule
13d-5(b)(i) under the Securities Exchange Act), other than any Permitted
Holder (as defined below) or any Restricted Subsidiary of McLeodUSA, shall
have occurred; (ii) any "Person" or "group" (within the meaning of Sections
13(d)(3) and 14(d)(2) of the Securities Exchange Act or any successor
provision to either of the foregoing, including any group acting for the
purpose of acquiring, holding or disposing of securities within the meaning of
Rule 13d-5(b)(i) under the Securities Exchange Act), other than any Permitted
Holder, becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act) of more than 35% of the total voting power of all
classes of the Voting Stock of McLeodUSA (including any warrants, options or
rights to acquire such Voting Stock), calculated on a fully diluted basis, and
such voting power percentage is greater than or equal to the total voting
power percentage then beneficially owned by the Permitted Holders in the
aggregate; or (iii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the board of directors
(together with any directors whose election or appointment by the board of
directors or whose nomination for election by the stockholders of McLeodUSA
was approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the board of directors then in office.
"Common Stock" means Capital Stock other than Preferred Stock.
"Consolidated Capital Ratio" of any Person as of any date means the
ratio of (i) the aggregate consolidated principal amount of Indebtedness of
such Person then outstanding to (ii) the aggregate consolidated paid-in
capital of such Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period
means the Consolidated Net Income of McLeodUSA and its Restricted Subsidiaries
for such period increased by the sum of (i) Consolidated Interest Expense of
McLeodUSA and its Restricted Subsidiaries for such period, plus (ii)
Consolidated Income Tax Expense of McLeodUSA and its Restricted Subsidiaries
for such period, plus (iii) the consolidated depreciation and amortization
expense included in the income statement of McLeodUSA and its Restricted
Subsidiaries for such period, plus (iv) any non-cash expense related to the
issuance to employees of McLeodUSA or any Restricted Subsidiary of McLeodUSA
of options to purchase Capital Stock of McLeodUSA or such Restricted
Subsidiary, plus (v) any charge related to any premium or penalty paid in
connection with redeeming or retiring any Indebtedness prior to its stated
maturity; and plus (vi) any non-cash expense related to a purchase accounting
adjustment not requiring an accrual or reserve and separately disclosed in
McLeodUSA's Consolidated Income Statement, and decreased by the amount of any
non-cash item that increases such Consolidated Net Income, all as determined
on a consolidated basis in accordance with GAAP; provided that there shall be
excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if
positive) of any Restricted Subsidiary of McLeodUSA (calculated separately for
such Restricted Subsidiary in the same manner as provided above for McLeodUSA)
that is subject to a restriction which prevents the payment of dividends or
the making of distributions to McLeodUSA or another Restricted Subsidiary of
McLeodUSA to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of McLeodUSA and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest
expense included in a consolidated income statement (excluding interest
income) of McLeodUSA and its Restricted Subsidiaries for such period in
accordance with GAAP, including without limitation or duplication (or, to the
extent not so included, with the addition of), (i) the amortization of
Indebtedness discount; (ii) any payments or fees with respect to letters of
credit,
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bankers' acceptances or similar facilities; (iii) fees with respect to
interest rate swap or similar agreements or foreign currency hedge, exchange
or similar agreements; (iv) Preferred Stock dividends of McLeodUSA and its
Restricted Subsidiaries (other than dividends paid in shares of Preferred
Stock that is not Disqualified Stock) declared and paid or payable; (v)
accrued Disqualified Stock dividends of McLeodUSA and its Restricted
Subsidiaries, whether or not declared or paid; (vi) interest on Indebtedness
guaranteed by McLeodUSA and its Restricted Subsidiaries; and (vii) the portion
of any Capital Lease Obligation paid during such period that is allocable to
interest expense in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without
duplication (i) all items classified as extraordinary, (ii) any net income (or
net loss) of any Person other than such Person and its Restricted
Subsidiaries, except to the extent of the amount of dividends or other
distributions actually paid to such Person or its Restricted Subsidiaries by
such other Person during such period, (iii) the net income of any Person
acquired by such Person or any of its Restricted Subsidiaries in a
pooling-of-interests transaction for any period prior to the date of the
related acquisition, (iv) any gain or loss, net of taxes, realized on the
termination of any employee pension benefit plan, (v) net gains (or net
losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries, (vi) the net income (or net loss) of any Restricted Subsidiary
of such Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter or any
agreement, instrument, contract, judgment, order, decree, statute, rule,
governmental regulation or otherwise, except for any dividends or
distributions actually paid by such Restricted Subsidiary to such Person,
(vii) with regard to a non-wholly-owned Restricted Subsidiary, any aggregate
net income (or loss) in excess of such Person's or such Restricted
Subsidiary's pro rata share of such non-wholly-owned Restricted Subsidiary's
net income (or loss) and (viii) the cumulative effect of changes in accounting
principles.
"Consolidated Net Worth" of any Person means, at any date of
determination, the consolidated stockholders' equity or partners' capital
(excluding Disqualified Stock) of such Person and its subsidiaries, as
determined in accordance with GAAP.
"Consolidated Tangible Assets" of any Person means the total amount
of assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person
and its Subsidiaries after deducting therefrom all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
"Default" means any event, act or condition, the occurrence of which
is, or after notice or the passage of time or both would be, an Event of
Default.
"Depository" means, with respect to the McLeodUSA notes issuable or
issued in whole or in part in the form of one or more Global Notes, The
Depository Trust Company for so long as it shall be a clearing agency
registered under the Securities Exchange Act, or such successor as McLeodUSA
shall designate from time to time in an Officers' Certificate delivered to the
trustee.
"Disqualified Stock" means any Capital Stock which, by its terms (or
by the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, prior to the Stated Maturity of
the McLeodUSA notes.
"Eligible Cash Equivalents" means (i) securities issued or directly
and fully guaranteed or insured by the United States of America or any agency
or instrumentality thereof, provided that the full faith and credit of the
United States of America is pledged in support thereof; (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than
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seven days for underlying securities of the types described in clause (i)
above entered into with any bank meeting the qualifications specified in
clause (ii) above; (iv) direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of the
holder thereof within 270 calendar days after the date of acquisition thereof
and, at the time of acquisition, having a rating of A or better from Standard
& Poor's Corporation or A-2 or better from Moody's Investors Service, Inc.,
(v) commercial paper issued by the parent corporation of any commercial bank
organized in the United States having capital and surplus in excess of $500
million and commercial paper issued by others having one of the two highest
ratings obtainable from either Standard & Poor's Corporation or Moody's
Investors Service, Inc. and in each case maturing within 270 calendar days
after the date of acquisition, (vi) overnight bank deposits and bankers'
acceptances at any commercial bank organized in the United States having
capital and surplus in excess of $500 million; (vii) deposits available for
withdrawal on demand with a commercial bank organized in the United States
having capital and surplus in excess of $500 million; and (viii) investments
in money market funds substantially all of whose assets comprise securities of
the types described in clauses (i) through (vi).
"Existing Indebtedness" means Indebtedness outstanding on the date of
the McLeodUSA indenture (other than under any Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the
sale value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
board of directors.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the McLeodUSA indenture shall utilize GAAP as in effect on the
Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing).
"holder" means (i) in the case of any certificated McLeodUSA note,
the Person in whose name such certificated McLeodUSA note is registered in the
Note Register and (ii) in the case of any Global McLeodUSA note, the
Depositary.
"Incur" means, with respect to any Indebtedness or other obligation
of any Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or otherwise become liable in respect of such Indebtedness
or other obligation including by acquisition of Subsidiaries or the recording,
as required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the
foregoing); provided that a change in GAAP that results in an obligation of
such Person that exists at such time becoming Indebtedness shall not be deemed
an Incurrence of such Indebtedness and that neither the accrual of interest
nor the accretion of original issue discount shall be deemed an Incurrence of
Indebtedness. Indebtedness otherwise incurred by a Person before it becomes a
Subsidiary of McLeodUSA (whether by merger, consolidation, acquisition or
otherwise) shall be deemed to have been incurred at the time at which such
Person becomes a Subsidiary of McLeodUSA.
"Indebtedness" means, at any time (without duplication), with respect
to any Person, whether recourse as to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition
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of Property, assets or businesses, excluding trade accounts payable made in
the ordinary course of business, (iii) any reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (iv) any obligation of such
Person issued or assumed as the deferred purchase price of Property or
services (but excluding trade accounts payable or accrued liabilities arising
in the ordinary course of business, which in either case are not more than 60
days overdue or which are being contested in good faith), (v) any Capital
Lease Obligation of such Person, (vi) the maximum fixed redemption or
repurchase price of Disqualified Stock of such Person and, to the extent held
by Persons other than such Person or its Restricted Subsidiaries, the maximum
fixed redemption or repurchase price of Disqualified Stock of such Person's
Restricted Subsidiaries, at the time of determination, (vii) every obligation
under Interest Rate and Currency Protection Agreements of such Person, (viii)
any Attributable Indebtedness with respect to any Sale and Leaseback
Transaction to which such Person is a party and (ix) any obligation of the
type referred to in clauses (i) through (viii) of this definition of another
Person and all dividends and distributions of another Person the payment of
which, in either case, such Person has Guaranteed or is responsible or liable,
directly or indirectly, as obligor, Guarantor or otherwise. For purposes of
the preceding sentence, the maximum fixed repurchase price of any Disqualified
Stock that does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Disqualified Stock as if such Disqualified
Stock were repurchased on any date on which Indebtedness shall be required to
be determined pursuant to the McLeodUSA indenture; provided that, if such
Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence
of the contingency giving rise to the obligation; provided that the amount
outstanding at any time of any Indebtedness issued with original issue
discount (including, without limitation, our 10 1/2% senior discount notes) is
the face amount of such Indebtedness less the remaining unamortized portion of
the original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
"Interest Rate or Currency Protection Agreement" of any Person means
any forward contract, futures contract, swap, option, future option or other
financial agreement or arrangement (including, without limitation, caps,
floors, collars and similar agreements) relating to, or the value of which is
dependent upon, interest rates or currency exchange rates or indices.
"Investment" in any Person means any direct, indirect or contingent
(i) advance or loan to, Guarantee of any Indebtedness of, extension of credit
or capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all
of the business, assets or stock or other evidence of beneficial ownership of
such Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the McLeodUSA notes were first
authenticated and delivered under the McLeodUSA indenture.
"Lien" means, with respect to any Property or other asset, any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien (statutory or other), charge, easement,
encumbrance, preference, priority or other security or similar agreement or
preferential arrangement of any kind or nature whatsoever on or with respect
to such Property or other asset (including, without limitation, any
conditional sale or title retention agreement having substantially the same
economic effect as any of the foregoing).
"Maturity" means, when used with respect to a McLeodUSA note, the
date on which the principal of such McLeodUSA note becomes due and payable as
provided therein or in the McLeodUSA indenture, whether on the date specified
in such McLeodUSA note as the fixed date on which the principal of such
McLeodUSA note is due
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and payable, a Change of Control Payment Date or an Asset Sale Payment Date,
or by declaration of acceleration, call for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property
or assets by any Person or any of its Restricted Subsidiaries, cash or readily
marketable cash equivalents received net of (i) all reasonable out-of-pocket
expenses of such Person or such Restricted Subsidiary incurred in connection
with such sale, including, without limitation, all legal, title and recording
tax expenses, commissions and other fees and expenses incurred (but excluding
any finder's fee or broker's fee payable to any Affiliate of such Person) and
all federal, state, foreign and local taxes arising in connection with such
sale that are paid or required to be accrued as a liability under GAAP by such
Person or its Restricted Subsidiaries, (ii) all payments made or required to
be made by such Person or its Restricted Subsidiaries on any Indebtedness
which is secured by such Properties or other assets in accordance with the
terms of any Lien upon or with respect to such Properties or other assets or
which must, by the terms of such Lien, or in order to obtain a necessary
consent to such transaction or by applicable law, be repaid in connection with
such sale, (iii) all contractually required distributions and other payments
made to minority interest holders (but excluding distributions and payments to
Affiliates of such Person) in Restricted Subsidiaries of such Person as a
result of such transaction and (iv) appropriate amounts to be provided by such
Person or any Restricted Subsidiary thereof, as the case may be, as a reserve
in accordance with GAAP against any liabilities associated with such assets
and retained by such Person or any Restricted Subsidiary thereof, as the case
may be, after such transaction, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such transaction, in each case as determined
by the board of directors of such Person, in its reasonable good faith
judgment evidenced by a resolution of the board of directors filed with the
trustee; provided that, in the event that any consideration for a transaction
(which would otherwise constitute Net Cash Proceeds) is required to be held in
escrow pending determination of whether a purchase price adjustment will be
made, such consideration (or any portion thereof) shall become Net Cash
Proceeds only at such time as it is released to such Person or its Restricted
Subsidiaries from escrow; and provided, further, that any non-cash
consideration received in connection with any transaction, which is
subsequently converted to cash, shall be deemed to be Net Cash Proceeds at
such time, and shall thereafter be applied in accordance with the McLeodUSA
indenture.
"Officers' Certificate" means a certificate signed by (i) the
Chairman of the Board, a Vice Chairman of the Board, the President, the Chief
Executive Officer or a Vice President, and (ii) the Chief Financial Officer,
the Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the
Secretary or an Assistant Secretary of McLeodUSA and delivered to the trustee,
which shall comply with the McLeodUSA indenture.
"Paying Agent" means any Person authorized by McLeodUSA to make
payments of principal, premium or interest with respect to the McLeodUSA notes
on behalf of McLeodUSA.
"Permitted Holders" means Alliant Energy Corp., Media/Communications
Partners III Limited Partnership and Forstmann Little & Co. and their
respective successors and assigns, and Clark E. and Mary E. McLeod, Richard A.
Lumpkin and Kwok Li and foundations and trusts controlled by them or any of
them, and Affiliates (other than McLeodUSA and the Restricted Subsidiaries) of
each of the foregoing.
"Permitted Interest Rate or Currency Protection Agreement" of any
Person means any Interest Rate or Currency Protection Agreement entered into
with one or more financial institutions in the ordinary course of business
that is designed to protect such Person against fluctuations in interest rates
or currency exchange rates with respect to Indebtedness Incurred and which
shall have a notional amount no greater than the payments due with respect to
the Indebtedness being hedged thereby and not for purposes of speculation.
"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
Investments in any Person as a result of which such Person becomes a
Restricted Subsidiary in compliance with the McLeodUSA indenture; (iv)
Investments pursuant to agreements or obligations of McLeodUSA or a Restricted
Subsidiary, in effect on the Issue Date, to make such Investments; (v)
Investments in prepaid expenses, negotiable instruments held for collection
and lease, utility and workers' compensation, performance and other similar
deposits; (vi) Permitted Interest Rate or Currency Protection Agreements with
respect to any floating rate Indebtedness that is permitted by the terms of
the McLeodUSA indenture to be outstanding; (vii)
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bonds, notes, debentures or other debt securities received as a result of
Asset Sales permitted under the covenant described under "--Asset Sales";
(viii) Investments in existence at the Issue Date; (ix) commission, payroll,
travel and similar advances to employees in the ordinary course of business to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP; (x) stock, obligations or
securities received in satisfaction of judgments; and (xi) Investments made
pursuant to any deferred-compensation plan, including Investments made through
a trust (including a grantor trust) established in connection with any such
plan, for the benefit of employees of McLeodUSA or of any Restricted
Subsidiary.
"Permitted Liens" means (i) Liens for taxes, assessments,
governmental charges or claims which are not yet delinquent or which are being
contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made therefor; (ii) other Liens incidental to the conduct of
McLeodUSA's and its Restricted Subsidiaries' business or the ownership of its
property and assets not securing any Indebtedness, and which do not in the
aggregate materially detract from the value of McLeodUSA's and its Restricted
Subsidiaries' property or assets when taken as a whole, or materially impair
the use thereof in the operation of its business; (iii) Liens with respect to
assets of a Restricted Subsidiary granted by such Restricted Subsidiary to
McLeodUSA to secure Indebtedness owing to McLeodUSA; (iv) pledges and deposits
made in the ordinary course of business in connection with workers'
compensation and unemployment insurance, statutory Liens of landlords,
carriers, warehousemen, mechanics, materialmen, repairmen and other types of
statutory obligations; (v) deposits made to secure the performance of tenders,
bids, leases, and other obligations of like nature incurred in the ordinary
course of business (exclusive of obligations for the payment of borrowed
money); (vi) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially detract
from the value of the property subject thereto or interfere with the ordinary
conduct of the business of McLeodUSA or its Restricted Subsidiaries; (vii)
Liens arising out of judgments or awards against McLeodUSA or any Restricted
Subsidiary with respect to which McLeodUSA or such Restricted Subsidiary is
prosecuting an appeal or proceeding for review and McLeodUSA or such
Restricted Subsidiary is maintaining adequate reserves in accordance with
GAAP; (viii) any interest or title of a lessor in the property subject to any
lease other than a Capital Lease; (ix) Liens (including extensions and
renewals thereof) upon real or personal property acquired after the Issue
Date; provided that (a) such Lien is created solely for the purpose of
securing Indebtedness Incurred, in accordance with "--Covenants--Limitation on
Consolidated Indebtedness," (1) to finance the cost (including the cost of
improvement or construction) of the item of property or assets subject thereto
and such Lien is created prior to, at the time of or within six months after
the later of the acquisition, the completion of construction or the
commencement of full operation of such property or (2) to refinance any
Indebtedness previously so secured, (b) the principal amount of the
Indebtedness secured by such Lien does not exceed 100% of such cost and (c)
any such Lien shall not extend to or cover any property or assets other than
such item of property or assets and any improvements on such item; (x) leases
or subleases granted to others that do not materially interfere with the
ordinary course of business of McLeodUSA and its Restricted Subsidiaries; (xi)
Liens encumbering property or assets under construction arising from progress
or partial payments by a customer of McLeodUSA or its Restricted Subsidiaries
relating to such property or assets; (xii) Liens arising from filing
precautionary Uniform Commercial Code financing statements regarding leases;
(xiii) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes a part
of, any Restricted Subsidiary; provided that such Liens do not extend to or
cover any property or assets of McLeodUSA or any Restricted Subsidiary other
than the property or assets acquired; (xiv) Liens in favor of McLeodUSA or any
Restricted Subsidiary; (xv) Liens securing reimbursement obligations with
respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof;
(xvi) Liens in favor of customs and revenue authorities arising as a matter of
law to secure payment of customs duties in connection with the importation of
goods; (xvii) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are either within the general parameters
customary in the industry and incurred in the ordinary course of business, in
each case, securing Indebtedness under Permitted Interest Rate Agreements and
Currency Agreements; and (xviii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by McLeodUSA or any of its Restricted Subsidiaries in the ordinary course
of business in accordance with the past practices of McLeodUSA and its
Restricted Subsidiaries prior to the Issue Date.
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"Person" means any individual, corporation, limited liability
company, partnership, limited liability partnership, joint venture, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of
any class or classes (however designated) that ranks prior, as to the payment
of dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, excluding Capital Stock in any other Person.
"Public Equity Offering" means an underwritten primary public
offering of Common Stock (other than Disqualified Stock) of McLeodUSA or a
Restricted Subsidiary pursuant to an effective registration statement filed
under the Securities Act (excluding registration statements on Form S-8).
"Purchase Money Indebtedness" means Indebtedness of McLeodUSA
(including Acquired Indebtedness and Capital Lease Obligations, mortgage
financings and purchase money obligations) incurred for the purpose of
financing all or any part of the cost of construction, acquisition,
development or improvement by McLeodUSA or any Restricted Subsidiary of any
Telecommunications Assets of McLeodUSA or any Restricted Subsidiary and
including any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
"Qualified Receivable Facility" means Indebtedness of McLeodUSA or
any Subsidiary Incurred from time to time pursuant to either (x) credit
facilities secured by Receivables or (y) receivable purchase facilities, and
including any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary
formed solely for the purpose of obtaining a Qualified Receivable Facility and
substantially all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other
than Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments,
documents or intangibles evidencing or relating to the right to payment of
money and proceeds and products thereof in each case generated in the ordinary
course of business.
"Restricted Payment" means (i) a dividend or other distribution
declared or paid on the Capital Stock of McLeodUSA or to McLeodUSA's
stockholders (in their capacity as such), or declared or paid to any Person
other than McLeodUSA or a Restricted Subsidiary of McLeodUSA on the Capital
Stock of any Restricted Subsidiary of McLeodUSA, in each case, other than
dividends, distributions or payments made solely in Qualified Stock of
McLeodUSA or such Restricted Subsidiary, (ii) a payment made by McLeodUSA or
any of its Restricted Subsidiaries (other than to McLeodUSA or any Restricted
Subsidiary) to purchase, redeem, acquire or retire any Capital Stock of
McLeodUSA or of a Restricted Subsidiary, (iii) a payment made by McLeodUSA or
any of its Restricted Subsidiaries (other than a payment made solely in
Qualified Stock of McLeodUSA) to redeem, repurchase, defease (including an
in-substance or legal defeasance) or otherwise acquire or retire for value
(including pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment, Indebtedness
of McLeodUSA or such Restricted Subsidiary which is subordinate (whether
pursuant to its terms or by operation of law) in right of payment to the
McLeodUSA notes and which was scheduled to mature on or after the maturity of
the McLeodUSA notes or (iv) an Investment in any Person, including an
Unrestricted Subsidiary or the designation of a Subsidiary as an Unrestricted
Subsidiary, other than (a) a Permitted Investment, (b) an Investment by
McLeodUSA in a Wholly-Owned Restricted Subsidiary or (c) an Investment by a
Restricted Subsidiary in McLeodUSA or a Wholly-Owned Restricted Subsidiary of
McLeodUSA.
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"Restricted Subsidiary" means any Subsidiary of McLeodUSA that has
not been designated as an "Unrestricted Subsidiary" pursuant to the terms of
the McLeodUSA indenture.
"Sale and Leaseback Transaction" means, with respect to any Person,
any direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Senior Credit Facility" means Indebtedness of McLeodUSA and its
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to McLeodUSA
and its Subsidiaries, whether or not secured, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Strategic Equity Investments" means the issuance and sale of Capital
Stock (other than Disqualified Stock) to a Person that has an equity market
capitalization, a net asset value or annual revenues of at least $1.0 billion
and owns and operates businesses primarily in a Telecommunications Business,
provided that such Telecommunications Business may be located anywhere in the
world.
"Subordinated Indebtedness" means Indebtedness of McLeodUSA as to
which the payment of principal of (and premium, if any) and interest and other
payment obligations in respect of such Indebtedness shall be subordinate to
the prior payment in full of the McLeodUSA notes to at least the following
extent: (i) no payments of principal of (or premium, if any) or interest on or
otherwise due in respect of such Indebtedness may be permitted for so long as
any default in the payment of principal (or premium, if any) or interest on
the McLeodUSA notes exists; (ii) in the event that any other default that with
the passing of time or the giving of notice, or both, would constitute an
event of default exists with respect to the McLeodUSA notes, upon notice by
25% or more in principal amount of the McLeodUSA notes to the trustee, the
trustee shall give notice to McLeodUSA and the holders of such Indebtedness
(or trustees or agents therefor) of a payment blockage, and thereafter no
payments of principal of (or premium, if any) or interest on or otherwise due
in respect of such Indebtedness may be made for a period of 179 days from the
date of such notice; and (iii) such Indebtedness may not (x) provide for
payments of principal of such Indebtedness at the stated maturity thereof or
by way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by McLeodUSA
(including any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by virtue of
acceleration of such Indebtedness upon an event of default thereunder), in
each case prior to the final Stated Maturity of the McLeodUSA notes or (y)
permit redemption or other retirement (including pursuant to an offer to
purchase made by McLeodUSA) of such other Indebtedness at the option of the
holder thereof prior to the final Stated Maturity of the McLeodUSA notes,
other than a redemption or other retirement at the option of the holder of
such Indebtedness (including pursuant to an offer to purchase made by
McLeodUSA) which is conditioned upon a change of control of McLeodUSA pursuant
to provisions substantially similar to those described under "--Repurchase at
the Option of Holders upon a Change of Control" (and which shall provide that
such Indebtedness will not be repurchased pursuant to such provisions prior to
McLeodUSA's repurchase of the McLeodUSA notes required to be repurchased by
McLeodUSA pursuant to the provisions described under "--Repurchase at the
Option of Holders upon a Change of Control").
"Subsidiary" means, with respect to any Person, (i) any corporation
more than 50% of the outstanding shares of Voting Stock of which is owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries
of such Person, or by such Person and one or more other Subsidiaries of such
Person, (ii) any general partnership, limited liability company, joint venture
or similar entity, more than 50% of the outstanding partnership,
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membership or similar interests of which are owned, directly or indirectly, by
such Person, or by one or more other Subsidiaries of such Person, or by such
Person and one or more other Subsidiaries of such Person and (iii) any limited
partnership of which such Person or any Subsidiary of such Person is a general
partner.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended
for use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting,
or providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (ii)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, (iii) creating, developing, producing or
marketing audiotext or videotext, (iv) publishing or distributing telephone
(including Internet) directories, whether in paper, electronic, audio or video
format, (v) marketing (including direct marketing and telemarketing), or (vi)
evaluating, participating in or pursuing any other business that is primarily
related to those identified in the foregoing clauses (i), (ii), (iii), (iv) or
(v) above (in the case of clauses (iii), (iv) and (v), however, in a manner
consistent with McLeodUSA's manner of business on the Issue Date), and shall,
in any event, include all businesses in which McLeodUSA or any of its
Subsidiaries are engaged on the Issue Date; provided that the determination of
what constitutes a Telecommunications Business shall be made in good faith by
the board of directors.
"Trading Day" means, with respect to a security traded on a
securities exchange, automated quotation system or market, a day on which such
exchange, system or market is open for a full day of trading.
"Unrestricted Subsidiary" means any Subsidiary of McLeodUSA that
McLeodUSA has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
McLeodUSA indenture.
"Voting Stock" means, with respect to any Person, securities of any
class or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such
Person.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary
of such Person all of the outstanding Capital Stock or other ownership
interests (other than any director's qualifying shares) of which shall at the
time be owned by such Person or by one or more other Wholly-Owned Restricted
Subsidiaries of such Person or by such Person and one or more other
Wholly-Owned Restricted Subsidiaries of such Person.
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OTHER MCLEODUSA INDEBTEDNESS
On March 4, 1997, we completed an offering of $500 million aggregate
principal amount at maturity of our 10 1/2% senior discount notes. Our 10 1/2%
senior discount notes were priced at a discount and we received net proceedS
of approximately $288.9 million from the offering of our 10 1/2% senior
discount notes. Our 10 1/2% senior discount notes will accrete to an aggregate
principal amount of $500 million by March 1, 2002. Interest will not accrue on
our 10 1/2% senior discount notes prior to March 1, 2002. Thereafter, interest
will accrue at a rate of 10 1/2% per annum which will be payable in cash
semi-annually in arrears on March 1 and September 1 of each year, commencing
September 1, 2002. Our 10 1/2% senior discount notes rank PARI PASSU in right
of payment with our 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior
notes, 8 1/8% senior notes and the McLeodUSA notes. Our 10 1/2% senior
discount notes wilL mature on March 1, 2007 and will be payable prior to the
maturity of our 9 1/4% senior notes, 8 1/2% senior notes, 9 1/2% senior notes,
8 1/4% senior notes and the McLeodUSA notes.
On July 21, 1997, we completed an offering of $225 million principal
amount of our 9 1/4% senior notes. We received net proceeds of approximately
$217.6 million from the offering of our 9 1/4% senior notes. Our 9 1/4% senior
notes accrue interest at a rate of 9 1/4% per annum which is payable in cash
semi-annually in arrears on July 15 and January 15 of each year, commencing
January 15, 1998. Our 9 1/4% senior notes rank PARI PASSU in right of payment
with our 10 1/2% senior discount notes, 8 3/8% senior notes, 9 1/2% senior
notes, 8 1/8% senior notes and the McLeodUSA notes. Our 9 1/4% senior notes
will mature on July 15, 2007 and will be payable prior to the maturity of our
8 3/8% senior notes, 9 1/2% senior notes, 8 1/8% senior notes and the
McLeodUSA notes.
On March 16, 1998, we completed an offering of $300 million principal
amount of our 8 3/8% senior notes. We received net proceeds of approximately
$291.9 million from the offering of our 8 3/8% senior notes. Our 8 3/8% senior
notes accrue interest at a rate of 8 3/8% per annum which is payable in cash
semi-annually in arrears on March 15 and September 15 of each year, commencing
September 15, 1998. Our 8 3/8% senior notes rank PARI PASSU in right of payment
with our 10 1/2% senior discount notes, 9 1/4% senior notes, 9 1/2% senior
notes, 8 1/8% senior notes and the McLeodUSA notes. Our 8 3/8% senior notes
will mature on March 15, 2008 and will be payable prior to the maturity of our
9 1/2% senior notes, 8 1/8% senior notes and the McLeodUSA notes.
On October 30, 1998, we completed an offering of $300 million
principal amount of our 9 1/2% senior notes. We received net proceeds of
approximately $291.9 million from the offering of our 9 1/2% senior notes. Our
9 1/2% senior notes accrue interest at a rate of 9 1/2% per annum which is
payable in cash semi-annually in arrears on May 1 and November 1 of each year,
commencing May 1, 1999. Our 9 1/2% senior notes rank PARI PASSU in right of
payment with our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8%
senior notes, 8 1/8% senior notes and the McLeodUSA notes. Our 9 1/2% senior
notes will mature on November 1, 2008 and will be payable prior to the
maturity of our 8 1/8% senior notes and the McLeodUSA notes.
On February 22, 1999, we completed an offering of $500 million
principal amount of our 8 1/8% senior notes. We received net proceeds of
approximately $487.8 million from the offering of our 8 1/8% senior notes. Our
8 1/8% senior notes accrue interest at a rate of 8 1/8% per annum, which is
payable in cash semi-annually in arrears on February 15 and August 15 of each
year, commencing August 15, 1999. Our 8 1/8% senior notes rank PARI PASSU in
right of payment with our 10 1/2% senior discount notes, 9 1/4% senior notes,
8 3/8% senior notes, 9 1/2% senior notes, 8 1/8% senior notes and the
McLeodUSA notes. Our 8 1/8% senior notes will mature on February 15, 2009 and
will be payable prior to the maturity of the McLeodUSA notes.
The indentures governing our 10 1/2% senior discount notes, 9 1/4%
senior notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior notes
impose operating and financial restrictions on us and our subsidiaries that
are substantially the same as the restrictions governing the McLeodUSA notes.
These restrictions affect, and in some cases significantly limit or prohibit,
among other things, our ability and the ability of our subsidiaries to incur
additional indebtedness, pay dividends or make distributions in respect of our
or such subsidiaries' capital stock, make other restricted payments, enter
into sale and leaseback transactions, create liens upon assets, enter into
transactions with affiliates, sell assets, or consolidate, merge or sell all
or substantially all of our, or our subsidiaries'
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assets. There can be no assurance that such covenants will not adversely
affect our ability to finance our future operations or capital needs or to
engage in other business activities that may be in our interest.
If the Concurrent Exchange Offer is consummated, we will issue up to
$150 million of additional senior notes. These notes will be due July 15, 2008
and will rank PARI PASSU in right of payment with the McLeodUSA notes and the
other senior notes referred to above. In addition, the McLeodUSA notes will be
effectively subordinated in certain respects to any CapRock notes and any
CapRock 12% senior notes due 2008 that remain outstanding after this exchange
offer and the Concurrent Exchange Offer for which CapRock will remain the
obligor.
On May 31, 2000 we put in place $1.3 billion of senior secured credit
facilities with a syndicate of financial institutions (the "Senior Secured
Credit Facilities"). The Senior Secured Credit Facilities consist of (1) a
seven-year senior secured revolving facility with an aggregate principal
amount of $450 million (the "Revolving Facility"), (2) a seven-year senior
secured multi-draw term loan facility with an aggregate principal amount of
$275 million ("Tranche A Term Facility"), and (3) an eight-year single draw
senior secured term loan with an aggregate principal amount of $575 million
("Tranche B Term Facility"). The Tranche A Term Facility provides for multiple
($50 million minimum) draws for the first 24 months of the agreement at which
time any undrawn commitments expire. At June 30, 2000 the Tranche B Term
Facility was drawn in full and the balance of the other facilities remained
undrawn.
The Senior Secured Credit Facilities are secured by (1) a first
priority pledge of all the capital stock owned by us and by each subsidiary,
and (2) a perfected first priority security interest in substantially all our
tangible and intangible assets and, to the extent of $100 million, by each
subsidiary. In addition, telecommunications assets acquired with proceeds or
refinanced from the Senior Secured Credit Facilities serve as collateral.
Interest on the Senior Secured Credit Facilities is payable quarterly
and variable at LIBOR plus 1% to LIBOR plus 3.25% based on our debt rating. At
our current debt rating, interest rates are LIBOR plus 2.25% on the Revolving
Facility and Tranche A Term Facility, and LIBOR plus 3.00% on the Tranche B
Term Facility. We must maintain certain financial covenants requiring minimum
revenue, minimum access lines and debt to capital and debt to EBITDA ratios.
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INFORMATION ABOUT CAPROCK
GENERAL
CAPROCK. CapRock is a facilities-based integrated communications
service provider primarily to small and medium-sized business and
communications carrier customers in the Southwestern United States. CapRock
offers business customers an integrated bundle of communications products and
services including local exchange, domestic and international long distance,
enhanced voice, data, Internet, DSL and dedicated private line services.
Additionally, CapRock offers its communications-intensive business and carrier
customers dark fiber, high bandwidth dedicated fiber infrastructure,
terminating access for domestic and international long distance and ATM, frame
relay and IP data transport services.
CapRock's communications services are provided through resale and
over its fiber, voice and data networks. As of June 30, 2000, CapRock's
network covered approximately 4,500 route miles (including 22 metro fiber
loops in key markets). Additionally, as of June 30, 2000, CapRock provided
switch-based competitive local exchange services in 13 markets. As of June 30,
2000, CapRock had 12 voice and 17 data switches installed and operational on
its network.
CapRock had 61 central office collocations as of June 30, 2000.
Additionally, CapRock is implementing its DSL footprint through its recent
agreement with a third party supplier of DSL services. These collocations
enable CapRock to provide local and other services over its own network
infrastructure, thereby lowering its cost of providing these services.
CAPROCK'S NETWORK. CapRock's fiber network is comprised primarily of
96 fiber strands pulled through one of four conduits buried below ground. A
key element of CapRock's strategy is to reduce the cost basis of fiber it
retains for its own use by sharing construction costs with other carriers and
to quickly recover its investment by selling excess dark fiber. CapRock plans
to retain at least 24 fiber strands throughout its entire network. CapRock is
also building a competitive local exchange service in 48 markets where it will
provide Class 5 switching functionality and DSL services to its local
customers. CapRock's data network will consist of data switches and fiber
capacity that will connect all of these markets, supporting ATM, frame relay
and IP traffic. In many of these local markets CapRock will install equipment
to backhaul its voice and data traffic to one of its switches in order to
significantly lower its capital requirements.
INFORMATION TECHNOLOGY SYSTEMS AND ELECTRONIC BONDING. CapRock is
automating most of the processes involved with switching a customer to its
network in order to decrease the time between receipt of a customer order and
completion of service installation. To achieve this goal, CapRock is
acquiring, integrating and developing information technology systems and
platforms to support its operations. CapRock has established and will continue
to implement "electronic bonding," which is the on-line and real-time
connections of its operating systems with those of ILECs. Additionally,
CapRock has developed and intends to roll out web-enabled ordering, billing
and customer service features to its customers.
CapRock has completed testing and began utilizing electronic bonding
with Southwestern Bell Telephone. Electronic bonding with Southwestern Bell
has enabled CapRock to reduce its provisioning times from approximately 25
business days to as few as five business days. Orders submitted with
electronic bonding are also less likely to be rejected by Southwestern Bell,
resulting in a greater percentage of customers being transitioned to CapRock's
facilities in a shorter amount of time.
JOINT BUILD PROJECTS. CapRock has entered into joint fiber
construction agreements with AT&T, Enron Broadband Services, Inc., Pathnet,
Inc. and 360networks, Inc. The joint construction arrangements provide several
benefits, including reduction of construction costs, accelerated construction,
and the freeing up of resources to focus attention on the construction of
additional portions of CapRock's network. To further recover the cost of
building its fiber network, CapRock has sold and intends to continue to sell
excess dark fiber.
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SALES ORGANIZATION. CapRock uses a direct sales force to sell its
communications products and services to business customers. CapRock believes
that its face-to-face sales efforts coupled with its personalized customer
care are highly effective in capturing and retaining market share among small
and medium-sized businesses. CapRock had 251 sales force employees as of June
30, 2000. CapRock provides its sales force with financial incentives that
promote a high level of ongoing customer care and loyalty.
Additionally, as of June 30, 2000, CapRock had 267 independent sales
agents who contributed to its sales efforts throughout the region, primarily
in smaller markets. CapRock's agent program was established in 1996, and
consists primarily of independent telephone equipment vendors authorized by
CapRock to market its products and services. Authorized agents receive
recurring commissions based on product, pricing, volume of usage and customer
loyalty. CapRock has six agent managers who actively recruit new independent
sales agents.
LITIGATION. On July 26, 2000, a stockholder class action complaint
was filed in the United States District Court for the Northern District of
Texas on behalf of all purchasers of CapRock common stock during the period
between April 28, 2000 and July 6, 2000. Additional stockholder suits have
been filed subsequently, also in the United States District Court for the
Northern District of Texas. The named defendants in these lawsuits, which
allege that CapRock made material misstatements or omissions of fact in
violation of Section 10(b) of the Securities Exchange Act, include CapRock and
certain of its officers and directors. The plaintiffs in the lawsuits seek
monetary damages. CapRock intends to vigorously defend the pending suits and
any other similar suits subsequently filed.
CapRock is a Texas corporation that was formed on February 3, 1998 to
be a holding company for its predecessor companies. The principal executive
offices of CapRock are located at 15601 Dallas Parkway, Suite 700, Dallas,
Texas 75001, and its phone number is 972-982-9500.
ADDITIONAL INFORMATION
A detailed description of the CapRock business, executive
compensation, various benefit plans, including stock option plans, voting
securities and the principal holders of these securities, relationships and
transactions between CapRock and its executive officers, directors and
principal stockholders, financial statements and other matters related to
CapRock is incorporated by reference or set forth in the CapRock registration
statement on Form S-3 (333-32910), the CapRock Annual Report on Form 10-K for
the year ended December 31, 1999, and the CapRock Quarterly Reports on Form
10-Q for the quarters ended March 31, 2000 and June 30, 2000, incorporated
into this prospectus by reference. Holders of CapRock notes desiring copies of
such documents may contact McLeodUSA at its address or telephone number
indicated under "Where You Can Find More Information."
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SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
The following table sets forth financial data as of and for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999 and as of and for the six
months ended June 30, 1999 and 2000. The business combination among CapRock's
predecessor companies was completed on August 26, 1998 and was accounted for
as a pooling of interests. Accordingly, these Consolidated Financial
Statements include CapRock's three predecessor companies (CapRock
Telecommunications Corp., CapRock Fiber Network, LTD. and IWL Communications,
Incorporated) as though these entities were always a part of CapRock.
In May 1998, IWL Communications changed its fiscal year end to
coincide with the fiscal years of CapRock, CapRock Telecommunications and
CapRock Fiber. The Consolidated Statement of Operations for the year ended
December 31, 1996 combines the operating activity of IWL Communications for
the year ended June 30, 1996 with the operating activity of CapRock
Telecommunications and CapRock Fiber for the year ended December 31, 1996. The
net income of IWL Communications in the amount of approximately $260,000 for
the six month period ended December 31, 1996 was excluded from the
Consolidated Statement of Operations for the year ended December 31, 1996 as a
result of the non-conforming year ends for such period. This amount was
included as an adjustment to retained earnings in the Consolidated Statement
of Stockholders' Equity and Comprehensive Income in 1997. IWL Communications'
cash flow for this period was added to the 1997 beginning balance in the
Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $29,407 $50,970 $75,349 $121,774 $192,623
Costs of Services......................... 21,185 39,357 52,471 83,221 115,676
------- ------- ------- -------- --------
Gross profit....................... 8,222 11,613 22,878 38,553 76,947
Operating expenses:
Selling, general and administrative... 7,326 8,983 14,074 23,528 56,535
Merger related expenses............... - - - 2,313 -
Depreciation and amortization......... 1,186 1,536 3,346 4,887 9,698
------- ------- ------- -------- --------
Total operating expenses........... 8,512 10,519 17,420 30,728 66,233
------- ------- ------- -------- --------
Operating income (loss)................... (290) 1,094 5,458 7,825 10,714
Interest expense, net..................... (484) (585) (1,603) (6,441) (17,861)
Other income (expense).................... 151 42 220 106 1,526
------- ------- ------- -------- --------
Income (loss) before income taxes and
extraordinary item.................... (623) 551 4,075 1,490 (5,621)
Income tax expense (benefit).............. 48 227 1,513 1,267 (2,080)
------- ------- ------- -------- --------
Income (loss) before extraordinary item... (671) 324 2,562 223 (3,541)
Extraordinary item - extinguishment of debt 645 - - - -
------- ------- ------- -------- --------
Net income (loss).................. $ (26) $ 324 $ 2,562 $ 223 $ (3,541)
======= ======= ======= ======== ========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item.................... $ (623) $ 551 $ 4,075 $ 1,490 $ (5,621)
Pro forma income taxes, as if CapRock
Fiber were a C corporation............ (211) 143 1,475 1,267 (2,080)
------- ------- ------- -------- --------
Income (loss) before extraordinary item (412) 408 2,600 223 (3,541)
Extraordinary item, net of taxes...... 397 - - - -
------- ------- ------- -------- --------
Pro forma net income (loss)........ $ (15) $ 408 $ 2,600 $ 223 $ (3,541)
======= ======= ======= ======== ========
Historical and pro forma income (loss)
per common share:
Income (loss) before extraordinary item $ (0.02) $ 0.01 $ 0.09 $ 0.01 $ (0.11)
Extraordinary item, net of tax........ $ 0.02 - - - -
------- ------- ------- -------- --------
Basic and diluted..................... $ - $ 0.01 $ 0.09 $ 0.01 $ (0.11)
======= ======= ======= ======== ========
Weighted average shares outstanding:
Basic................................. 25,926 27,146 27,984 28,899 31,727
Diluted............................... 25,936 27,156 28,481 30,028 31,727
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1999 2000
-------- ------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 74,596 $ 113,936
Costs of Services......................... 44,919 79,220
-------- ---------
Gross profit....................... 29,677 34,716
Operating expenses:
Selling, general and administrative... 25,012 43,398
Merger related expenses............... - -
Depreciation and amortization......... 3,337 9,077
-------- ---------
Total operating expenses........... 28,349 52,475
-------- ---------
Operating income (loss)................... 1,328 (17,759)
Interest expense, net..................... (7,134) (7,021)
Other income (expense).................... (135) 25
-------- ---------
Income (loss) before income taxes and
extraordinary item.................... (5,941) (24,755)
Income tax expense (benefit).............. (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary item... (3,606) (15,637)
Extraordinary item - extinguishment of debt - -
-------- ---------
Net income (loss).................. $ 3,606 $ (15,637)
======== =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item.................... $ (5,941) $ (24,755)
Pro forma income taxes, as if CapRock
Fiber were a C corporation............ (2,335) (9,118)
-------- ---------
Income (loss) before extraordinary item (3,606) (15,637)
Extraordinary item, net of taxes...... - -
-------- ---------
Pro forma net income (loss)........ $ (3,606) $ (15,637)
======== =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item $ (0.12) $ (0.47)
Extraordinary item, net of tax........ - -
-------- ---------
Basic and diluted..................... $ (0.12) $ (0.47)
======== =========
Weighted average shares outstanding:
Basic................................. 30,321 33,406
Diluted............................... 30,321 33,406
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ (797) $ (2,153) $ (305) $ 102,489 $ 216,145
Property, plant and equipment, net........ 6,705 15,901 27,341 59,607 228,601
Total assets.............................. 13,198 28,522 49,389 191,966 548,835
Long-term debt and capital lease obligations 2,443 13,254 21,062 145,187 347,502
Stockholders' equity...................... 3,552 3,886 14,086 16,062 96,030
OPERATING DATA:
EBITDA(1)................................. $ 896 $ 2,630 $ 8,804 $ 15,025 $ 20,412
Cash flows provided by (used in) operations 827 781 4,112 7,125 (13,302)
Cash flows used in investing activities... (1,919) (9,350) (12,987) (134,350) (264,623)
Cash flows provided by financing activities 903 8,605 12,114 123,990 283,338
Capital expenditures...................... (2,282) (10,212) (13,631) (36,855) (201,289)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1999 2000
-------- ------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................. $ 337,555 $ 104,312
Property, plant and equipment, net........ 97,360 423,039
Total assets.............................. 479,533 676,174
Long-term debt and capital lease obligations 347,012 348,218
Stockholders' equity...................... 94,939 177,738
OPERATING DATA:
EBITDA(1)................................. $ (4,665) $ (8,682)
Cash flows provided by (used in) operations (14,897) 50,799
Cash flows used in investing activities... (258,169) (159,910)
Cash flows provided by financing activities 283,872 107,113
Capital expenditures...................... (45,717) (216,263)
</TABLE>
(1) EBITDA consists of operating income or loss before interest, income
taxes, depreciation and amortization and other nonrecurring operating
expenses. EBITDA is a measure commonly used in the communications industry.
EBITDA is not a measure of financial performance under generally accepted
accounting principles and should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity.
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<PAGE>
DESCRIPTION OF THE CAPROCK NOTES
The CapRock notes were issued under the indenture, dated May 18,
1999, between CapRock and Chase Manhattan Trust Company, National Association,
as trustee.
We refer to this indenture as the CapRock indenture. The terms of the
CapRock notes include those stated in the CapRock indenture and those made a
part of the CapRock indenture by reference to the Trust Indenture Act of 1939
as in effect on the date of the CapRock indenture. The CapRock notes are
subject to all of those terms, and holders of the CapRock notes should refer
to the CapRock indenture and the Trust Indenture Act for a complete statement
of the applicable terms. The CapRock indenture has been filed as an exhibit to
the registration statement, of which this prospectus is a part, and copies of
the CapRock indenture are available upon request from McLeodUSA.
Because this section is a summary, it does not describe every aspect
of the CapRock notes. This summary is subject to and qualified in its entirety
by reference to all the provisions of the CapRock indenture, including
definitions of some terms used in the CapRock indenture. For example, in this
section we use capitalized words to signify defined terms that have been given
special meaning in the CapRock indenture. We describe the meaning for only the
more important terms, under "--Certain Definitions." We also include
references in parentheses to certain sections of the CapRock indenture.
Whenever we refer to particular sections or defined terms of the CapRock
indenture in this prospectus, these sections or defined terms are incorporated
by reference into this prospectus.
CONSENT SOLICITATION
On October 11, 2000, CapRock commenced a solicitation of consents
from the holders of the CapRock notes to amend the CapRock indenture to (a)
modify certain restrictive covenants contained in the CapRock indenture in
order to permit the merger of CapRock with a wholly-owned subsidiary of
McLeodUSA, (b) allow the merger of CapRock and the McLeodUSA subsidiary to
occur without triggering the change of control provisions of the CapRock
indenture, and (c) eliminate most of the restrictive covenants and reporting
requirements contained in the CapRock indenture. See "--The Proposed
Amendments."
Any CapRock notes that are not tendered to us or are not accepted for
exchange will remain outstanding and will continue to accrue interest in
accordance with and otherwise be entitled to all of the rights and privileges
under the indenture governing the CapRock notes. If CapRock obtains the
requisite number of consents from the CapRock noteholders, however, the
indenture will be amended as summarized in the preceding paragraph and the
holders of any CapRock notes that remain outstanding after the exchange offer
will be without the protection that the deleted restrictive covenants and
reporting requirements gave them. The elimination of these restrictive
covenants and other provisions will permit CapRock to, among other things,
incur indebtedness, pay dividends and make other restricted payments, incur
liens and make investments which would otherwise not have been permitted under
the CapRock indenture. It is possible that any such actions that CapRock will
be permitted to take as a result of the changes to the CapRock indenture will
increase the risk with respect to CapRock. The receipt by CapRock of the
requisite consents to approve the amendments to the CapRock indenture is a
condition to the consummation of the exchange offer.
Notwithstanding the merger, CapRock will remain the obligor under the
CapRock indenture and any CapRock notes that remain outstanding after
consummation of the exchange offer.
Unless otherwise indicated, the summary of the terms of the CapRock
notes set forth below does not give effect to the amendments referred to in
this section.
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GENERAL DESCRIPTION OF THE CAPROCK NOTES
The CapRock notes:
- are unsecured unsubordinated obligations of CapRock;
- have a $210 million aggregate principal amount outstanding;
- will mature on May 1, 2009; and
- bear interest at the rate of 11 1/2% per annum.
Interest is paid semi-annually on May 1 and November 1 of each year
to the registered holder at the close of business on the preceding April 15 or
October 15.
Interest on the CapRock notes is computed on the basis of a 360-day
year of twelve 30-day months. Principal of, premium, if any, and interest on
the CapRock notes is payable, and the CapRock notes may be exchanged or
transferred, at the office or agency of CapRock in the Borough of Manhattan,
The City of New York; provided that, at the option of CapRock, payments of
interest may be made by check mailed to the holders at their addresses as they
appear in the Security Register.
The CapRock notes were issued only in fully registered form, without
coupons, in denominations of $1,000 principal amount and integral multiples
thereof. See "Book-Entry, Delivery and Form." No service charge will be made
for any registration of transfer or exchange of the CapRock notes, but CapRock
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection with such transfer or
exchange.
OPTIONAL REDEMPTION
The CapRock notes are redeemable, at CapRock's option, in whole or in
part, at any time or from time to time, on or after May 1, 2004 and prior to
maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each holder's last address, as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the Redemption Date
(subject to the right of holders of record on the relevant record date that is
prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period beginning on May 1 of the years
set forth below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2004....................................................................... 105.750%
2005....................................................................... 103.834%
2006....................................................................... 101.917%
2007 and after............................................................. 100.000%
</TABLE>
In addition, at any time or from time to time on or prior to May 1,
2002, CapRock may, other than in any circumstances resulting in a Change of
Control, redeem, at its option, up to 35% of the aggregate principal amount of
the CapRock notes with the proceeds of one or more additional Public Equity
Offerings or Strategic Equity Investments resulting in aggregate gross
proceeds to CapRock of at least $25 million, at any time or from time to time
in part, at a Redemption Price (expressed as a percentage of principal amount)
of 111.50%, plus accrued and unpaid interest to the Redemption Date (subject
to the right of holders of record on the relevant record date that is prior to
the Redemption Date to receive interest due on an Interest Payment Date);
provided that at least 65% of the aggregate principal amount of CapRock notes
originally issued remain outstanding after each such redemption. Any such
redemption shall be made within 60 days after the consummation of such Public
Equity Offering or Strategic Equity Investment upon not less than 30 nor more
than 60 days' prior notice.
If less than all of the CapRock notes are to be redeemed at any time,
the trustee will select the CapRock notes, or portions thereof, for redemption
in compliance with the requirements of the principal national securities
90
<PAGE>
exchange, if any, on which the CapRock notes are listed or, if the CapRock
notes are not listed on a national securities exchange, on a pro rata basis,
by lot or by such other method as the trustee in its sole discretion shall
deem to be fair and appropriate; provided that no CapRock note of $1,000 in
principal amount or less shall be redeemed in part. If any CapRock note is to
be redeemed in part only, the notice of redemption relating to such CapRock
note shall state the portion of the principal amount thereof to be redeemed. A
new CapRock note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the holder thereof upon cancellation of the
original CapRock note.
CAPROCK NOTES CALLED FOR REDEMPTION CEASE TO BE OUTSTANDING
CapRock notes called for redemption in accordance with the terms of
the CapRock indenture will be deemed to be paid and discharged and cease to be
outstanding, and interest on such CapRock notes will cease to accrue, from and
after the date set for redemption if CapRock has deposited with the trustee,
in trust, money and/or Temporary Cash Investments that, through the payment of
interest and principal in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the CapRock notes on the Redemption Date in
accordance with the terms of the CapRock indenture and the CapRock notes.
RANKING
The Indebtedness evidenced by the CapRock notes ranks PARI PASSU in
right of payment with all existing and future unsecured senior indebtedness of
CapRock and senior in right of payment to all existing and future indebtedness
of CapRock expressly subordinated in right of payment to the CapRock notes. As
of June 30, 2000, CapRock had outstanding debt and other liabilities of
approximately $203 million (in addition to the $210 million evidenced by the
CapRock notes). None of such debt or liabilities ranked senior in right of
payment to the CapRock notes. As of the same date, CapRock's subsidiaries had
no outstanding debt (other than trade payables).
CapRock is a holding company with no direct operations and no
significant assets other than the stock and other equity interests of its
subsidiaries. CapRock's subsidiaries have no direct obligation to pay amounts
due on the CapRock notes and have not guaranteed the CapRock notes. As a
result, the CapRock notes are effectively subordinated to all existing and
future indebtedness and other liabilities (including trade payables) of
CapRock's subsidiaries. As of June 30, 2000, CapRock's subsidiaries had
approximately $97 million of liabilities (excluding intercompany payables),
all of which are structurally senior to the CapRock notes. CapRock is
dependent upon access to the cash flow or assets of its subsidiaries to make
payments on the CapRock notes, and CapRock's ability to obtain such access may
be limited by law.
CapRock, CapRock Telecommunications Corp. and CapRock Fiber Network,
LTD. have entered into a $100 million secured Credit Facility. This Credit
Facility is secured by substantially all of the assets of each of CapRock's
subsidiaries. The CapRock notes are unsecured. This means that in the event of
a default on the secured debt, the secured creditors could foreclose on their
collateral and receive payment out of the proceeds of that collateral prior to
the CapRock noteholders. CapRock and its subsidiaries are permitted to incur
certain additional indebtedness and, in limited situations, to secure such
indebtedness. The CapRock notes are effectively subordinated to such security
interests to the extent of such security interests.
CERTAIN COVENANTS
The CapRock indenture contains, among others, the covenants described
below:
LIMITATION ON INDEBTEDNESS
The CapRock indenture provides that CapRock will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness
(including Acquired Indebtedness) other than Permitted Indebtedness; provided
that CapRock may Incur Indebtedness, in addition to Permitted Indebtedness,
if, after giving effect to the Incurrence of such Indebtedness and the receipt
and application of the proceeds thereof, (i) the Consolidated
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<PAGE>
Leverage Ratio would be less than or equal to 7.0 to 1, for Indebtedness
Incurred on or prior to June 30, 2000, or less than or equal to 5.0 to 1, for
Indebtedness Incurred thereafter and (ii) no Default or Event of Default shall
have occurred and be continuing or occur as a consequence of the actions set
forth in this covenant.
Notwithstanding any other provision of the foregoing "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that CapRock or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded on account of the result of
fluctuations in the exchange rates of currencies.
For purposes of determining any particular amount of Indebtedness
under this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (2) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with the foregoing "Limitation on Indebtedness" covenant, in the event that an
item of Indebtedness meets the criteria of more than one of the types of
Indebtedness described in the definition of "Indebtedness," CapRock, in its
sole discretion, shall classify such item of Indebtedness and only be required
to include the amount and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make any
Restricted Payment if, at the time of, and after giving effect to, the
proposed Restricted Payment: (A) a Default or Event of Default shall have
occurred and be continuing, (B) CapRock could not Incur at least $1.00 of
Indebtedness under clause (i) of the first paragraph of the "Limitation on
Indebtedness" covenant or (C) the aggregate amount of all Restricted Payments
(the amount, if other than in cash, to be determined in good faith by the
board of directors of CapRock, whose determination shall be conclusive and
evidenced by a board resolution) made after the 1998 Senior Notes Issue Date
shall exceed the sum of:
(1) 50% of the aggregate amount of the Adjusted Consolidated Net
Income (or, if the Adjusted Consolidated Net Income is a loss, minus 100% of
the amount of such loss) accrued on a cumulative basis during the period
(taken as one accounting period) beginning on the first day of the fiscal
quarter commencing immediately following the 1998 Senior Notes Issue Date and
ending on the last day of the last fiscal quarter preceding the Calculation
Date for which reports have been filed with the SEC or provided to the trustee
pursuant to the "SEC Reports and Reports to Holders" covenant, plus
(2) the aggregate Net Cash Proceeds received by CapRock after
the 1998 Senior Notes Issue Date, from a capital contribution from, or the
issuance and sale permitted by the CapRock indenture to, a Person who is not a
Subsidiary of CapRock of (a) its Capital Stock (other than Redeemable Stock),
(b) any options, warrants or other rights to acquire its Capital Stock (in
each case, exclusive of any Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the CapRock notes) and (c)
Indebtedness of CapRock or a Restricted Subsidiary that has been exchanged for
or converted into Capital Stock of CapRock (other than Redeemable Stock) or
such options, warrants or other rights, in each case except to the extent such
Net Cash Proceeds are used to Incur Indebtedness permitted under clause (viii)
of the definition of "Permitted Indebtedness," plus
(3) an amount equal to the net reduction in Investments (other
than reductions in Permitted Investments and reductions in Investments made
pursuant to clause (vi) of the second paragraph of this "Limitation on
Restricted Payments" covenant) in any Person resulting from payments of
interest on Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to CapRock or any Restricted Subsidiary or
from the Net Cash Proceeds from the sale of any such Investment (except, in
each case, to the extent any such payment or proceeds are included in the
calculation of Adjusted Consolidated Net Income), or from redesignations of
Unrestricted Subsidiaries as Restricted Subsidiaries (valued in each case as
provided in the definition of
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"Investments"), not to exceed, in each case, the amount of Investments
previously made by CapRock or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at such date of declaration, such payment would comply
with the foregoing paragraph;
(ii) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the CapRock notes, including premium, if any, and accrued and unpaid
interest thereon to the date of payment, with the proceeds of, or in exchange
for, Indebtedness Incurred under clause (iii) of the definition of "Permitted
Indebtedness";
(iii) the purchase, redemption or other acquisition or retirement
for value of Capital Stock of CapRock (or options, warrants or other rights to
acquire such Capital Stock) in exchange for, or out of the proceeds of a
substantially concurrent offering to a Person who is not a Subsidiary of
CapRock of, shares of Capital Stock (other than Redeemable Stock) of CapRock
(or options, warrants or other rights to acquire such Capital Stock (exclusive
of any options, warrants or other rights that are redeemable at the option of
the holder, or are required to be redeemed, prior to the Stated Maturity of
the CapRock notes)) including in connection with a "cashless" exercise of an
option, warrant or right;
(iv) the making of any principal payment or the purchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of CapRock which is subordinated in right of payment to the
CapRock notes, including premium, if any, and accrued and unpaid interest
thereon to the date of payment, in exchange for, or out of the proceeds of, a
substantially concurrent offering to a Person who is not a Subsidiary of
CapRock of, shares of the Capital Stock (other than Redeemable Stock) of
CapRock (or options, warrants or other rights to acquire such Capital Stock
(exclusive of any options, warrants or other rights that are redeemable at the
option of the holder, or are required to be redeemed, prior to the Stated
Maturity of the CapRock notes));
(v) payments or distributions to dissenting stockholders pursuant
to applicable law in connection with any consolidation, merger or transfer of
assets that complies with the provisions of the CapRock indenture applicable
to mergers, consolidations and transfers of all or substantially all of the
property and assets of CapRock;
(vi) Investments in any Person that is in the Telecommunications
Business on the date of such Investments; provided that the aggregate amount
of Investments made pursuant to this clause (vi) does not exceed the sum of
(x) $85 million plus (y) the amount of Net Cash Proceeds received by CapRock
after the 1998 Senior Notes Issue Date as a capital contribution or from the
sale of Capital Stock (other than Redeemable Stock) of CapRock (or options,
warrants or other rights to acquire such Capital Stock (exclusive of any
options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
CapRock notes)) to a Person who is not a Subsidiary of CapRock, except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the definition of "Permitted Indebtedness" or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or
clauses (iii) or (iv) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (z) the net reduction in Investments made pursuant to
this clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such Investment
(except in each case to the extent any such payment or proceeds is included in
the calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"); provided that the net reduction in any
Investment shall not exceed the amount of such Investment;
(vii) the purchase, redemption or other retirement or acquisition
for value of shares of Capital Stock of CapRock to the extent necessary, in
the judgment of the board of directors of CapRock, to prevent the loss or
secure the renewal or reinstatement of any license or franchise held by
CapRock or any Restricted Subsidiary from any governmental agency;
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<PAGE>
(viii) the purchase, redemption or other retirement or acquisition
for value of shares of Capital Stock of CapRock, or options, warrants or other
rights to purchase such shares, held by directors, employees, or former
directors or employees of CapRock or any Restricted Subsidiary (or their
estates or beneficiaries under their estates) upon their death, disability,
retirement or termination of employment or pursuant to the terms of any
agreement under which such shares of Capital Stock or options were issued;
provided that the aggregate consideration paid for such purchase, redemption
or other retirement or acquisition for value of such shares of Capital Stock
or options, warrants or rights after the Closing Date does not exceed $2
million in any calendar year, or $5 million in the aggregate;
(ix) Investments acquired (x) as a capital contribution to CapRock
or a Restricted Subsidiary or (y) in exchange for Capital Stock (other than
Redeemable Stock) of CapRock (or options, warrants or other rights to acquire
such Capital Stock (exclusive of any options, warrants or other rights that
are redeemable at the option of the holder, or are required to be redeemed,
prior to the Stated Maturity of the CapRock notes)) so long as immediately
after giving effect to such transaction described in clause (y) above no
Default or Event of Default shall have occurred and be continuing;
(x) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness of CapRock which is subordinated in right
of payment to the CapRock notes, including premium, if any, and accrued and
unpaid interest thereon to the date of payment, at a price not greater than
101% of the principal amount thereof plus any accrued and unpaid interest
thereon to the date of repayment in the event of a Change of Control in
accordance with provisions similar to the "Change of Control" covenant;
provided that prior to such purchase, redemption, defeasance or other
acquisition or retirement, CapRock has made the Change of Control Offer as
provided in such covenant with respect to the CapRock notes and has purchased
all notes validly tendered for payment in connection with such Change of
Control Offer; or
(xi) any payment, distribution, repurchase or other transaction
that, but for this provision, would constitute a Restricted Payment but only
to the extent that the aggregate amount of such payments, distributions,
repurchases and other transactions not exceed $25 million.
The actions described in clauses (i), (v), (vi), (vii), (viii), (x)
and (xi) of the immediately preceding paragraph are Restricted Payments that
are permitted in accordance with the immediately preceding paragraph but
reduce the amount that would otherwise be available for Restricted Payments
under clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant. The actions described in clauses (ii), (iii), (iv) and
(ix) of the immediately preceding paragraph are Restricted Payments that are
permitted in accordance with the immediately preceding paragraph and do not
reduce the amount that would otherwise be available for Restricted Payments
under clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (i) pay dividends, in cash or otherwise, or make any other
distributions permitted by applicable law on any Capital Stock or any other
interest or participation in, or measured by, its profits of such Restricted
Subsidiary owned by CapRock or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to CapRock or any other Restricted Subsidiary, (iii) make
loans or advances to CapRock or any other Restricted Subsidiary or (iv)
transfer any of its property or assets to CapRock or any other Restricted
Subsidiary.
The foregoing provisions do not restrict any encumbrances or
restrictions:
(i) in the 1998 Senior Notes Indenture, the CapRock indenture or
any other agreements in effect on the 1998 Senior Notes Issue Date, and any
extensions, refinancings, renewals or replacements of such agreements;
provided that the encumbrances and restrictions in any such extensions,
refinancings, renewals or replacements are
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no less favorable in any material respect to the holders than those
encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing with respect to any Person or the property or
assets of such Person acquired by CapRock or any Restricted Subsidiary and
existing at the time of such acquisition and not incurred in contemplation
thereof, which encumbrances or restrictions are not applicable to any Person
or the property or assets of any Person other than such Person or the property
or assets of such Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the
subletting, assignment or transfer of any property or asset that is a lease,
license, conveyance or contract or similar property or asset, (B) existing by
virtue of any transfer of, agreement to transfer, option or right with respect
to, or Lien on, any property or assets of CapRock or any Restricted Subsidiary
not otherwise prohibited by the CapRock indenture or (C) arising or agreed to
in the ordinary course of business, not relating to any Indebtedness, and that
do not, individually or in the aggregate, detract from the value of property
or assets of CapRock or any Restricted Subsidiary in any manner material to
CapRock or any Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant
to an agreement that has been entered into for the sale or disposition of all
or substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary; or
(vi) pursuant to (x) a Credit Facility, (y) a Vendor Credit
Facility or (z) any agreement which amends, extends, renews, refinances,
replaces or refunds a Credit Facility or Vendor Credit Facility; provided,
however, that in the case of subclauses (x), (y) and (z), the provisions of
the Credit Facility or Vendor Credit Facility (A) permit (whether explicitly
or as a result of the relative maturities of the Credit Facility, the Vendor
Credit Facility and the CapRock notes) distributions to CapRock for the
purposes of, and in an amount sufficient to fund, the payment of principal due
at stated maturity and interest in respect of the CapRock notes (provided, in
either case, that such payment is due or to become due within 30 days from the
date of such distribution) at a time when there does not exist an event which
after notice or passage of time or both would permit the lenders under the
Credit Facility or Vendor Credit Facility to declare all amounts thereunder
due and payable, and (B) provide that in no event shall any encumbrance or
restriction pursuant to the Credit Facility or Vendor Credit Facility prohibit
distributions to CapRock for such purposes for more than 180 days in any
consecutive 360-day period, unless (1) there exists a default under the Credit
Facility or Vendor Credit Facility resulting from any payment default under
the Credit Facility or Vendor Credit Facility or (2) the maturity of the
Credit Facility or Vendor Credit Facility has been accelerated.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant prevents CapRock or
any Restricted Subsidiary from (1) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted by the "Limitation on Liens" covenant
described below or (2) restricting the sale or other disposition of property
or assets of CapRock or any of its Restricted Subsidiaries subject to such
Liens.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF
RESTRICTED SUBSIDIARIES
The CapRock indenture provides that CapRock will not sell, pledge,
hypothecate or otherwise convey or dispose of any Capital Stock of a
Restricted Subsidiary or permit any Restricted Subsidiary, directly or
indirectly, to issue, sell, pledge, hypothecate or otherwise convey or dispose
of, any shares of Capital Stock of a Restricted Subsidiary (including options,
warrants or other rights to purchase shares of such Capital Stock) except:
(i) to CapRock or a Wholly-Owned Restricted Subsidiary,
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(ii) issuances of directors' qualifying shares or other issuances
or sales to the extent required by applicable law or regulation,
(iii) issuances or sales of 100% of the Capital Stock of a
Restricted Subsidiary, provided that CapRock or such Restricted Subsidiary
applies the Net Cash Proceeds, if any, of any such sale pursuant to this
clause (iii) in accordance with clause (A) or (B) of the "Limitation on Asset
Sales" covenant described below,
(iv) issuances or sales in a transaction if, immediately after
giving effect thereto, such Restricted Subsidiary would no longer be a
Restricted Subsidiary, if (A) such transaction does not violate the
"Limitation on Asset Sales" covenant and (B) any Investment in such Person
remaining after giving effect to such transaction would not violate the
"Limitation on Restricted Payments" covenant if made at the date of such
issuance or sale,
(v) pursuant to a Credit Facility or a Vendor Credit Facility,
(vi) issuances or sales of Redeemable Stock in exchange for, or
upon conversion of, or the proceeds from the issuance or sale of which are
used to refinance, shares of Redeemable Stock of such Restricted Subsidiary,
if the amounts payable with respect to the redemption of such newly issued or
sold Redeemable Stock do not exceed the amount payable with respect to the
redemption of the Redeemable Stock being exchanged, converted or refinanced
and such newly issued or sold Redeemable Stock does not require any redemption
earlier than the date on which the Redeemable Stock being exchanged, converted
or refinanced required a redemption, or
(vii) issuances or sales of Redeemable Stock (other than
Redeemable Stock convertible into or exchangeable for Common Stock of any
Restricted Subsidiary) that does not otherwise violate the provisions of the
CapRock indenture.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES
The CapRock indenture provides that CapRock will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness
of CapRock which is PARI PASSU in right of payment with, or subordinate in
right of payment to, the CapRock notes ("Guaranteed Indebtedness"), unless:
(i) such Restricted Subsidiary simultaneously executes and
delivers a supplemental indenture to the CapRock indenture providing for a
Guarantee (a "Subsidiary Guarantee") of payment of the CapRock notes by such
Restricted Subsidiary and
(ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against CapRock or
any other Restricted Subsidiary as a result of any payment by such Restricted
Subsidiary under its Subsidiary Guarantee;
provided that this paragraph does not apply to (x) any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary or (y) any Guarantee of any
Restricted Subsidiary of Indebtedness Incurred under Credit Facilities or
Vendor Credit Facilities pursuant to clause (ix) of the definition of
"Permitted Indebtedness." If the Guaranteed Indebtedness is (A) PARI PASSU in
right of payment with the CapRock notes, then the Guarantee of such Guaranteed
Indebtedness shall be PARI PASSU in right of payment with, or subordinated in
right of payment to, the Subsidiary Guarantee or (B) subordinated in right of
payment to the CapRock notes, then the Guarantee of such Guaranteed
Indebtedness shall be subordinated in right of payment to the Subsidiary
Guarantee at least to the extent that the Guaranteed Indebtedness is
subordinated in right of payment to the CapRock notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of CapRock, of all of CapRock's and
each Restricted Subsidiary's Capital Stock in, or all or substantially all the
assets of, such Restricted Subsidiary (which sale, exchange or transfer is not
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prohibited by the CapRock indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except
a discharge or release by or as a result of payment under such Guarantee.
LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, enter into, renew
or extend any transaction (including, without limitation, the purchase, sale,
lease or exchange of property or assets, or the rendering of any service) with
any holder (or any Affiliate of such holder) of 5% or more of any class of
Capital Stock of CapRock or with any Affiliate of CapRock or any Restricted
Subsidiary, except (a) in writing (other than the payment of salaries or
bonuses to officers of CapRock or any Restricted Subsidiary in the ordinary
course of business which need not be in writing) upon fair and reasonable
terms no less favorable in any material respect to CapRock or such Restricted
Subsidiary than could be obtained, at the time of the execution of the
agreement providing therefor, in a comparable arm's-length transaction with a
Person that is not such a holder or an Affiliate, (b) with respect to any
transaction or series of related transactions involving an aggregate value in
excess of $5 million, if CapRock delivers an Officers' Certificate to the
trustee certifying that such transaction or series of related transactions
complies with clause (a) above, and (c) with respect to any transaction or
series of related transactions involving an aggregate value in excess of $10
million, if either (1) such transaction or series of related transactions has
been approved by a majority of the Disinterested Directors of CapRock, or in
the event there is only one Disinterested Director, by such Disinterested
Director, or (2) CapRock delivers to the trustee a written opinion of an
investment banking firm of national standing or other recognized independent
expert with experience appraising the terms and conditions of the type of
transaction or series of related transactions for which an opinion is required
stating that the transaction or series of related transactions is fair to
CapRock or such Subsidiary from a financial point of view.
The foregoing limitation does not limit, and does not apply to:
(i) any transaction solely between CapRock and any of its
Wholly-Owned Restricted Subsidiaries or solely between Wholly-Owned Restricted
Subsidiaries;
(ii) the payment of reasonable and customary regular fees to
directors of CapRock who are not employees of CapRock;
(iii) any payments or other transactions pursuant to any
tax-sharing agreement between CapRock and any other Person with which CapRock
files a consolidated tax return or with which CapRock is part of a
consolidated group for tax purposes;
(iv) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant; or
(v) any transaction or agreement as described in the offering
memorandum pursuant to which the CapRock notes were initially issued and as in
effect as of May 13, 1999.
LIMITATION ON LIENS
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any of its assets or properties of any
character, or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, without making effective provision for all of the CapRock notes
and all other amounts due under the CapRock indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the CapRock notes, prior to)
the obligation or liability secured by such Lien. The foregoing limitation
does not apply to Permitted Liens.
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LIMITATION ON SALE-LEASEBACK TRANSACTIONS
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, enter into any sale-leaseback transaction
involving any of its assets or properties, whether now owned or hereafter
acquired, whereby CapRock or a Restricted Subsidiary sells or transfers such
assets or properties and then or thereafter leases such assets or properties
or any part thereof or any other assets or properties which CapRock or such
Restricted Subsidiary, as the case may be, intends to use for substantially
the same purpose or purposes as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if
(i) the lease is for a period, including renewal rights, of not
in excess of three years;
(ii) the lease secures or relates to industrial revenue or
pollution control bonds;
(iii) the transaction is solely between CapRock and any
Wholly-Owned Restricted Subsidiary or solely between Wholly-Owned Restricted
Subsidiaries; or
(iv) CapRock or such Restricted Subsidiary, within 12 months
after the sale or transfer of any assets or properties is completed, applies
an amount not less than the net proceeds received from such sale in accordance
with clause (A) or (B) of the first paragraph of the "Limitation on Asset
Sales" covenant described below.
LIMITATION ON ASSET SALES
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the
consideration received by CapRock or such Restricted Subsidiary is at least
equal to the fair market value of the assets sold or disposed of and (ii) at
least 75% of the consideration received consists of cash or Temporary Cash
Investments (with the amount of Indebtedness and liabilities of CapRock or a
Restricted Subsidiary that are unconditionally assumed by the transferee being
deemed to be cash for purposes of this covenant). In the event and to the
extent that the Net Cash Proceeds received by CapRock or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the 1998
Senior Notes Issue Date in any period of 12 consecutive months exceed the
greater of $10 million and 10% of Adjusted Consolidated Net Tangible Assets
(determined as of the date closest to the commencement of such 12-month period
for which a consolidated balance sheet of CapRock and its Subsidiaries has
been filed with the SEC or provided to the trustee pursuant to the "SEC
Reports and Reports to Holders" covenant), then CapRock shall or shall cause
the relevant Restricted Subsidiary to (i) within 12 months after the date Net
Cash Proceeds so received exceed the greater of $10 million and 10% of
Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such
excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of
CapRock or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant
to the "Limitation on Issuances of Guarantees by Restricted Subsidiaries"
covenant described above or Indebtedness of any other Restricted Subsidiary,
in each case owing to a Person other than CapRock or any of its Subsidiaries,
or (B) invest an amount equal to such excess Net Cash Proceeds, or the amount
of such Net Cash Proceeds not so applied pursuant to clause (A) (or enter into
a definitive agreement committing to so invest within 12 months after the date
of such agreement), in Telecommunications Assets and (ii) apply (no later than
the end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this "Limitation on Asset Sales" covenant. The amount
of such excess Net Cash Proceeds required to be applied (or to be committed to
be applied) during such 12-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds." Pending the final application of any such
Net Cash Proceeds, CapRock or such Restricted Subsidiary may invest such funds
in Temporary Cash Investments or temporarily reduce revolving Indebtedness
under any Credit Facility or any Vendor Credit Facility.
If, as of the first day of any calendar month, the aggregate amount
of Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $10 million, CapRock
must commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to
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Purchase from the holders on a pro rata basis an aggregate principal amount of
notes equal to the Excess Proceeds on such date, at a purchase price equal to
100% of the principal amount of the CapRock notes plus, in each case, accrued
interest to the Payment Date. To the extent CapRock or a Restricted Subsidiary
is required under the terms of Indebtedness of CapRock or such Restricted
Subsidiary which is PARI PASSU with, or (in the case of any secured
Indebtedness) senior with respect to such collateral to, the CapRock notes
with any proceeds which constitute Excess Proceeds under the CapRock
indenture, CapRock shall make a pro rata offer to the holders of all other
PARI PASSU Indebtedness (including the CapRock notes) with such proceeds. If
the aggregate principal amount of CapRock notes and other PARI PASSU
Indebtedness surrendered by holders thereof exceeds the amount of such Excess
Proceeds, the trustee shall select the CapRock notes and other PARI PASSU
Indebtedness to be purchased on a pro rata basis. To the extent that the
aggregate purchase price for the CapRock notes tendered pursuant to an Offer
to Purchase is less than the Excess Proceeds, CapRock or any Restricted
Subsidiary may use such deficiency for general corporate purposes. Upon
completion of such Offer to Purchase, the amount of Excess Proceeds shall be
reset to zero.
SEC REPORTS AND REPORTS TO HOLDERS
Whether or not CapRock is required to file reports with the SEC,
CapRock shall file with the SEC (if permitted by SEC practice and applicable
law and regulations) all such reports and other information as it would be
required to file with the SEC by Section 13(a) or 15(d) under the Exchange Act
if it were subject thereto. CapRock shall supply the trustee and each holder
or shall supply to the trustee for forwarding to each such holder, without
cost to such holder, copies of such reports and other information; provided,
however, that the copies of such reports and information mailed to holders
need not contain the exhibits thereto, but CapRock agrees to furnish any such
exhibits to any holder upon written request therefor.
LIMITATION ON RESTRICTIVE COVENANTS
Notwithstanding any other provisions of the CapRock indenture, the
restrictive covenants set forth therein, including, without limitation, those
described under "Limitation on Restricted Payments," "Limitation on Dividend
and other Payments Restrictions Affecting Restricted Subsidiaries,"
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries," "Limitation on Transactions with Stockholders and Affiliates,"
"Limitation on Liens," "Limitation on Sale-Leaseback Transactions" and
"Limitation on Asset Sales" are limited and are deemed limited to the extent
necessary so that the creation, existence and effectiveness of such
restrictive covenants did not result in a breach of the covenants of the 1998
Senior Notes Indenture relating to "Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries."
REPURCHASE OF CAPROCK NOTES UPON A CHANGE OF CONTROL
If a Change of Control shall occur at any time, each holder of
CapRock notes shall have the right to require that CapRock purchase all such
holder's CapRock notes in whole or in part in integral multiples of $1,000, at
a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest to the Payment Date. CapRock shall commence such Offer to
Purchase within 30 days following the occurrence of such Change of Control.
There can be no assurance that CapRock will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of CapRock notes) required by the foregoing covenant
(as well as may be contained in other securities of CapRock which might be
outstanding at the time). The foregoing covenant requiring CapRock to
repurchase the CapRock notes will, unless consents are obtained, require
CapRock to repay all indebtedness then outstanding which by its terms would
prohibit such note repurchase, either prior to or concurrently with such note
repurchase.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the
CapRock indenture:
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(a) defaults in the payment of principal of (or premium, if any,
on) any CapRock note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) defaults in the payment of interest on any CapRock note when
the same becomes due and payable, which defaults continue for a period of 30
days;
(c) defaults in the performance or breach of the provisions of
the CapRock indenture applicable to mergers, consolidations and transfers of
all or substantially all of the assets of CapRock or mandatory redemption, or
the failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or the "Repurchase of CapRock Notes Upon a Change
of Control" covenants described above;
(d) defaults in the performance or breach of any covenant or
agreement of CapRock in the CapRock indenture or under the CapRock notes
(other than a default specified in clause (a), (b) or (c) above), which
default or breach continues (i) for a period of 30 consecutive days or (ii) in
the event such default or breach cannot be cured in such 30-day period and
CapRock is diligently and in good faith attempting to cure such default or
breach, for a period of 60 consecutive days in the case of both clauses (i)
and (ii), after written notice by the trustee or the holders of at least 25%
in aggregate principal amount of the CapRock notes then outstanding;
(e) there occurs with respect to any issue or issues of
Indebtedness of CapRock or any Restricted Subsidiary having an outstanding
principal amount of $7.5 million or more in the aggregate for all such issues
of all such Persons, whether such Indebtedness now exists or shall hereafter
be created, (i) an event of default that has caused the holder thereof to
declare such Indebtedness to be due and payable prior to its Stated Maturity
and such Indebtedness has not been discharged in full or such acceleration has
not been rescinded or annulled within 30 days of such acceleration and/or (ii)
the failure to make a principal payment at the final (but not any interim)
fixed maturity and such defaulted payment shall not have been made, waived or
extended within 30 days of such payment default;
(f) any final judgment or order (not covered by insurance) for
the payment of money in excess of $7.5 million in the aggregate for all such
final judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against
CapRock or any Restricted Subsidiary and shall not be paid or discharged, and
there shall be any period of 30 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final
judgments or orders outstanding and not paid or discharged against all such
Persons to exceed $7.5 million during which a stay of enforcement of such
final judgment or order, by reason of a pending appeal or otherwise, shall not
be in effect;
(g) a court having jurisdiction in the premises enters a decree
or order for (i) relief in respect of CapRock or any Restricted Subsidiary in
an involuntary case under any applicable bankruptcy, insolvency or other
similar law now or hereafter in effect, (ii) appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator or similar official of
CapRock or any Restricted Subsidiary or for all or substantially all of the
property and assets of CapRock or any Restricted Subsidiary or (iii) the
winding up or liquidation of the affairs of CapRock or any Restricted
Subsidiary and, in each case, such decree or order shall remain unstayed and
in effect for a period of 60 consecutive days; or
(h) CapRock or any Restricted Subsidiary (i) commences a
voluntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, or consents to the entry of an order for
relief in an involuntary case under any such law, (ii) consents to the
appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of CapRock or any
Restricted Subsidiary or for all or substantially all of the property and
assets of CapRock or any Restricted Subsidiary or (iii) effects any general
assignment for the benefit of creditors.
If an Event of Default (other than an Event of Default specified in
clauses (g) or (h) above that occurs with respect to CapRock) occurs and is
continuing under the CapRock indenture, the trustee or the holders of at least
25% in aggregate principal amount of the CapRock notes then outstanding, by
written notice to CapRock (and to the trustee if such notice is given by the
holders), may, and the trustee at the request of such holders shall, declare
the
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principal of, premium, if any, and accrued interest on the CapRock notes to be
immediately due and payable. Upon a declaration of acceleration, such
principal, premium, if any, and accrued interest shall be immediately due and
payable. In the event of a declaration of acceleration because an Event of
Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if
the event of default triggering such Event of Default pursuant to clause (e)
shall be remedied or cured by CapRock or the relevant Restricted Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clauses (g) or (h) above occurs with respect to CapRock, the
principal of, premium, if any, and accrued interest on the CapRock notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration or other act on the part of the trustee or any holder. The
holders of at least a majority in principal amount of the CapRock notes, by
written notice to CapRock and to the trustee, may waive all past defaults and
their consequences including the acceleration of the CapRock notes if (i) all
existing Events of Default, other than the nonpayment of the principal of,
premium, if any, and interest on the CapRock notes that have become due solely
by such acceleration, have been cured or waived and (ii) the rescission would
not conflict with any judgment or decree of a court of competent jurisdiction.
For information as to the waiver of defaults, see "--Modification and Waiver."
The holders of at least a majority in aggregate principal amount of
the CapRock notes may direct the time, method and place of conducting any
proceeding for any remedy available to the trustee or exercising any trust or
power conferred on the trustee. However, the trustee may refuse to follow any
direction that conflicts with law or the CapRock indenture that may involve
the trustee in personal liability, or that the trustee determines in good
faith may be unduly prejudicial to the rights of holders of CapRock notes not
joining in the giving of such direction, and may take any other action it
deems proper that is not inconsistent with any such direction received from
holders of CapRock notes. A holder may not pursue any remedy with respect to
the CapRock indenture or the CapRock notes unless:
(i) the holder gives the trustee written notice of a continuing
Event of Default;
(ii) the holders of at least 25% in aggregate principal amount of
CapRock notes make a written request to the trustee to pursue the remedy;
(iii) such holders offer the trustee indemnity satisfactory to the
trustee against any costs, liability or expense;
(iv) the trustee does not comply with the request within 60 days
after receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the holders of a majority in
aggregate principal amount of the CapRock notes do not give the trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any holder of a CapRock note to receive payment of
the principal of, premium, if any, or (subject to certain provisions of the
CapRock indenture) interest on, such CapRock note or to bring suit for the
enforcement of any such payment, on or after the due date expressed in the
CapRock notes, which right shall not be impaired without the consent of the
holder.
The CapRock indenture requires certain officers of CapRock to
certify, on or before a date not more than 90 days after the end of each
fiscal year, that a review has been conducted of the activities of CapRock and
its Restricted Subsidiaries and the performance of CapRock and its Restricted
Subsidiaries under the CapRock indenture and that CapRock has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. CapRock is also obligated to notify the trustee of any default or
defaults in the performance of any covenants or agreements under the CapRock
indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
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The CapRock indenture provides that CapRock shall not consolidate
with, merge with or into, or sell, convey, transfer, lease or otherwise
dispose of all or substantially all of its property and assets (as an entirety
or substantially an entirety in one transaction or a series of related
transactions) to any Person, or permit any Person to merge with or into
CapRock, unless:
(i) CapRock shall be the continuing Person, or the Person (if
other than CapRock) formed by such consolidation or into which CapRock is
merged or that acquired or leased such property and assets of CapRock shall be
a corporation organized and validly existing under the laws of the United
States of America or any jurisdiction thereof, and shall expressly assume, by
a supplemental indenture, executed and delivered to the trustee, all of the
obligations of CapRock on all of the CapRock notes and under the CapRock
indenture;
(ii) immediately after giving effect to such transaction, no
Default or Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro
forma basis, CapRock, or any Person becoming the successor obligor of the
CapRock notes, as the case may be, could Incur at least $1.00 of Indebtedness
under clause (i) of the first paragraph of the "Limitation on Indebtedness"
covenant described above; provided, however, that this clause (iii) shall not
apply to a consolidation or merger with or into a Wholly-Owned Restricted
Subsidiary with a positive net worth, provided that in connection with any
such merger or consolidation, no consideration (except Capital Stock (other
than Redeemable Stock) in the surviving Person or CapRock (or a Person that
owns directly or indirectly all of the Capital Stock of the surviving Person
or CapRock immediately following such transaction) or cash paid to satisfy
dissenter or appraisal rights; provided that such rights are exercised with
respect to no more than 5% of the outstanding Capital Stock of CapRock or
other Person) shall be issued or distributed to the stockholders of CapRock;
and
(iv) CapRock delivers to the trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clause
(iii) above) and an Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture comply with
this provision and that all conditions precedent provided for herein relating
to such transaction have been complied with; provided, however, that clauses
(ii) and (iii) above do not apply if, in the good faith determination of the
board of directors of CapRock, whose determination shall be evidenced by a
board resolution, the principal purpose of such transaction is to change the
state of incorporation of CapRock; and PROVIDED FURTHER that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE
The CapRock indenture provides that CapRock will be deemed to have
paid and will be discharged from any and all obligations in respect of the
CapRock notes on the 123rd day after the deposit referred to below, and the
provisions of the CapRock indenture will no longer be in effect with respect
to the CapRock notes (except for, among other matters, certain obligations to
register the transfer or exchange of the CapRock notes, to replace stolen,
lost or mutilated notes, to maintain paying agencies and to hold monies for
payment in trust) if, among other things, (A) CapRock has deposited with the
trustee, in trust, money and/or U.S. Government Obligations that through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of,
premium, if any, and accrued interest on the CapRock notes on the Stated
Maturity of such payments in accordance with the terms of the CapRock
indenture and the CapRock notes, (B) CapRock has delivered to the trustee (i)
either (x) an Opinion of Counsel to the effect that holders will not recognize
income, gain or loss for federal income tax purposes as a result of CapRock's
exercise of its option under this "Defeasance" provision and will be subject
to federal income tax on the same amount and in the same manner and at the
same times as would have been the case if such deposit, defeasance and
discharge had not occurred, which Opinion of Counsel must be based upon (and
accompanied by a copy of) a ruling of the Internal Revenue Service to the same
effect unless there has been a change in applicable federal income tax law
after the Closing Date such that a ruling is no longer required or (y) a
ruling directed to the trustee received from the Internal Revenue Service to
the same
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effect as the aforementioned Opinion of Counsel and (ii) an Opinion of Counsel
to the effect that the creation of the defeasance trust does not violate the
Investment Company Act of 1940 and after the passage of 123 days (or, under
certain circumstances, one year) following the deposit, the trust fund will
not be subject to the effect of Section 547 of the United States Bankruptcy
Code or Section 15 of the New York Debtor and Creditor Law, (C) immediately
after giving effect to such deposit on a pro forma basis, no Event of Default,
or event that after the giving of notice or lapse of time or both would become
an Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which CapRock
or any of its Subsidiaries is a party or by which CapRock or any of its
Subsidiaries is bound, and (D) if at such time the CapRock notes are listed on
a national securities exchange, CapRock has delivered to the trustee an
Opinion of Counsel to the effect that the CapRock notes will not be delisted
as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT
The CapRock indenture further provides that its provisions will no
longer be in effect with respect to clauses (iii) and (iv) under
"Consolidation, Merger and Sale of Assets" and all the covenants described
herein under "Certain Covenants," clause (d) under "Events of Default" with
respect to such covenants and clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets," and that clauses (e) and (f) under "Events of
Default" shall be deemed not to be Events of Default, upon, among other
things, the deposit with the trustee, in trust, of money and/or U.S.
Government Obligations that through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on
the CapRock notes on the Stated Maturity of such payments in accordance with
the terms of the CapRock indenture and the CapRock notes, the satisfaction of
the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by CapRock to the trustee of an Opinion of Counsel
to the effect that, among other things, the holders will not recognize income,
gain or loss for federal income tax purposes as a result of such deposit and
defeasance of certain covenants and Events of Default and will be subject to
federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such deposit and defeasance had not
occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT
In the event CapRock exercises its option to omit compliance with
certain covenants and provisions of the CapRock indenture with respect to the
CapRock notes as described in the immediately preceding paragraph and the
CapRock notes are declared due and payable because of the occurrence of an
Event of Default that remains applicable, the amount of money and/or U.S.
Government Obligations on deposit with the trustee will be sufficient to pay
amounts due on the CapRock notes at the time of their Stated Maturity but may
not be sufficient to pay amounts due on the CapRock notes at the time of the
acceleration resulting from such Event of Default. However, CapRock will
remain liable for such payments.
MODIFICATION AND WAIVER
From time to time, CapRock, when authorized by the trustee, without
the consent of the holders, may amend, waive or supplement the CapRock
indenture and the CapRock notes for certain specified purposes, including,
among other things, curing ambiguities, defects or inconsistencies, to provide
for the assumption of CapRock's obligations to holders in the case of a merger
or consolidation, to make any change that would provide any additional rights
or benefits to the holders, to add guarantors with respect to the CapRock
notes, to secure the CapRock notes, to maintain the qualification of the
CapRock indenture under the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"), or to make any change that does not adversely affect
the rights of any holder. Other amendments and modifications of the CapRock
indenture or the CapRock notes issued thereunder may be made by CapRock and
the trustee with the consent of the holders of not less than a majority in
aggregate principal amount of the CapRock notes; provided, however, that no
such modification or amendment may, without the consent of each holder
affected thereby:
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(i) change the Stated Maturity of the principal of, or any
installment of interest on, any CapRock note,
(ii) reduce the principal of, or premium, if any, or interest on,
any CapRock note,
(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any CapRock note,
(iv) impair the right to institute suit for the enforcement of
any payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any CapRock note,
(v) reduce the above-stated percentage of outstanding CapRock
notes the consent of whose holders is necessary to modify or amend the CapRock
indenture,
(vi) waive a default in the payment of principal of, premium, if
any, or interest on the CapRock notes, or
(vii) reduce the percentage or aggregate principal amount of
outstanding CapRock notes the consent of whose holders is necessary for waiver
of compliance with certain provisions of the CapRock indenture or for waiver
of certain defaults.
GOVERNING LAW
The CapRock indenture provides that the CapRock indenture and the
CapRock notes are governed by and construed in accordance with the laws of the
State of New York without giving effect to principles of conflicts of law.
CONCERNING THE TRUSTEE
The CapRock indenture provides that, except during the continuance of
a Default, the trustee will not be liable, except for the performance of such
duties as are specifically set forth in such CapRock indenture. If an Event of
Default has occurred and is continuing, the trustee will use the same degree
of care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The CapRock indenture and provisions of the Trust Indenture Act
incorporated by reference therein contain limitations on the rights of the
trustee, should it become a creditor of CapRock, to obtain payment of claims
in certain cases or to realize on certain property received by it in respect
of any such claims, as security or otherwise. The trustee is permitted to
engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the covenants and other provisions of the CapRock indenture. Reference is made
to the CapRock indenture for the definition of any other capitalized term used
herein for which no definition is provided.
"1998 Senior Notes Indenture" means the Indenture dated as of July
16, 1998, among CapRock, CapRock Telecommunications Corp., CapRock Fiber
Network, Ltd. and IWL Communications, Incorporated and PNC Bank, N.A. (now
known as Chase Manhattan Trust Company, National Association), as trustee,
providing for the issuance of the 1998 Senior Notes in the aggregate principal
amount of $150,000,000, as such instrument may be amended and supplemented
from time to time.
"1998 Senior Notes Issue Date" means the date on which the 1998
Senior Notes were originally issued under the 1998 Senior Notes Indenture.
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"1998 Senior Notes" means CapRock's 12% Senior Notes due 2008 issued
pursuant to the 1998 Senior Notes Indenture, as such instrument may be amended
or supplemented from time to time.
"Acquired Indebtedness" means Indebtedness of a Person existing at
the time such Person becomes a Restricted Subsidiary or assumed in connection
with an Asset Acquisition by CapRock or a Restricted Subsidiary; provided that
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon consummation of the transaction by
which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the
aggregate net income (or loss) of CapRock and its Restricted Subsidiaries for
such period determined in conformity with GAAP; provided that the following
items shall be excluded in computing Adjusted Consolidated Net Income (without
duplication):
(i) the net income (or loss) of any Person (other than a
Restricted Subsidiary) in which any Person (other than CapRock or any of its
Restricted Subsidiaries) has a joint interest and the net income (or loss) of
any Unrestricted Subsidiary, except
(x) with respect to net income, to the extent of the
amount of dividends or other distributions actually paid in cash to CapRock or
any of its Restricted Subsidiaries by such other Person or such Unrestricted
Subsidiary during such period and
(y) with respect to net losses, to the extent of the
amount of cash contributed by CapRock or any Restricted Subsidiary to such
Person during such period;
(ii) the net income (or loss) of any Person acquired by CapRock
or any of its Restricted Subsidiaries in a pooling-of-interests transaction
for any period prior to the date of the related acquisition;
(iii) the net income of any Restricted Subsidiary to the extent
that the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary;
(iv) any gains or losses (on an after-tax basis) attributable to
Asset Sales;
(v) any net after-tax extraordinary or non-recurring gains or
losses;
(vi) any gain or loss, net of taxes, realized upon the
termination of any employee benefit plan; and
(vii) any compensation or other expense paid or payable solely
with Capital Stock (other than Redeemable Stock) of CapRock or any options,
warrants or other rights to acquire such Capital Stock.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of CapRock and its Restricted Subsidiaries (less applicable
depreciation, amortization and other valuation reserves), except to the extent
resulting from write-ups of capital assets (excluding write-ups in connection
with accounting for acquisitions in conformity with GAAP), minus (i) all
current liabilities of CapRock and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, all as set
forth on the most recent quarterly or annual consolidated balance sheet of
CapRock and its Restricted Subsidiaries, prepared in conformity with GAAP and
filed with the SEC or provided to the trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described above.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control," when used with respect to any specified Person, means
the power to direct the management
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and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Acquisition" means (i) an investment by CapRock or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with CapRock or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of CapRock and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by CapRock or any of its Restricted
Subsidiaries of the property and assets of any Person other than CapRock or
any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
CapRock and its Restricted Subsidiaries on the date of such acquisition.
"Asset Disposition" means the sale or other disposition by CapRock or
any of its Restricted Subsidiaries (other than to CapRock or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets of a
division or line of business of CapRock or any of its Restricted Subsidiaries.
"Asset Sale" means any direct or indirect sale, transfer or lease or
other disposition (including by way of merger, consolidation or sale-leaseback
transaction) in one transaction or a series of related transactions by CapRock
or any of its Restricted Subsidiaries to any Person other than CapRock or any
of its Restricted Subsidiaries of:
(i) all or any of the Capital Stock of any Restricted Subsidiary,
(ii) all or substantially all of the property and assets of an
operating unit or business of CapRock or any of its Restricted Subsidiaries or
(iii) any other property and assets of CapRock or any of its
Restricted Subsidiaries outside the ordinary course of business of CapRock or
such Restricted Subsidiary other than the Capital Stock of or Investment in an
Unrestricted Subsidiary
that, with respect to each of (i), (ii) and (iii), is not governed by the
provisions of the CapRock indenture applicable to mergers, consolidations and
sales of all or substantially all of the assets of CapRock; provided that
"Asset Sale" shall not include:
(a) sales, transfers or other dispositions of assets, whether in
one transaction or a series of related transactions occurring within one year,
involving assets with a fair market value not in excess of $1.0 million in any
transaction or series of related transactions,
(b) contemporaneous exchanges by CapRock or any Restricted
Subsidiary of Telecommunications Assets for other Telecommunications Assets in
the ordinary course of business, including fiber swaps and partitioning of
switches; provided that the applicable Telecommunications Assets received by
CapRock or such Restricted Subsidiary have at least substantially equal fair
market value to the Telecommunications Assets disposed of, or
(c) sales, transfers or other dispositions of assets that have
become uneconomic, obsolete or worn-out.
"Average Life" means, at any date of determination with respect to
any debt security, the quotient obtained by dividing (i) the sum of the
products of (a) the number of years from such date of determination to the
dates of each successive scheduled principal payment of such debt security and
(b) the amount of such principal payment by (ii) the sum of all such principal
payments.
"Board of Directors" means, with respect to any Person, its board of
directors, general partner(s), manager(s), or similar governing body.
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"Calculation Date" means, with respect to the Incurrence of any
Indebtedness by CapRock or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
"Capital Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) in equity of such Person, whether outstanding on
the Closing Date or issued thereafter, including, without limitation, all
Common Stock and Preferred Stock.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Change of Control" shall be deemed to occur if:
(i) the sale, conveyance, transfer or lease of all or
substantially all of the assets of CapRock to any Person or "group" (as such
term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act, including
any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act),
other than to one or more Permitted Holders and/or one or more Restricted
Subsidiaries, shall have occurred,
(ii) any Person or "group" (as such term is used in Sections
13(d)(3) and 14(d)(2) of the Exchange Act including any group acting for the
purpose of acquiring, holding or disposing of securities within the meaning of
Rule 13d-5(b)(1) under the Exchange Act), other than any Permitted Holder (or
group that includes a Permitted Holder), becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of more than 50% of the total
voting power of all classes of the Voting Stock of CapRock (including any
warrants, options or rights to acquire such Voting Stock), calculated on a
fully diluted basis,
(iii) during any period of two consecutive years, individuals who
at the beginning of such period constituted the board of directors of CapRock
(together with any directors whose election or appointment by the board of
directors of CapRock or whose nomination for election by the stockholders of
CapRock was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the board of directors of CapRock then in
office or
(iv) the merger, amalgamation or consolidation of CapRock with or
into another Person or the merger of another Person with or into CapRock shall
have occurred, and the securities of CapRock that are outstanding immediately
prior to such transaction and which represent 100% of the aggregate voting
power of the Voting Stock of CapRock are changed into or exchanged for cash,
securities or property, unless pursuant to such transaction such securities
are changed into or exchanged for, in addition to any other consideration,
securities of the surviving Person that represent, immediately after giving
effect to such transaction, at least a majority of the aggregate voting power
of the Voting Stock of the surviving Person.
"Closing Date" means May 18, 1999.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
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"Consolidated EBITDA" means, for any period, Adjusted Consolidated
Net Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income,
(i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets),
(iii) depreciation expense,
(iv) amortization expense,
(v) all other non-cash items reducing Adjusted Consolidated Net
Income (other than items that will require cash payments and for which an
accrual or reserve is, or is required by GAAP to be, made), and
(vi) costs directly related to the Transaction or the offering of
the 1998 Senior Notes and expensed by CapRock in accordance with GAAP on or
prior to December 31, 1998,
less all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for CapRock and its Restricted Subsidiaries
in conformity with GAAP; provided that, if any Restricted Subsidiary is not a
Wholly-Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to
the extent not otherwise reduced in accordance with GAAP) by an amount equal
to (A) the amount of the Adjusted Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of
shares of outstanding Common Stock of such Restricted Subsidiary not owned on
the last day of such period by CapRock or any of its Restricted Subsidiaries
divided by (2) the total number of shares of outstanding Common Stock of such
Restricted Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, without
duplication, the aggregate amount of interest in respect of Indebtedness,
including, without limitation:
(i) amortization of original issue discount on any Indebtedness
and the interest portion of any deferred payment obligation, calculated in
accordance with the effective interest method of accounting;
(ii) all commissions, discounts and other fees and charges owed
with respect to letters of credit and bankers' acceptance financing;
(iii) the net costs associated with Interest Rate Agreements;
(iv) Preferred Stock dividends of CapRock's Restricted
Subsidiaries (other than dividends paid in shares of Preferred Stock that are
not Redeemable Stock) declared and paid or payable;
(v) accrued Redeemable Stock dividends of CapRock and its
Restricted Subsidiaries, whether or not declared or paid; and
(vi) the interest component of rentals in respect of Capitalized
Lease Obligations paid, accrued or scheduled to be paid or to be accrued by
CapRock and its Restricted Subsidiaries during such period;
excluding, however, (a) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof (but only in the same proportion as the net income of
such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof)
and (b) any premiums, fees and expenses (and any amortization thereof) payable
in connection with the offering of the CapRock notes, the 1998 Senior Notes
and the Transaction, all as determined on a consolidated basis (without taking
into account Unrestricted Subsidiaries) in conformity with GAAP.
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"Consolidated Leverage Ratio" means, on any Calculation Date, the
ratio of (i) the aggregate amount of Indebtedness of CapRock and its
Restricted Subsidiaries on a consolidated basis outstanding on such
Calculation Date to (ii) the aggregate amount of Consolidated EBITDA for the
then most recent four fiscal quarters for which financial statements of
CapRock have been filed with the SEC or provided to the trustee pursuant to
the "SEC Reports and Reports to Holders" covenant described above (such four
fiscal quarter period being the "Four Quarter Period"); provided that, in
making the foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness to be Incurred or repaid on the Calculation Date; (B) pro forma
effect shall be given to Asset Dispositions and Asset Acquisitions (including
giving pro forma effect to the application of proceeds of any Asset
Disposition) that occur from the beginning of the Four Quarter Period through
the Calculation Date (the "Reference Period"), as if they had occurred and
such proceeds had been applied on the first day of such Reference Period; and
(C) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of proceeds
of any asset disposition) that have been made by any Person that has become a
Restricted Subsidiary or has been merged with or into CapRock or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary, as if such asset
dispositions or asset acquisitions had occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four
full fiscal quarters immediately preceding the Calculation Date of the Person,
or division or line of business of the Person, that is acquired or disposed of
for which financial information is available.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of CapRock and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the outstanding principal amount of any promissory notes receivable from
the sale of the Capital Stock of CapRock or any of its Restricted
Subsidiaries, each item to be determined in conformity with GAAP (excluding
the effects of foreign currency exchange adjustments under Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 52).
"Credit Facilities" means any senior commercial term loan and/or
revolving credit or working capital facility or any letter of credit facility
entered into principally with commercial banks and/or other financial
institutions typically party to commercial loan agreements.
"Currency Agreement" means any spot or forward foreign exchange
contract, currency swap agreement, currency option or other similar financial
agreement or arrangement entered into by CapRock or any of its Subsidiaries
designed solely to protect against or manage exposure to fluctuations in
currency exchange rates.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any matter, a member
of the board of directors who does not have any material direct or indirect
financial interest in or with respect to such matter.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"fair market value" means the price that would be paid in an
arm's-length transaction between a willing seller under no compulsion to sell
and a willing buyer under no compulsion to buy, as determined in good faith by
the board of directors, whose determination shall be conclusive if evidenced
by a Board Resolution; provided that for purposes of clause (viii) of the
definition of "Permitted Indebtedness", (x) the fair market value of any
security registered under the Exchange Act shall be the average of the closing
prices, regular way, of such security for the 20 consecutive trading days
immediately preceding the capital contribution or sale of Capital Stock and
(y) in the event the aggregate fair market value of any other property (other
than cash or cash equivalents) received by CapRock exceeds $10 million, the
fair market value of such property shall be determined by a nationally
recognized
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investment banking firm (selected by the board of directors of CapRock) and
set forth in their written opinion which shall be delivered to the trustee.
"GAAP" means generally accepted accounting principles in the United
States of America in effect on the 1998 Senior Notes Issue Date, including,
without limitation, those set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as approved
by a significant segment of the accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services (unless such purchase arrangements are at arm's-length
and are entered into in the ordinary course of business), to take-or-pay, or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness
of the payment thereof or to protect such obligee against loss in respect
thereof (in whole or in part); provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.
"Guaranteed Indebtedness" has the meaning given it under the caption
"Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Acquired Indebtedness; provided that
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness. The terms "Incurrence" and
"Incurred" shall have corresponding meanings.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(i) all indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments,
(iii) all obligations of such Person in respect of letters of
credit, acceptance facilities or other similar instruments (including
reimbursement obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due
more than six months after the date of placing such property in service or
taking delivery and title thereto or the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided that the amount of such Indebtedness shall be the lesser of
(A) the fair market value of such asset at such date of determination and (B)
the amount of such Indebtedness,
(vii) all Indebtedness of other Persons and all dividends and
distributions of another Person the payment of which, in either case, such
Person has Guaranteed or is responsible or liable for, directly or indirectly,
as obligor, guarantor or otherwise,
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(viii) all Redeemable Stock of such Person valued at its maximum
fixed repurchase price plus (to the extent not otherwise included in such
repurchase price) accrued and unpaid dividends payable prior to the Stated
Maturity of the CapRock notes in connection with a mandatory redemption or in
connection with a redemption at the option of the holder thereof unless such
Redeemable Stock has actually been called for redemption but not yet redeemed,
in which case it shall be valued at the redemption price therefor plus such
accrued and unpaid dividends unless the holder thereof can require redemption
or repurchase at any higher price, and
(ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation.
Notwithstanding anything herein to the contrary:
(A) the amount outstanding at any time of any Indebtedness
issued with original issue discount is the face amount of such Indebtedness
less the remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance, as determined in conformity with
GAAP,
(B) money borrowed and set aside at the time of the Incurrence
of any Indebtedness or thereafter in order to refund the payment of the
interest on such Indebtedness shall not be deemed to be "Indebtedness,"
(C) Indebtedness shall not include any liability for federal,
state, local or other taxes,
(D) Indebtedness shall not include any Trade Payable or amounts
due under leases that are not Capitalized Lease Obligations,
(E) Indebtedness shall not include amounts due with respect to
any customer advance payments and customer deposits in the ordinary course of
business with CapRock or any Restricted Subsidiary, and
(F) Indebtedness shall not include overdrafts.
For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if such
Redeemable Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the CapRock indenture, and if such price
is based upon, or measured by, the fair market value of such Redeemable Stock,
such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Stock.
"Interest Rate Agreement" means any interest rate protection
agreement, interest rate future agreement, interest rate option agreement,
interest rate swap agreement, interest rate cap agreement, interest rate
collar agreement, interest rate hedge agreement, option or future contract or
other similar agreement or arrangement.
"Investment" in any Person means any direct or indirect advance,
loan, account receivable (other than an account receivable arising in the
ordinary course of business) or other extension of credit (including, without
limitation, by way of Guarantee or similar arrangement) or any capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase or acquisition of Capital Stock, bonds, notes, debentures or
other similar instruments issued by, such Person and shall include (i) the
designation of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii)
the fair market value of the Capital Stock (or any other Investment), held by
CapRock or any of its Restricted Subsidiaries, of (or in) any Person that has
ceased to be a Restricted Subsidiary at the time it so ceases to be a
Restricted Subsidiary, including, without limitation, by reason of any
transaction permitted by clause (iii) of the "Limitation on the Issuance and
Sale of Capital Stock of Restricted Subsidiaries" covenant described above.
For purposes of the
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definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described above, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to
CapRock or any of its Subsidiaries)) of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii)
the fair market value of the assets (net of liabilities (other than
liabilities to CapRock or any of its Subsidiaries)) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding
Investments and (iii) any property transferred to or from any Person shall be
valued at its fair market value at the time of such transfer.
"Lien" means any mortgage, pledge, security interest, encumbrance,
lien (statutory or other) or charge of any kind (including, without
limitation, any conditional sale or other title retention agreement or lease
in the nature thereof or any agreement to give any security interest). The
term "Lien" does not include any lease or grant of rights to use any fiber or
other asset under an arrangement that does not qualify as a conditional sale
or other title retention agreement or lease in the nature thereof or a switch
partition.
"Merger Agreement" means that certain Agreement and Plan of Merger
and Plan of Exchange dated as of February 16, 1998 among CapRock, CapRock
Telecommunications Corp., CapRock Fiber Network, Ltd. and IWL Communications,
Incorporated and certain other parties thereto, as amended through the 1998
Senior Notes Issue Date and thereafter in accordance with the terms of the
1998 Senior Notes Indenture.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to CapRock or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes (whether or
not such taxes will actually be paid or are payable) as a result of such Asset
Sale without regard to the consolidated results of operations of CapRock and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or
(B) is required to be paid as a result of such sale and (iv) appropriate
amounts to be provided by CapRock or any Restricted Subsidiary as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP, and (b) with respect to any capital contribution or issuance or
sale of Capital Stock, options, warrants or other rights to acquire Capital
Stock or Indebtedness, the proceeds of such capital contribution or issuance
or sale in the form of cash or cash equivalents, including payments in respect
of deferred payment obligations (to the extent corresponding to the principal,
but not interest, component thereof) when received in the form of cash or cash
equivalents (except to the extent such obligations are financed or sold with
recourse to CapRock or any Restricted Subsidiary) and proceeds from the
conversion of other property received when converted to cash or cash
equivalents, net of attorney's fees, accountants' fees, underwriters' or
placement agents' fees, discounts or commissions and brokerage, consultant and
other fees incurred in connection with such issuance or sale and net of taxes
payable as a result thereof.
"Offer to Purchase" means an offer by CapRock to purchase CapRock
notes from the holders commenced by mailing a notice to the trustee and each
holder stating:
(i) the covenant pursuant to which the offer is being made and
that all CapRock notes validly tendered will be accepted for payment on a pro
rata basis;
(ii) the purchase price and the date of purchase (which shall be
a Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed);
(iii) that any CapRock note not tendered will continue to accrue
interest pursuant to its terms;
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(iv) that, unless CapRock defaults in the payment of the purchase
price, any CapRock note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date;
(v) that holders electing to have a note purchased pursuant to
the Offer to Purchase will be required to surrender the CapRock note, together
with the form entitled "Option of the Holder to Elect Purchase" on the reverse
side of the CapRock note completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the Business Day
immediately preceding the Payment Date;
(vi) that holders will be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a facsimile transmission
or letter setting forth the name of such holder, the principal amount of
CapRock notes delivered for purchase and a statement that such holder is
withdrawing his election to have such CapRock notes purchased; and
(vii) that holders whose CapRock notes are being purchased only in
part will be issued new CapRock notes equal in principal amount to the
unpurchased portion of the CapRock notes surrendered; provided that each
CapRock note purchased and each new CapRock note issued shall be in a
principal amount of $1,000 or integral multiples thereof.
On the Payment Date, CapRock shall (i) accept for payment on a pro
rata basis CapRock notes or portions thereof tendered pursuant to an Offer to
Purchase; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all CapRock notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the trustee all CapRock notes or
portions thereof so accepted together with an Officers' Certificate specifying
the CapRock notes or portions thereof accepted for payment by CapRock. The
Paying Agent shall promptly mail to the holders of CapRock notes so accepted
payment in an amount equal to the purchase price, and the trustee shall
promptly authenticate and mail to such holders a new CapRock note equal in
principal amount to any unpurchased portion of the CapRock note surrendered;
provided that each CapRock note purchased and each new CapRock note issued
shall be in a principal amount of $1,000 or integral multiples thereof.
CapRock will publicly announce the results of an Offer to Purchase as soon as
practicable after the Payment Date. The trustee shall act as the Paying Agent
for an Offer to Purchase. CapRock will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable, in the event that CapRock is
required to repurchase CapRock notes pursuant to an Offer to Purchase.
"Payment Date" means the date on which any CapRock note is purchased
pursuant to an Offer to Purchase.
"Permitted Holders" means Jere W. Thompson, Sr., Jere W. Thompson,
Jr., Mark Langdale, Timothy W. Rogers, Scott L. Roberts, Timothy M. Terrell
and Ignatius W. Leonards and any corporation, limited liability company,
partnership, joint venture or other entity controlled by any one or more of
them.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of CapRock pursuant to the CapRock notes and
the CapRock indenture;
(ii) Indebtedness owed (A) to CapRock and evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiaries; provided
that such Indebtedness to any Restricted Subsidiary is subordinated in right
of payment from and after such time as the CapRock notes shall become due and
payable (whether at Stated Maturity, by acceleration or otherwise); provided
further that any event which results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any subsequent transfer of such Indebtedness
(other than to CapRock or another Restricted Subsidiary) shall be deemed, in
each case, to constitute an Incurrence of such Indebtedness not permitted by
this clause (ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness (other
than Indebtedness Incurred under clause (ii), (iv), (vi) or (xii) of the
definition of Permitted Indebtedness) and any refinancings of such new
Indebtedness in an amount not to exceed the amount so refinanced or refunded
(plus premiums, accrued interest, fees and expenses); provided that
Indebtedness the
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proceeds of which are used to refinance or refund the CapRock notes or
Indebtedness that is PARI PASSU in right of payment with, or subordinated in
right of payment to, the CapRock notes shall only be permitted under this
clause (iii) if (A) in case the CapRock notes are refinanced in part or the
Indebtedness to be refinanced is PARI PASSU in right of payment with the
CapRock notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made PARI PASSU in right of payment with, or
subordinate in right of payment to, the remaining CapRock notes, (B) in case
the Indebtedness to be refinanced is subordinated in right of payment to the
CapRock notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is issued or
remains outstanding, is expressly made subordinate in right of payment to the
CapRock notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the CapRock notes and (C) such new Indebtedness, determined as
of the date of Incurrence of such new Indebtedness, does not mature prior to
the Stated Maturity of the Indebtedness to be refinanced or refunded, and the
Average Life of such new Indebtedness is at least equal to the remaining
Average Life of the Indebtedness to be refinanced or refunded; and provided
further that in no event may Indebtedness of CapRock be refinanced by means of
any Indebtedness of any Restricted Subsidiary pursuant to this clause (iii);
(iv) Indebtedness (A) to reimburse workers' compensation
insurance companies for claims paid by such companies on behalf of CapRock or
any Restricted Subsidiary in accordance with the policies issued to CapRock
and the Restricted Subsidiaries, (B) in respect of performance, surety or
appeal bonds or similar obligations provided in the ordinary course of
business, or (C) under Currency Agreements and Interest Rate Agreements;
provided that such agreements (I) are designed solely to protect CapRock or
its Subsidiaries against fluctuations in foreign currency exchange rates or
interest rates and (II) do not increase the Indebtedness of the obligor
outstanding at any time other than as a result of fluctuations in foreign
currency exchange rates or interest rates or by reason of fees, indemnities
and compensation payable thereunder or (D) arising from agreements providing
for indemnification, adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or performance bonds
securing any obligations of CapRock or any of its Restricted Subsidiaries
pursuant to such agreements, in each case Incurred in connection with the
disposition of any business, assets or Restricted Subsidiary (other than
Guarantees of Indebtedness Incurred by any Person acquiring all or any portion
of such business, assets or Restricted Subsidiary for the purpose of financing
such acquisition), in a principal amount not to exceed the gross proceeds
actually received by CapRock or any Restricted Subsidiary in connection with
such disposition;
(v) Indebtedness of CapRock, to the extent the net proceeds
thereof are promptly used to purchase CapRock notes tendered in an Offer to
Purchase made as a result of a Change of Control or Indebtedness of CapRock or
any Restricted Subsidiary to the extent the net proceeds thereof are promptly
deposited to defease all of the CapRock notes as described above under
"--Defeasance";
(vi) Guarantees of the CapRock notes and Guarantees of
Indebtedness of CapRock by any Restricted Subsidiary; provided that the
Guarantee of such Indebtedness is permitted by and made in accordance with the
"Limitation on Issuance of Guarantees by Restricted Subsidiaries" covenant
described above;
(vii) Acquired Indebtedness and any Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund,
such Acquired Indebtedness in an amount not to exceed the amount so refinanced
or refunded (plus premium, accrued interest, and reasonable fees and expenses)
in an aggregate amount not to exceed at any one time outstanding $25 million;
(viii) (A) Indebtedness of CapRock not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by CapRock after the
1998 Senior Notes Issue Date as a capital contribution or from the issuance
and sale of its Capital Stock (other than Redeemable Stock) or options,
warrants or other rights to acquire Capital Stock (other than Redeemable
Stock) to a Person that is not a Subsidiary of CapRock to the extent such Net
Cash Proceeds have not been used pursuant to clause (C)(2) of the first
paragraph or clause (iii), (iv) or (vi) of the second paragraph of the
"Limitation on Restricted Payments" covenant described above to make a
Restricted Payment less any Indebtedness Incurred pursuant to clause (B), (B)
Indebtedness Incurred by (x) CapRock and/or (y) any of the Restricted
Subsidiaries in an aggregate amount not to exceed, at any one time
outstanding, the Net Cash Proceeds received by CapRock after the 1998 Senior
Notes Issue Date as a capital contribution or from the issuance and sale
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of its Capital Stock (other than Redeemable Stock) or options, warrants or
other rights to acquire Capital Stock (other than Redeemable Stock) to a
Person that is not a Subsidiary of CapRock to the extent such Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph
or clause (iii), (iv) or (vi) of the second paragraph of the "Limitation on
Restricted Payments" covenant described above to make a Restricted Payment;
provided that the Incurrence of Indebtedness pursuant to this clause (B) will
only be permitted to the extent that such Incurrence does not cause the amount
of Indebtedness Incurred pursuant to clause (A) to exceed the amount permitted
thereunder, and (C) Indebtedness of CapRock not to exceed, at any one time
outstanding, 100% of the fair market value of property (other than cash and
cash equivalents) received by CapRock after the 1998 Senior Notes Issue Date
from a contribution of capital or the proceeds from the sale of its Capital
Stock (other than Redeemable Stock) or options, warrants or other rights to
acquire Capital Stock (other than Redeemable Stock) to a Person that is not
CapRock or a Restricted Subsidiary, to the extent such capital contribution or
sale of Capital Stock or options, warrants or rights have not been used
pursuant to clause (iii), (iv) or (ix) of the second paragraph of the
"Limitation on Restricted Payments" covenant described above to make a
Restricted Payment; provided that such Indebtedness does not mature prior to
the Stated Maturity of the CapRock notes and has an Average Life longer than
the CapRock notes;
(ix) Indebtedness under one or more Credit Facilities or Vendor
Credit Facilities; provided that the aggregate principal amount of any
Indebtedness incurred pursuant to this clause (ix) (including any amounts
refinanced or refunded under this clause (ix)) does not exceed at any time
outstanding the greater of (x) 85% of eligible accounts receivable and 65% of
eligible inventory of CapRock and its Restricted Subsidiaries as of the last
fiscal quarter for which financial statements are prepared or (y) $175 million
less any amount of such Indebtedness permanently repaid as provided under the
"Limitation on Asset Sales" covenant described above;
(x) Indebtedness existing as of the Closing Date;
(xi) Capitalized Lease Obligations in an aggregate principal
amount outstanding at any time not to exceed $25 million; and
(xii) Indebtedness of CapRock (in addition to Indebtedness
permitted under clauses (i) through (xi) above) in the aggregate principal
amount outstanding at any time not to exceed $75 million, less any amount of
such Indebtedness permanently repaid as provided under the "Limitation on
Asset Sales" covenant described above.
"Permitted Investment" means any of the following:
(i) an Investment in CapRock or a Restricted Subsidiary or a
Person which will, upon the making of such Investment, become a Restricted
Subsidiary or be merged or consolidated with or into or transfer or convey all
or substantially all its assets to, CapRock or a Restricted Subsidiary;
provided that such Person's primary business is related, ancillary or
complementary to the businesses of CapRock and its Restricted Subsidiaries on
the date of such Investment;
(ii) a Temporary Cash Investment;
(iii) commission, payroll, travel, relocation and similar advances
to cover matters that are expected at the time of such advances ultimately to
be treated as expenses in accordance with GAAP;
(iv) stock, obligations or securities received in satisfaction of
judgments or settlement of disputed accounts receivable that arose in the
ordinary course of business;
(v) Investments in prepaid expenses, negotiable instruments held
for collection, and lease, utility and workers' compensation, performance and
other similar deposits;
(vi) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the definition of "Permitted
Indebtedness;" and
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(vii) loans and advances to employees of CapRock or any Subsidiary
in an aggregate amount not to exceed $1 million at any time outstanding.
"Permitted Liens" means any of the following:
(i) Liens for taxes, fees, assessments, governmental charges or
claims that are not yet due and payable, or, if delinquent, are payable
without penalty or are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made;
(ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, material men, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts
not yet delinquent, or, if delinquent, are payable without penalty or are or
being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security;
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money);
(v) easements, rights-of-way, restrictions, municipal and zoning
ordinances, reservations, permits and similar charges, encumbrances, title
defects or other irregularities that do not materially interfere with the
ordinary course of business of CapRock or any of its Restricted Subsidiaries;
(vi) Liens securing Acquired Indebtedness created prior to (and
not in connection with or in contemplation of) the Incurrence of such
Indebtedness by CapRock or any Restricted Subsidiary; provided that such Lien
does not extend to any property or assets of CapRock or any Restricted
Subsidiary other than the asset acquired in connection with the Incurrence of
such Acquired Indebtedness;
(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of CapRock and its Restricted
Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction
arising from progress or partial payments by a customer of CapRock or its
Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to
any Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of CapRock or any Restricted
Subsidiary other than the property or assets acquired and any proceeds thereof;
(xii) Liens in favor of CapRock or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or
order against CapRock or any Restricted Subsidiary that does not give rise to
an Event of Default;
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(xiv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvi) Liens encumbering customary initial deposits and margin
deposits, and other Liens that are either within the general parameters
customary in the industry or incurred in the ordinary course of business, in
each case securing Indebtedness under Interest Rate Agreements and Currency
Agreements and forward contracts, options, future contracts, futures options
or similar agreements or arrangements designed solely to protect CapRock or
any of its Restricted Subsidiaries from fluctuations in interest rates,
currencies or the price of commodities;
(xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
CapRock or any of its Restricted Subsidiaries in the ordinary course of
business in accordance with the past practices of CapRock and its Restricted
Subsidiaries;
(xviii) Liens on or sales of receivables, including related
intangible assets and proceeds thereof;
(xix) Liens securing Indebtedness incurred under clauses (iv)(A),
(iv)(B), (vii), (viii)(B), (ix), (x) or (xii) of the definition of "Permitted
Indebtedness";
(xx) Liens arising solely by virtue of any statutory or common
law provision relating to banker's liens, rights of set-off, or similar rights
and remedies as to deposit accounts or other funds maintained with a creditor
depository institution;
(xxi) Liens securing Capitalized Lease Obligations on assets
subject to such Capitalized Leases;
(xxii) Liens of CapRock or any Restricted Subsidiary securing
Indebtedness in effect at the Closing Date;
(xxiii) Liens granted after the Closing Date on any assets or
Capital Stock of CapRock or its Restricted Subsidiaries created in favor of
the holders;
(xxiv) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to CapRock or a Wholly-Owned Restricted
Subsidiary to secure Indebtedness owing to CapRock or such other Restricted
Subsidiary;
(xxv) Liens securing Indebtedness that is Incurred to refinance
secured Indebtedness permitted to be Incurred under clause (iii) of the
definition of "Permitted Indebtedness"; provided that such Liens do not extend
to or cover any property or assets of CapRock or any Restricted Subsidiary
other than the property or assets securing the Indebtedness being refinanced;
(xxvi) any extension, renewal or replacement, in whole or in part,
of any Lien described in the foregoing clauses (i) through (xxv); provided
that any such extension, renewal or replacement shall be no more restricted in
any material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference equity,
whether outstanding on the Closing Date or issued thereafter, including,
without limitation, all series and classes of such preferred or preference
stock.
"pro forma" means, with respect to the preparation of financial
statements to show the effect of any particular transaction, the preparation
of such financial statements in accordance with Article 11 of Regulation S-X.
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"Public Equity Offering" means an underwritten primary public
offering of Common Stock (other than Redeemable Stock) of CapRock or a
Restricted Subsidiary pursuant to an effective registration statement filed
under the Securities Act (excluding registration statements on Form S-8).
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the CapRock notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the
Stated Maturity of the CapRock notes or (iii) convertible into or exchangeable
for Capital Stock referred to in clause (i) or (ii) above or Indebtedness
having a scheduled maturity prior to the Stated Maturity of the CapRock notes;
provided that any Capital Stock that would not constitute Redeemable Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the
CapRock notes shall not constitute Redeemable Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are no more
favorable in any material respect to the holders of such Capital Stock than
the provisions contained in "Limitation on Asset Sales" and "Repurchase of
CapRock Notes upon a Change of Control" covenants described above are to the
holders of the CapRock notes and such Capital Stock specifically provides that
such Person will not repurchase or redeem any such stock pursuant to such
provision prior to CapRock's repurchase of such notes as are required to be
repurchased pursuant to the "Limitation on Asset Sales" and "Repurchase of
CapRock Notes Upon a Change of Control" covenants described above.
"Restricted Payment" means
(i) a declaration or payment of any dividend or the making of
any distribution on or with respect to CapRock's Capital Stock (other than (x)
dividends or distributions payable solely in shares of CapRock's Capital Stock
(other than Redeemable Stock) or in options, warrants or other rights to
acquire shares of such Capital Stock and (y) dividends or distributions
payable to CapRock or any Wholly-Owned Restricted Subsidiary),
(ii) a payment made by CapRock or any Restricted Subsidiary used
to purchase, redeem, retire or otherwise acquire for value any shares of
Capital Stock of (A) CapRock or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of
CapRock (other than a Wholly-Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or more of any class of Capital Stock of
CapRock (including options, warrants or other rights to acquire such shares of
Capital Stock) (other than (x) payments payable solely in shares of Capital
Stock (other than Redeemable Stock) of CapRock or in options, warrants or
other rights to acquire shares of such Capital Stock and (y) payments payable
to CapRock or any Wholly-Owned Restricted Subsidiary),
(iii) any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or
retirement for value, of Indebtedness of CapRock that is subordinated in right
of payment to the CapRock notes (other than, in each case, the purchase,
repurchase or acquisition of Indebtedness either in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity that in any
case is due within one year after the date of such purchase, repurchase or
acquisition), or
(iv) any Investment, other than a Permitted Investment, in any
Person.
"Restricted Subsidiary" means any Subsidiary of CapRock other than an
Unrestricted Subsidiary.
"Stated Maturity" means (i) with respect to any debt security, the
date specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
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"Strategic Equity Investments" means the issuance and sale of Capital
Stock (other than Redeemable Stock) to a Person that has an equity market
capitalization, a net asset value or annual revenues of at least $1.0 billion
and owns and operates businesses primarily in a Telecommunications Business;
provided that such Telecommunications Business may be located anywhere in the
world.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting
power of the outstanding Voting Stock is owned, directly or indirectly, by
such Person and one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" has the meaning given it under the caption
"Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses) that
are utilized by such Person, directly or indirectly, in the Telecommunications
Business and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall also include a majority of the
Voting Stock of another Person, if such Voting Stock is acquired by CapRock or
a Restricted Subsidiary and all or substantially all the assets of such other
Person comprise Telecommunications Assets; and such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of CapRock pursuant to the CapRock indenture. The determination of
what constitutes Telecommunications Assets shall be made by the board of
directors of CapRock and evidenced by a Board Resolution delivered to the
trustee.
"Telecommunications Business" means the business of (i) transmitting
or providing services relating to the transmission of voice, video, signals,
data or Internet services; (ii) constructing, creating, developing, owning,
operating, and marketing one or more communications networks, related,
ancillary or complementary network transmission equipment, information
systems, software, and other related, ancillary or complementary assets and
devices; (iii) planning, designing, and consulting with respect to the matters
described in clauses (i) and (ii); and (iv) evaluating, participating and
pursuing any other activity or opportunity that is related, ancillary, or
complementary to those identified in clauses (i), (ii) and (iii) above, as
determined in good faith by the board of directors of CapRock.
"Temporary Cash Investment" means any of the following:
(i) direct obligations of the United States of America or any
agency thereof or obligations fully and unconditionally guaranteed by the
United States of America or any agency thereof with a maturity of 365 days or
less,
(ii) time deposit accounts, certificates of deposit and money
market deposits maturing within one year of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized
by the United States of America, and which bank or trust company has capital,
surplus and undivided profits aggregating in excess of $50 million (or the
foreign currency equivalent thereof) and has outstanding debt which is rated
"A" (or such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436 under the
Securities Act) or any money-market fund sponsored by a registered broker
dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days
for underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) commercial paper, maturing not more than one year after the
date of acquisition, issued by a corporation (other than an Affiliate of
CapRock) organized and in existence under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America with a rating at the time as of which any investment therein
is made of "P-1" (or higher) according to Moody's Investors Service, Inc. or
"A-1" (or higher) according to Standard & Poor's Ratings Service, and
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(v) securities with maturities of six months or less from the
date of acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Service or Moody's Investors Service, Inc.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries
arising in the ordinary course of business in connection with the acquisition
of goods or services.
"Transaction" means the transactions contemplated by the Merger
Agreement, which were consummated on August 26, 1998.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time
of determination shall be an Unrestricted Subsidiary (as designated by the
board of directors of CapRock, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The board of directors of CapRock may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither CapRock nor any other
Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary, (ii) no default with respect to any Indebtedness of such
Subsidiary would permit (upon notice, lapse of time or otherwise) any holder
of any other Indebtedness of CapRock or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its Stated Maturity, (iii) any Investment in
such Subsidiary made as a result of designating such Subsidiary an
Unrestricted Subsidiary will not violate the provisions of the "Limitation on
Restricted Payments" covenant, (iv) neither CapRock nor any Restricted
Subsidiary has a contract, agreement, arrangement, understanding or obligation
of any kind, whether written or oral, with such Subsidiary on terms more
favorable to such Subsidiary than those that might be obtained at the time
from persons who are not Affiliates of CapRock, and (v) neither CapRock nor
any other Subsidiary has any obligation (1) to subscribe for additional shares
of Capital Stock or other equity interests in such Subsidiary, or (2) to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results. Any such
designation by the board of directors of CapRock shall be evidenced to the
trustee by filing a Board Resolution with the trustee giving effect to such
designation. The board of directors of CapRock may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if, immediately after giving effect to
such designation, there would be no Default or Event of Default under the
CapRock indenture and CapRock could incur $1.00 of additional Indebtedness
under clause (i) of the first paragraph of the "Limitation on Indebtedness"
covenant described above pursuant to the "Limitation on Indebtedness" covenant.
"Vendor Credit Facility" means any agreement entered into with one or
more vendors, suppliers or lessors of telecommunications equipment or assets
(including any agreement entered into with any such vendor, supplier or lessor
or any financial institution acting on behalf of any such vendor, supplier or
lessor) in order to finance the acquisition or construction of
telecommunications equipment or assets, as such agreement may be amended,
modified, supplemented, refunded, refinanced, restructured, renewed or
replaced from time to time; provided that (i) any equipment or other assets
acquired or leased under or pursuant to such Vendor Credit Facility are
received by CapRock or a Restricted Subsidiary and (ii) all obligations with
respect to or under such Vendor Credit Facility or any amendment,
modification, supplement, refunding, refinancing, restructuring, renewal or
replacement thereof are owed, whether directly or indirectly as the case may
be, to a Person who is not an Affiliate of CapRock or any of its Subsidiaries
and no such Affiliate shall act as a facilitator or conduit or in a similar
capacity with respect thereto.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of
directors, managers or other voting members of the governing body of such
Person.
"Wholly-Owned" means, with respect to any Subsidiary of any Person,
the ownership of all of the outstanding Capital Stock of such Subsidiary
(other than any director's qualifying shares or Investments by foreign
nationals or other shares issued to Persons as mandated by applicable law) by
such Person or one or more Wholly-Owned Subsidiaries of such Person.
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BOOK-ENTRY, DELIVERY AND FORM
The CapRock notes are represented by one or more permanent global
certificates in definitive, fully registered form. This global note was
deposited upon issuance with The Depository Trust Company, New York, New York
and registered in the name of a nominee of The Depository Trust Company.
THE GLOBAL NOTE
Pursuant to procedures established by The Depository Trust Company,
(1) upon the issuance of the global note, The Depository Trust
Company or its custodian credited, on its internal system, the principal
amount of the individual beneficial interests represented by the global note
to the respective accounts of persons who have accounts with such depositary
and
(2) ownership of beneficial interests in the global note is
shown on, and the transfer of ownership will be effected only through, records
maintained by The Depository Trust Company or its nominee, with respect to
interests of participants, and the records of participants, with respect to
interests of persons other than participants.
Ownership of beneficial interests in the global notes is limited to
persons who have accounts with The Depository Trust Company or persons who
hold interests through participants.
So long as The Depository Trust Company or its nominee is the
registered owner or holder of the CapRock notes, The Depository Trust Company
(or the nominee) will be considered the sole owner or holder of the CapRock
notes represented by the global note for all purposes under the CapRock
indenture. No beneficial owner of an interest in the global note will be able
to transfer that interest except in accordance with The Depository Trust
Company's procedures.
Payments of interest, principal and other amounts due on the global
note are made to The Depository Trust Company or its nominee as the registered
owner. None of CapRock, the trustee or any paying agent has any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the global note or for
maintaining, supervising or reviewing any records relating to this beneficial
ownership interest.
We expect that The Depository Trust Company or its nominee, upon
receipt of any payment of interest, principal or other amounts due on the
global note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the global note as
shown on the records of The Depository Trust Company. We also expect that
payments by participants to owners of beneficial interests in the global note
held through such participants will be governed by standing instructions and
customary practice, as is the case with securities held for the accounts of
customers registered in the names of nominees for those customers. These
payments will be the responsibility of the participants.
Transfers between participants in The Depository Trust Company are
effected in the ordinary way through The Depository Trust Company's settlement
system in accordance with The Depository Trust Company rules and are settled
in same day funds.
The Depository Trust Company has advised us that it will take any
action permitted to be taken by a holder of CapRock notes, including the
presentation of CapRock notes for exchange as described below, only at the
direction of a participant to whose account The Depository Trust Company
interests in the global note are credited. Further, The Depository Trust
Company will take action only as to such portion of the CapRock notes as to
which the participant has given such direction. However, if there is an Event
of Default under the CapRock indenture, The Depository Trust Company will
exchange the global note for certificated notes, which it will distribute to
its participants.
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The Depository Trust Company has advised us as follows: The
Depository Trust Company is a limited purpose trust company organized under
the laws of the State of New York, a member of the Federal Reserve System, a
"clearing corporation" within the meaning of the Uniform Commercial Code and a
"Clearing Agency" registered under the provisions of Section 17A of the
Exchange Act. The Depository Trust Company was created to hold securities for
its participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers,
banks, trust companies and clearing corporations and certain other
organizations. Indirect access to The Depository Trust Company system is
available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly.
Although The Depository Trust Company has agreed to the foregoing
procedures in order to facilitate transfers of interests in the global note
among participants of The Depository Trust Company, it is under no obligation
to perform those procedures, and those procedures may be discontinued at any
time. Neither CapRock nor the trustee will have any responsibility for the
performance by The Depository Trust Company or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED SECURITIES.
If (1) The Depository Trust Company is at any time unwilling or
unable to continue as a depositary for the global note and a successor
depositary is not appointed by CapRock within 90 days or (2) an Event of
Default under the CapRock indenture has occurred and is continuing with
respect to the CapRock notes, certificated notes will be issued in exchange
for the global note.
THE PROPOSED AMENDMENTS
On October 11, 2000, CapRock commenced a solicitation of consents
from the holders of the CapRock notes to amend the CapRock indenture as
summarized below. Capitalized terms used below that are not otherwise defined
below shall have the meanings assigned to them in the CapRock indenture.
The proposed amendments amend the CapRock indenture to permit a
merger of CapRock with McLeodUSA or any wholly-owned subsidiary of McLeodUSA
and to allow the merger be consummated without triggering the change of
control provisions of the CapRock indenture. We refer to these amendments as
the Merger Amendments.
The proposed amendments also eliminate in their entirety from the
CapRock indenture the following covenants and the references to such
covenants, as well as the events of default and definitions related solely to
such covenants. We refer to these amendments as the Covenant Amendments. The
Covenant Amendments replace the text of each of the following articles,
sections or subsections of the CapRock indenture with the words "Intentionally
Omitted":
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SECTION 5.01(c)......................... EVENTS OF DEFAULT. Defines an "Event of Default" to include a
default in the performance or breach of the provisions of Article 8
or the failure to make or consummate an Offer to Purchase in
accordance with section 10.10 or 10.15.
SECTION 7.04............................ REPORTS BY ISSUER. Requires CapRock to file annual and quarterly
reports and other required documents with the SEC, to provide copies
of such reports and documents to the Trustee and to provide summaries
of certain reports and documents to the Holders.
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ARTICLE 8............................... CONSOLIDATION, MERGER, SALE OF ASSETS, ETC. Prohibits CapRock from
consolidating, merging, selling or otherwise transferring all or
substantially all of its assets unless certain conditions are met.
SECTION 10.04........................... CORPORATE EXISTENCE. Requires CapRock to maintain the corporate
existence, rights, licenses and franchises of Caprock and its
Restricted Subsidiaries.
SECTION 10.05........................... PAYMENT OF TAXES AND OTHER CLAIMS. Requires CapRock to pay or
discharge all material taxes, assessments and governmental charges
levied or imposed on CapRock or any of its Restricted Subsidiaries
before such taxes, assessments and governmental charges become
delinquent.
SECTION 10.06........................... MAINTENANCE OF PROPERTIES. Requires CapRock to cause all material
properties owned, or used or held for use in the conduct of business,
by CapRock or any of its Restricted Subsidiaries to be maintained and
kept in good condition.
SECTION 10.07........................... INSURANCE. Requires CapRock to insure all of its and its Restricted
Subsidiaries' properties against loss or damage to the extent that
property of similar character is usually and customarily insured.
SECTION 10.10........................... REPURCHASE OF CAPROCK NOTES UPON A CHANGE OF CONTROL. Requires
CapRock to offer to purchase the CapRock notes governed by the
CapRock indenture within 30 days of a "Change of Control," at a price
equal to 101% of the unpaid principal amount of the CapRock notes,
plus accrued and unpaid interest.
SECTION 10.11........................... LIMITATION ON INDEBTEDNESS. Restricts the ability of CapRock and its
Restricted Subsidiaries to incur, directly or indirectly,
Indebtedness.
SECTION 10.13........................... LIMITATION ON RESTRICTED PAYMENTS. Restricts the ability of CapRock
and its Restricted Subsidiaries to make Restricted Payments,
including payment of dividends on or purchases of CapRock's Capital
Stock, purchases of subordinated indebtedness or making Investments.
SECTION 10.14........................... LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES.
Restricts the ability of CapRock and its Restricted Subsidiaries to
enter into or suffer to exist any transaction with any of their
respective Affiliates (except for transactions solely between CapRock
and any of its Wholly-Owned Restricted Subsidiaries or solely between
Wholly-Owned Restricted Subsidiaries) or any holder of 5% or more of
the Capital Stock of CapRock.
SECTION 10.15........................... LIMITATION ON ASSET SALES. Restricts the ability of CapRock and its
Restricted Subsidiaries to sell, transfer or lease capital stock of
Restricted Securities, assets of CapRock or Restricted Subsidiaries
which constitute all or substantially all of an operating unit or
business and other property of CapRock or a Restricted Subsidiary
outside the ordinary course of business.
SECTION 10.16........................... LIMITATION ON LIENS. Restricts the ability of CapRock and its
Restricted Subsidiaries to create, incur, assume or suffer to exist
any Liens of any
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kind against or upon any property or assets of CapRock or any
Restricted Subsidiary or any shares of Capital Stock or Indebtedness
of any Restricted Subsidiary.
SECTION 10.18........................... LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Restricts the ability of CapRock to sell or otherwise
convey or dispose of any Capital Stock of a Restricted Subsidiary and
restricts the ability of CapRock's Restricted Subsidiaries to issue,
sell or otherwise convey or dispose of any of their Capital Stock.
SECTION 10.19........................... LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES. Restricts the ability of CapRock and its
Restricted Subsidiaries to limit any Restricted Subsidiary's ability
to pay dividends, to pay Indebtedness owed to CapRock or any
Restricted Subsidiary, to make loans or advances to CapRock or any
Restricted Subsidiary, or to transfer any of its properties to
CapRock or to the other Restricted Subsidiaries.
SECTION 10.20........................... LIMITATION ON SALE-LEASEBACK TRANSACTIONS. Restricts the ability of
CapRock and its Restricted Subsidiaries to enter into any
sale-leaseback transaction involving any of its assets or properties
unless certain conditions are met.
SECTION 10.21........................... LIMITATION ON RESTRICTIVE COVENANTS. Limits the applicability of the
restrictive covenants in the CapRock indenture so as to avoid a
breach of Section 10.19 of the indenture pursuant to which the
CapRock 12% senior notes were issued.
SECTION 10.22........................... COMMISSION REPORTS AND REPORTS TO HOLDERS. Requires CapRock to file
annual and quarterly reports and other required documents with the
SEC and to provide copies of such reports and documents to the
Trustee and the Holders.
SECTION 10.23........................... LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES.
Limits the ability of CapRock's Restricted Subsidiaries to guarantee
any indebtedness of CapRock unless such Restricted Subsidiary also
guarantees CapRock's obligations under the CapRock Notes.
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The Merger Amendments will become effective upon (a) receipt of the
consent of the holders of at least a majority of the aggregate principal
amount of the CapRock notes and (b) execution by CapRock and the trustee of a
supplemental indenture. The Covenant Amendments will become effective upon (a)
receipt of the consent of the holders of at least a majority of the aggregate
principal amount of the CapRock notes, (b) execution by CapRock and the
trustee of a supplemental indenture and (c) the later of (i) the effective
time of the merger of CapRock with a wholly-owned subsidiary of McLeodUSA and
(ii) 20 business days following commencement of the exchange offer. The form
of the supplemental indenture which embodies the proposed amendments has been
filed as an exhibit to the registration statement of which this prospectus
forms a part, and is considered a part of this document.
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LEGAL MATTERS
The legality of the McLeodUSA notes offered by this prospectus are
being passed upon for McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C.,
special counsel for McLeodUSA.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
ended December 31, 1999, 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 Splitrock Services, Inc. as
of December 31, 1999 and 1998, and for the period from March 5, 1997 (date of
inception) to December 31, 1997 and for each of the two years in the period
ended December 31, 1999 included in this registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of CapRock Communications Corp.
as of December 31, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 1999 are incorporated by reference in this
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC of which this
prospectus forms a part. The registration statement, including the attached
exhibits and schedules, contain additional relevant information about the
McLeodUSA notes. The rules and regulations of the SEC allow us to omit some of
the information included in the registration statement from this prospectus.
In addition, both McLeodUSA and CapRock have filed reports, proxy
statements and other information with the SEC under the Securities Exchange
Act. You may read and copy any of this information at the following locations
of the SEC:
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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, like McLeodUSA and
CapRock, that file electronically with the SEC. The address of that site is
http://www.sec.gov. The SEC file number for McLeodUSA's documents filed under
the Securities Exchange Act is 0-20763, and the SEC file number for CapRock's
documents filed under the Securities Exchange Act is 0-24581.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, except for any such information that is superseded by information
included directly in this document.
This prospectus incorporates by reference the documents listed below that
we have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
- Our Annual Report on Form 10-K for our fiscal year ended December 31,
1999, filed on March 30, 2000
- Our Quarterly Reports on Form 10-Q for our quarterly periods ended
March 31, 2000 and June 30, 2000, filed on May 15, 2000 and August 14,
2000, respectively
- Our Current Reports on Form 8-K filed on January 19, 2000, January 21,
2000, February 3, 2000, February 11, 2000, March 14, 2000, April 14,
2000, May 24, 2000, June 1, 2000 and October 13, 2000, and our amended
Current Report on Form 8-K/A filed on June 13, 2000
- All documents filed with the SEC by us under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act after the date of this
prospectus and before the offering is terminated, are considered to be
a part of this prospectus, effective the date such documents are filed
This prospectus also incorporates by reference the documents listed below
that CapRock has previously filed or will file with the SEC. They contain
important information about CapRock and its financial condition.
- CapRock's Annual Report on Form 10-K for its fiscal year ended
December 31, 1999, as filed on March 30, 2000
- CapRock's Quarterly Reports on Form 10-Q for CapRock's quarterly
periods ended March 31, 2000 and June 30, 2000, filed on May 15, 2000
and August 14, 2000, respectively
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- CapRock's Current Reports on Form 8-K, filed on April 20, 2000,
July 10, 2000 (two), August 3, 2000, and August 16, 2000 and
October 10, 2000
- All documents filed with the SEC by CapRock under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act after the date of
this prospectus and before the offering is terminated are considered
to be a part of this prospectus, effective the date such documents
are filed
In the event of conflicting information in these documents, the
information in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through
the SEC's Internet Web site at the address described above, or directly from
us, by requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 790-7775
We will provide a copy of any of these documents without charge,
excluding any exhibits unless the exhibit is specifically listed as an exhibit
to the registration statement of which this prospectus forms a part. If you
request any documents from us, we will mail them to you by first class mail,
or another equally prompt means, within two business days after we receive
your request. You should make your request at least five business days prior
to the expiration of the exchange offer in order to ensure timely delivery of
these documents before the exchange offer expires.
The indenture that will govern the McLeodUSA notes requires us to furnish
the trustee with annual reports containing consolidated financial statements
audited by our independent public accountants and with quarterly reports
containing unaudited condensed consolidated financial statements for each of
the first three quarters of each fiscal year.
All information contained in or considered a part of this prospectus
relating to McLeodUSA has been supplied by McLeodUSA, and all such information
relating to CapRock has been supplied by CapRock.
127
<PAGE>
SPLITROCK SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants......................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the Period
from Inception (March 5, 1997) Through December 31, 1997 and the years
ended December 31, 1998 and
1999.................................................................................... F-4
Consolidated Statements of Stockholders' Equity(Deficit) for the Period from Inception
(March 5, 1997) Through December 31, 1999 .............................................. F-5
Consolidated Statements of Cash Flows for the Period from Inception (March 5,
1997) Through December 31, 1997 and the years ended December 31, 1998 and
1999.................................................................................... F-6
Notes to Consolidated Financial Statements................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Splitrock Services, Inc.:
We have audited the accompanying consolidated balance sheets of Splitrock
Services, Inc. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of operations and comprehensive loss,
stockholders' equity, and cash flows for the period from inception (March 5,
1997) to December 31, 1997 and for each of the two years in the period ended
December 31, 1999. These financial statements are the responsibility of
Splitrock Services, Inc.'s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Splitrock
Services, Inc. and subsidiary as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the period from inception
(March 5, 1997) to December 31, 1997 and for each of the two years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 16, 2000
P-2
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
---------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 28,330 $ 92,593
Unrestricted investments -- short term........................................... 120,475 5,441
Restricted investments -- short term............................................. 39,476 33,646
Accounts receivable, net of $537 and $1,403 allowance in 1998 and 1999,
respectively................................................................... 3,205 11,292
Prepaid expenses and other current assets........................................ 480 2,975
---------- --------
Total current assets......................................................... 191,966 145,947
---------- --------
Restricted investments -- long term................................................. 19,001 140
Deposits............................................................................ 270 11,910
Property and equipment, net......................................................... 73,899 120,863
Intangibles, net.................................................................... 11,005 22,426
---------- --------
$ 296,141 $301,286
========== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of capital lease obligations.................................. $ 9,121 $ 21,089
Accounts payable................................................................. 21,582 2,906
Accrued interest payable......................................................... 13,375 14,141
Accrued liabilities.............................................................. 15,894 31,013
---------- --------
Total current liabilities...................................................... 59,972 69,149
Senior notes payable ($261,000 face value net of unamortized discount )............. 258,217 258,387
Capital lease obligations........................................................... 8,243 18,934
---------- --------
Total liabilities............................................................ 326,432 346,470
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value, 25,000,000 shares authorized, no shares issued. -- --
Common stock, $.001 par value, 150,000,000 shares authorized, 46,624,845
and 57,030,590 shares issued and outstanding as of December 31, 1998 and
1999, respectively............................................................. 47 57
Common stock warrants............................................................ 2,849 1,750
Additional paid-in capital....................................................... 34,717 124,461
Accumulated other comprehensive income (loss).................................... 47 (180)
Accumulated deficit.............................................................. (67,951) (171,272)
----------- ---------
Total stockholders' deficit.................................................. (30,291) (45,184)
$ 296,141 $301,286
========== ========
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
F-3
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997) Year Ended Year Ended
to December 31, December 31, December 31,
1997 1998 1999
--------------- ----------- -------------
<S> <C> <C> <C>
Revenue........................................................... $ 22,708 $ 63,611 $ 89,556
Operating expenses:
Splitrock network costs........................................ 2,362 32,912 87,398
Legacy network costs........................................... 25,804 58,292 31,904
Selling, general and administrative............................ 1,276 6,390 21,386
Depreciation and amortization.................................. 3,500 13,850 27,322
----------- ----------- -------------
32,942 111,444 168,010
----------- ----------- -------------
Loss from operations.............................................. (10,234) (47,833) (78,454)
Other income (expense):
Interest income................................................ 348 5,393 7,714
Interest expense............................................... (235) (15,390) (32,581)
------------ ------------ --------------
Loss before income taxes.......................................... (10,121) (57,830) (103,321)
Provision for income taxes........................................ -- -- --
----------- ----------- --------------
Net loss.......................................................... (10,121) (57,830) (103,321)
Other comprehensive income (loss):
Unrealized gain (loss) on securities........................... -- 47 (180)
----------- ----------- --------------
Comprehensive loss................................................ $ (10,121) $ (57,783) $ (103,501)
============ ============ ==============
Net loss per share-- basic and diluted............................ $ (0.42) $ (1.30) $ (2.03)
=========== ============ ==============
Weighted average shares-- basic and diluted....................... 24,109,823 44,388,948 50,866,855
=========== ========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From Inception (March 5, 1997) Through December 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Common Stock
-----------------------
Common Additional
Par Stock Paid-in
Shares Value Warrants Capital
----------- ------- -------- -------
<S> <C> <C> <C>
Initial capitalization............... 15,764,000 $ 16 -- $ 12
Issuance of Common Stock for
cash of $1.11 per share and
warrant......................... 18,466,400 18 -- 20,482
Conversion of note payable to
Common Stock at $1.11
per share....................... 9,008,000 9 -- 9,991
Net loss............................. -- -- -- --
------------ ----- -------- ----------
Balance at December 31, 1997......... 43,238,400 43 -- 30,485
Unrealized gain on securities..... -- -- -- --
Issuance of warrants to
purchase 1,487,791 shares of
Common Stock in connection
with Senior Notes (Note 5)...... -- -- 2,849 --
Exercise of stock options and
Warrant......................... 3,386,445 4 -- 4,232
Net loss.......................... -- -- -- --
------------ ----- -------- ----------
Balance at December 31, 1998......... 46,624,845 47 2,849 34,717
Unrealized loss on securities..... -- -- -- --
Exercise of stock options and
warrants........................ 713,117 1 (1,099) 1,322
Sale of Common Stock under
public offering, net of
expenses........................ 9,692,628 9 -- 88,422
Net loss.......................... -- -- -- --
------------- ----- -------- ----------
Balance at December 31, 1999......... 57,030,590 $ 57 $ 1,750 $ 124,461
============= ===== ======== ==========
<CAPTION>
Accumulated
Other Com- Accumu-
Prehensive Lated
Income (Loss) Deficit Total
--------------- ------------ -----------
<S> <C> <C> <C>
Initial capitalization............... $ -- $ -- $ 28
Issuance of Common Stock for
cash of $1.11 per share and
warrant......................... -- -- 20,500
Conversion of note payable to
Common Stock at $1.11
per share....................... -- -- 10,000
Net loss............................. -- (10,121) (10,121)
----------- ----------- -----------
Balance at December 31, 1997......... -- (10,121) 20,407
Unrealized gain on securities..... 47 -- 47
Issuance of warrants to
purchase 1,487,791 shares of
Common Stock in connection
with Senior Notes (Note 5)...... -- -- 2,849
Exercise of stock options and
Warrant......................... -- -- 4,236
Net loss.......................... -- (57,830) (57,830)
----------- ----------- -----------
Balance at December 31, 1998......... 47 (67,951) (30,291)
Unrealized loss on securities..... (227) -- (227)
Exercise of stock options and
warrants........................ -- -- 224
Sale of Common Stock under
public offering, net of
expenses........................ -- -- 88,431
Net loss.......................... -- (103,321) (103,321)
----------- ----------- -----------
Balance at December 31, 1999......... $ (180) $ (171,272) $ (45,184)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997) Year Ended Year Ended
to December 31, December 31, December 31,
1997 1998 1999
--------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................... $ (10,121) $ (57,830) $ (103,321)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................ 3,500 13,850 27,322
Amortization of debt discount and deferred
financing costs.............................................. -- 467 1,114
Changes in assets and liabilities:
(Increase) decrease in accounts receivable................... (4,252) 1,047 (8,087)
Increase in prepaid and other current assets................. (221) (259) (2,495)
Increase (decrease) in accounts payable and accrued
liabilities................................................ 8,861 28,615 (3,557)
Increase in accrued interest payable......................... -- 13,375 766
----------- ----------- ------------
Net cash used in operating activities........................ (2,233) (735) (88,258)
------------ ------------ -------------
Cash flows from investing activities:
Purchase of equipment.......................................... (16,969) (45,261) (39,464)
(Purchase) liquidation of unrestricted investments............. -- (119,462) 114,807
Reinvestment of interest earned on unrestricted
investments.................................................. -- (966) --
Reinvestment of interest earned on restricted
investments.................................................. -- (1,725) 28,194
Increase in deposits........................................... (229) (41) (11,640)
Increase in intangibles........................................ -- (2,057) (12,509)
----------- ------------ -------------
Net cash provided by (used in)investing activities......... (17,198) (169,512) 79,388
Cash flows from financing activities:
Proceeds from initial public offering, net of
offering costs............................................... -- -- 88,422
Proceeds from senior notes payable and
warrants issued.............................................. -- 261,000 --
Proceeds from notes payable to stockholder..................... 11,750 10,000 --
Repayments of notes payable to stockholder..................... (750) (11,000) --
Proceeds from notes payable.................................... -- 1,477 --
Repayments of notes payable.................................... -- (1,477) --
Financing costs incurred....................................... -- (9,501) (2,079)
Restriction of cash under senior note agreement................ -- (56,752) --
Sale of common stock and exercise of stock options
and warrants................................................. 20,528 4,236 224
Proceeds from sale-leaseback of equipment...................... 1,152 960 --
Principal payments on capital lease obligations................ (2,067) (11,548) (9,931)
Restriction of cash under credit agreement..................... (3,472) 3,472 (3,503)
------------ ----------- -------------
Net cash provided by financing activities.................. 27,141 190,867 73,133
----------- ----------- ------------
Increase in cash and cash equivalents............................. 7,710 20,620 64,263
Cash and cash equivalents:
Beginning of period............................................ -- 7,710 28,330
----------- ----------- ------------
End of period.................................................. $ 7,710 $ 28,330 $ 92,593
=========== =========== ============
Supplemental cash flow information:
Cash paid for interest......................................... $ 235 $ 1,536 $ 30,679
=========== =========== ============
Noncash investing and financing activities:
Assumption of capital lease obligations and
other liabilities (Note 2)................................... $ 5,900 $ -- $ --
=========== =========== ============
Capital lease obligations incurred............................. $ 20,916 $ 4,792 $ 32,590
=========== =========== ============
Conversion of note payable to stockholder
into common stock............................................ $ 10,000 $ -- $ --
=========== =========== ============
Approximately $18,400 of the increase in accounts
payable and accrued liabilities at December 31, 1998, were related to
equipment purchases.
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Splitrock Services, Inc. ("the Company") was formed on March 5, 1997 as
a Texas corporation and was reincorporated in Delaware on May 8, 1998. The
Company provides high-quality, nationwide telecommunication services on a
flexible multi-service platform.
On October 29, 1999 the Company formed Splitrock Leasing, LLC, a
wholly-owned subsidiary. The accompanying consolidated financial statements
include the operations of Splitrock Leasing, LLC. Significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
The Company effected a 0.563-for-1 reverse stock split of its common
stock on July 12, 1999. All share and per share amounts included in these
consolidated financial statements have been retroactively adjusted to give
effect to the reverse stock split.
The following is a summary of the Company's significant accounting
policies:
USE OF ESTIMATES. The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures of
contingent assets and liabilities. Because of inherent uncertainties in this
process, actual future results could differ from those expected at the reporting
date. Management believes the estimates are reasonable.
CASH AND CASH EQUIVALENTS AND INVESTMENTS. The Company considers highly
liquid investments with an original maturity of three months or less from the
date of purchase to be classified as cash and cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value.
Short-term investments have original maturities of more than three
months and a remaining maturity of less than one year at the date of purchase.
At December 31, 1998 and 1999, cash equivalents and short-term investments
consisted primarily of money market funds and securities of the highest grade.
All short- term investments have been classified as available for sale under the
provisions of Statement of Financial Accounting Standards No. ("SFAS") 115,
Accounting for Certain Investments in Debt and Equity Securities, and have
various maturity dates which do not exceed one year. Available for sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method.
The following is a summary of the investments classified as restricted and
unrestricted as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED COST UNREALIZED GAINS UNREALIZED LOSSES FAIR VALUE
---------------------- ---------------- ------------------ ---------------------
1998 1999 1998 1999 1998 1999 1998 1999
---------- -------- ----- ----- -------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale securities:
Money market funds $ 23,557 $ 3,944 $ -- $ -- $ -- $ -- $ 23,557 $ 3,944
Corporate notes 108,496 5,414 3 -- (80) (3) 108,419 5,411
Municipal securities 12,061 -- -- -- (6) -- 12,055 --
U.S. Treasury notes 34,791 30,049 181 5 (51) (182) 34,921 29,872
---------- -------- ----- ----- -------- ------- ---------- ---------
$ 178,905 $ 39,407 $ 184 $ 5 $ (137) $ (185) $ 178,952 $ 39,227
========== ======== ===== ===== ======== ======= ========== =========
</TABLE>
At December 31, 1997, restricted investments represented collateral to
support an outstanding letter of credit. Restricted investments as of December
31, 1998, represented escrowed funds that, together with interest received
thereon, will be sufficient to pay, when due, the first four semi-annual
interest payments on the Senior
F-7
<PAGE>
Notes. As of December 31, 1999, restricted investments included $3,500 held
as collateral to support outstanding letters of credits with the remainder
were held that, together with interest received thereon, will be sufficient
to pay, when due, the next two semi-annual interest payments on the Senior
Notes.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially
subject the Company to concentration of credit risk are primarily cash and cash
equivalents, investments and accounts receivable. The Company's cash investment
policies limit investments to short-term, investment grade instruments with
quality financial institutions. The Company's revenues and its accounts
receivable balances for the periods ended December 31, 1998 and 1999, were
largely derived from services provided to Prodigy, the Company's major customer
during the periods. Prodigy was the Company's only customer from inception
through December 31, 1997 and during 1998 and 1999 represented 99% and 85.5%,
respectively, of the Company's revenue. Management believes that the risk of
incurring material losses related to credit risks is remote.
FAIR VALUES OF FINANCIAL INSTRUMENTS. Due to the short-term nature of
the Company's financial instruments, management believes the carrying values of
the Company's assets, short-term liabilities and lease obligations approximate
their fair values. The fair value of the Company's Senior Notes (Note 5) at
December 31, 1999, approximates $241,000, based upon quoted market prices.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Shelters are depreciated using the straight-line method over the estimated
useful life of twenty years. Depreciation and amortization of all other property
and equipment, including assets under capital leases, is initiated as it is
placed into service using the straight-line method over the estimated useful
lives of three to ten years from the date of installation.
COMPUTER SOFTWARE. Effective January 1, 1999, the Company adopted the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. This standard requires that certain costs related
to the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. This SOP also requires
that costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use computer software
development project be expensed as incurred.
DEPOSITS AND INTANGIBLES. At December 31, 1999, deposits include
$11,200 paid in connection with the fiber acquisition agreement with Level 3.
Intangibles consist primarily of debt issuance costs incurred in connection with
the issuance of our 11 3/4% Senior Notes, and other intangible assets such as
capitalized circuit charges, leasehold improvements and lease acquisition costs.
Debt issuance costs are amortized using the effective interest rate method. All
other intangibles are amortized by use of the straight-line method over their
estimated lives, which are generally two to five years. At December 31, 1998 and
1999, debt issuance costs, net of accumulated amortization, were $9,027 and
$10,183, respectively.
LONG-LIVED ASSETS. The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The carrying amount of a long-lived
asset is considered impaired when anticipated undiscounted cash flows expected
to result from the use of the asset and its eventual disposition are less than
its carrying amount. The Company believes that no material impairment exists at
December 31, 1999.
INCOME TAXES. Deferred tax assets and liabilities are determined based
on the temporary differences between the consolidated financial statement
carrying amounts and the tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse. In estimating future tax consequences, all expected future events are
considered with the exception of enacted changes in the tax law or rates.
STOCK-BASED COMPENSATION. The Company has adopted SFAS No. 123,
Accounting for Stock-Based Compensation, for disclosure purposes. Under SFAS No.
123, the Company measures compensation expense for its stock-based employee
compensation plan using the intrinsic value method prescribed in Accounting
Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees. The
Company provides disclosure of the effect
F-8
<PAGE>
on net income as if the fair value-based method prescribed in SFAS No. 123
has been applied in measuring compensation expense.
REVENUE RECOGNITION. The Company recognizes revenue when services are
provided and collectibility is deemed probable under its agreement with the
customer.
LEGACY NETWORK COSTS. Legacy network costs contain all expenses
incurred in connection with operating and decommissioning legacy networks. This
includes facility fees, line charges for legacy network POPs, certain personnel
costs, occupancy costs, equipment maintenance costs and access fees.
COMPREHENSIVE LOSS. Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, as displayed in its Consolidated
Statements of Operations and Comprehensive Loss for all periods presented. This
SFAS establishes standards for reporting and display of comprehensive income and
its components. The Company's comprehensive loss is comprised of net loss and
unrealized gains and losses on available for sale securities.
NET LOSS PER SHARE. Basic and diluted net loss per share have been
computed in accordance with SFAS No. 128, Earnings Per Share. SFAS No. 128
requires the Company to report both basic earnings (loss) per share, which is
based on the weighted average number of common shares outstanding, and diluted
earnings (loss) per share, which is based on the weighted average number of
common shares outstanding and all dilutive potential common shares outstanding.
At December 31, 1998, options to acquire 1,801,882 shares of Common Stock at the
weighted- average exercise price of $2.31 and warrants to acquire 1,487,791
shares of Common Stock at $0.02 and at December 31, 1999, options to acquire
4,286,855 shares of Common Stock at the weighted-average exercise price of $7.78
and warrants to acquire 914,730 shares of Common Stock at an exercise price of
$0.02 were not included in the computation of diluted earnings per share because
their effect is anti-dilutive.
SEGMENT REPORTING. The Company conducts its business within one
segment. The Company presents its consolidated financial statements to reflect
how the "key operating decision maker" views the business and has made the
appropriate enterprise-wide disclosures in accordance with SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which is effective for
fiscal years beginning after June 15, 1999, and establishes accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of SFAS No. 133 to June 15,
2000. The Company has historically not engaged in derivative instrument
activity. The adoption of this standard is not expected to have a material
effect on the Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition issues in financial statements. The Company adopted SAB 101 as
required in the first quarter of 2000 and the adoption of this standard did not
have a material effect on its financial position or results of operations.
2. Prodigy Agreement
On June 24, 1997, the Company entered a four-year Full Service
Agreement with Prodigy, in which the Company agreed to provide certain network
services to Prodigy from July 1, 1997 through June 30, 2001 for the lower of a
price per hour of usage or a price per subscriber as stipulated. Monthly minimum
service charges under this contract have increased from $3,000 to $4,000 and
will increase to $4,500 on July 1, 2000. Monthly maximum service charges are
based on average usage per subscriber and the number of subscribers. Prodigy may
terminate the Full Service Agreement without termination charges in an event of
default by the Company; such defaults include documented failures (without cure)
to meet certain network performance standards. The agreement also allows
F-9
<PAGE>
Prodigy to terminate its arrangement with the Company at any time upon the
payment of a termination charge. In February 2000, the Company amended the
pricing and extended the terms under its Full Service Agreement with Prodigy
(see Note 11).
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Telecommunications network equipment and shelters............................... $ 43,275 $ 76,103
Software........................................................................ 2,186 4,352
Furniture, fixtures and office equipment........................................ 1,749 5,429
Telecommunications network equipment under
construction............................................................... 13,289 9,982
------------ -------------
60,499 95,866
Less -- accumulated depreciation................................................ (10,392) (21,884)
------------- -------
Purchased property and equipment, net...................................... 50,107 73,982
------------ -------------
Leased telecommunications network equipment..................................... 29,102 51,315
Leased Software................................................................. -- 4,410
Leased office equipment......................................................... 1,496 1,492
------------ -------------
30,598 57,217
Less -- accumulated amortization................................................ (6,806) (10,336)
------------- -------------
Leased property and equipment, net......................................... 23,792 46,881
------------ -------------
Property and equipment, net..................................................... $ 73,899 $ 120,863
============ =============
</TABLE>
4. Accrued Liabilities
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Access and transmission telecommunications line costs (Note 7)........... $ 3,172 $ 16,490
Telecommunications network equipment and shelters........................ 9,900 8,608
Other.................................................................... 2,822 5,915
------------ -------------
Accrued liabilities...................................................... $ 15,894 $ 31,013
============ =============
</TABLE>
5. Indebtedness
The components of indebtedness are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Senior Notes, net of unamortized discount of $2,783 and $2,613........... $ 258,217 $ 258,387
------------ -------------
$ 258,217 $ 258,387
============ =============
</TABLE>
On July 24, 1998, the Company sold 261 units consisting of $261,000 principal
amount of 11 3/4% Senior Notes due 2008 ("Senior Notes") and warrants to
purchase 1,487,791 shares of common stock ("the Senior Notes Offering"). Upon
issuance, the Senior Notes were recorded in the Company's consolidated financial
statements net of a $2,849 discount. The discount was attributable to the
Company's estimate of the value of the warrants based on an independent third
party valuation. The discount is amortized as a component of interest expense
over the life of the Senior Notes using the effective interest method. This
amortization will result in an increase in the consolidated financial statement
balance of the Senior Notes to a $261,000 face value by 2008. In November 1998,
the Senior
F-10
<PAGE>
Notes were exchanged for substantially the same terms in an offering
registered under the Securities Act.
Upon the occurrence of a change of control (as defined in the Indenture
for the Senior Notes) the Company will be required to make an offer to
repurchase all Senior Notes properly tendered at a price equal to 101% of the
principal amount plus accrued and unpaid interest to the date of repurchase. On
January 6, 2000, the Company signed a definitive merger agreement, if approved,
that will constitute a change in control (see Note 11). The indenture also
provides for redemption of the Senior Notes at any time, in whole or in part, on
or after July 15, 2003 at a premium through July 15, 2005. In addition, on or
prior to July 15, 2001, the Company may redeem up to 35% of the original
aggregate principal amount of the Senior Notes at a premium with the proceeds of
one or more equity offerings.
The Senior Note indenture also restricts the Company's ability to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of assets to, or merge or consolidate with, an
unaffiliated entity. In October 1999, the Company paid the holders of the Senior
Notes $2,100 in consideration for modified terms which allowed the Company to
enter into a commitment for approximately $122,000 of capital lease financing.
In connection with the Senior Notes Offering, the Company repaid $1,477
outstanding under a credit facility and refinanced $11,000 of indebtedness owed
to Linsang Partners L.L.C. ("Linsang"), a stockholder of the Company. In
connection with the refinancing, Linsang acquired 11,000 units in the Senior
Notes Offering. The net proceeds to the Company, after the Senior Notes Offering
expenses and retirement and refinancing of debt, approximated $239,000.
In December 1997, the Company borrowed $1,000 from Linsang. The
unsecured note had a stated rate of interest of 9.75% and provided for monthly
interest payments beginning February 1, 1998, with the principal due on demand
after December 31, 1998, and maturing December 31, 2002. During 1998, the
Company borrowed $10,000 from Linsang on terms substantially the same as the
previous note. The Linsang notes were refinanced in July 1998, in connection
with the Senior Notes offering, as stated above.
6. Income Taxes
A provision for income taxes for the periods ended December 31, 1997,
1998 and 1999 has not been recognized as the Company had operating losses for
both tax and financial reporting purposes. Due to the uncertainty surrounding
the timing of realizing the benefits of its favorable tax attributes in future
tax returns, the Company has recorded a full valuation allowance against its
otherwise recognizable net deferred tax asset.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
Net operating loss carryforwards................................................ $ 22,465 $ 65,758
Depreciation.................................................................... 3,325 4,965
Other........................................................................... 429 1,082
------------ -------------
Deferred tax assets........................................................ 26,219 71,805
------------ -------------
Leases.......................................................................... (474) (6,750)
------------ -------------
Deferred tax liabilities................................................... (474) (6,750)
------------ -------------
Net deferred tax assets......................................................... 25,745 65,055
Valuation allowance............................................................. (25,745) (65,055)
------------- -------------
Net deferred tax assets......................................................... $ -- $ --
------------ -------------
</TABLE>
The Company's net operating loss carryforward totals approximately
$173,000 of which approximately $9,500 expires in 2012, $55,100 expires in 2018
and the remainder in 2019. Certain changes in ownership of the
F-11
<PAGE>
Company could result in limitations on the Company's ability to utilize the
losses.
7. Commitments and Contingencies
The Company leases office space, equipment facilities and equipment
under noncancelable operating and capital leases expiring through the year 2003.
Rent expense for noncancelable operating leases amounted to $663 in 1998 and
$5,131 in 1999.
Future minimum payments by year end in the aggregate related to
noncancelable operating and capital leases at December 31, 1999 are:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
-------- -------- ----------
<S> <C> <C> <C>
2000 ........................................................................... $ 22,956 $ 6,207 $ 29,163
2001 ........................................................................... 11,004 7,061 18,065
2002 ........................................................................... 10,366 6,962 17,328
2003 ........................................................................... 384 6,912 7,296
2004 ........................................................................... -- 5,806 5,806
-------- -------- ----------
Total minimum lease payments........................................... $ 44,710 $ 32,948 $ 77,658
======== ======== ==========
Less amount representing interest...................................... (4,687)
--------
Present value of minimum capital lease payments................................. $ 40,023
========
</TABLE>
The Company leases telephone lines from competitive local exchange
suppliers, interexchange carriers and long distance telephone companies
primarily for access and transport purposes ("line costs"). These line costs are
leased under both cancelable and noncancelable operating leases over periods
ranging from month-to-month to five years and are included in Network operating
costs on the consolidated statement of operations. The Company has commitments
to certain of these telecommunication vendors to meet certain minimum usage
volumes. Additionally, the Company is subject to certain cancellation penalties,
which could become applicable upon termination of a number of these agreements.
The cancellation penalties typically require a payment of certain percentage of
the remaining amounts due under the contract, depending on the year in which
cancellation may occur. Line costs included in the Splitrock Network operating
costs were $22,617 and $67,131 during the year ended December 31, 1998 and 1999,
respectively. Line costs incurred during both years comprise a substantial
portion of the Network operating costs.
In October 1999, the Company entered into lease financing arrangements
with a third party leasing company to fund up to $122,000 of purchase
commitments for equipment, including optronics equipment. These lease
arrangements were originally structured as an operating lease, but were
converted to a capital lease after the Company obtained the necessary consents
from the holders of the Senior Notes. The consents were received on November 24,
1999. Capital leases require payments on a monthly basis over periods ranging
from 30 to 48 months, with implicit interest rates of 9% to 12%.
The Company has an agreement with a telecommunication supplier to
provide certain installation services for the Company. The minimum amount of
services for which the Company is required to pay is approximately $1,300. As of
December 31, 1999, the Company has incurred approximately $1,000 of such amount
in connection with this agreement.
In April 1999, the Company entered into a cost sharing agreement with a
national telecommunications provider (the Provider). The agreement grants the
Company an exclusive 20 year indefeasible right to use (IRU) in four dark fibers
in the nationwide fiber optic communication system currently under construction
by the Provider with an option to acquire the indefeasible rights to use up to
12 additional dark fibers, which expires April 26, 2000. The Company made an
initial payment of $11,200 to the Provider and is required to make additional
payments as dark fiber segments are accepted, which is expected to occur from
the first quarter of 2000 through the first quarter of 2001. The Company's
remaining obligation to retain its IRU in the original four dark fibers
approximates
F-12
<PAGE>
$81,600. In addition the Company is obligated to pay its pro-rata portion of
the maintenance costs incurred by the Provider for these fiber strands for
the term of the IRU.
In connection with the fiber optic network deployment, in October 1999,
the Company committed to purchase a minimum of approximately $50,000 of fiber
optronics equipment, associated network management systems, and installation
services from Nortel. The equipment and services are expected to be delivered
through the next five quarters as the dark fiber network is available.
On November 4, 1999, Ericsson, Inc. filed a Demand for Arbitration on a
"contract dispute" pursuant to the Commercial Arbitration Rules with the
American Arbitration Association concerning the Network Implementation
Agreement, between the parties. The Company has filed a counterclaim and intends
to vigorously defend the dispute pursuant to state tort and contract causes of
action, including negligent misrepresentation, fraud in the inducement, breach
of contract, failure to timely perform, failure to perform in a good and
workmanlike manner, breach of the duty of good faith, failure of consideration
and failure of essential purpose. The Company is seeking damages by offset and
credit. Both parties are in the process of selecting arbitrators so that a
preliminary hearing can be scheduled.
8. Equity Transactions
The Company effected a 1-for-100 stock exchange on June 3, 1997, a
1-for-10 stock exchange on August 8, 1997 and a 0.563-for-1 reverse stock split
effected July 12, 1999. All share amounts included in these consolidated
financial statements have been adjusted to reflect the effect of the stock
exchanges and reverse stock split.
Warrants issued in connection with the Company's Senior Note Offering
are exercisable at $.02 per share at any time on or after July 26, 1999 through
July 15, 2008 for 1,487,791 shares of common stock. At December 31, 1999,
warrants for 914,730 shares of common stock remain unexercised.
On August 6, 1999, the Company completed its initial public offering of
its common stock pursuant to a Registration Statement filed with the SEC. The
Company sold 9,692,628 shares of common stock at a price of $10.00 per share,
which resulted in net proceeds of approximately $88,400 after deducting the
underwriting discount and other fees and expenses. The underwriters purchased
692,628 of these shares pursuant to an over-allotment option. In addition
157,372 additional shares were sold, under the same agreement, by certain
existing shareholders. The Company did not receive any of the proceeds from the
sale of the 157,372 shares.
9. Stock Options
The Company's 1997 and 1999 Incentive Share Plans provide for options
to purchase up to 11,260,000 shares of common stock to be granted to certain
directors, employees or consultants of the Company. Options under the Plans have
terms of ten years and are granted with an exercise price equivalent to market
value at the date of grant. Individual option grants vest over time, based upon
a schedule approved by the Board of Directors, which is generally four years.
All of the Company's common stock options vest automatically upon a change in
control of the Company, as defined (see Note 11).
F-13
<PAGE>
The following summarizes the activity for the Plans:
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of fiscal year...... -- -- 1,058,440 $1.11 1,801,882 $ 2.31
Granted............................................ 1,058,440 $1.11 1,443,251 $2.97 3,094,798 $ 10.77
Exercised.......................................... -- -- 571,445 $1.94 140,056 $ 1.41
Canceled........................................... -- -- 128,364 $1.49 469,769 $ 8.34
--------- --------- ---------
Options outstanding at end of year................... 1,058,440 $1.11 1,801,882 $2.31 4,286,855 $ 7.78
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
NUMBER WEIGHTED- NUMBER
OUTSTAND- AVERAGE WEIGHTED EXERCISABLE WEIGHTED
RANGE OF ING AT REMAINING AVERAGE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1999 LIFE (YEARS) PRICE 1999 PRICE
------------- -------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C>
$1.11 - $1.95............................... 1,186,739 7.74 $ 1.18 696,018 $1.14
$5.95 - $11.25.............................. 2,604,771 9.33 $ 9.10 97,581 $5.95
$13.88 - $24.19............................. 495,345 9.84 $16.70 -- $ --
--------- ---- ------ ------- ------
$1.11 - $24.19.............................. 4,286,855 8.95 $ 7.78 793,598 $ 1.73
</TABLE>
In October 1996, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which allows the Company to account for its employee
stock-based compensation plans under APB No. 25 and the related interpretations.
According to APB No. 25, deferred compensation is recorded for stock-based
compensation grants based on the excess of the market value of the common stock
on the measurement date over the exercise price. The deferred compensation is
amortized over the vesting period of each unit of stock-based compensation
grant. If the exercise of the stock-based compensation grants is equal to the
market price of the Company's stock on the date of grant, no compensation
expense is recorded.
During the year ended December 31, 1998 and 1999, the Company
recognized compensation expense of $46 and $0 for options granted at a discount
from the then estimated fair market value of the Company's Common Stock.
Had compensation cost for the Company's stock option plan been
determined based on the estimated fair market value at the grant date,
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
would have been as follows:
<TABLE>
<CAPTION>
PRO FORMA
PERIOD FROM
INCEPTION
(MARCH 5,
1997) PRO FORMA PRO FORMA
THROUGH YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss...................................................... $(10,141) $(58,254) $(105,322)
Net loss per share -- basic and diluted....................... (0.42) (1.31) (2.07)
</TABLE>
Options granted in 1997, 1998 and 1999 had weighted-average fair values
of $0.077, $1.00, and $6.42, respectively. For purposes of estimating the fair
value of options granted, the Company used no future dividends,
F-14
<PAGE>
used average U.S. government security interest rates for its risk-free
interest rates of 5.80%, 4.39% and 5.36%, assumed no volatility, 70.5% and
75% volatility, and assumed expected life of the options of five, four and
four years in 1997, 1998 and 1999, respectively.
10. Related Party Transactions
The Company's chairman of the Board of Directors (the "Chairman"), who
is also a shareholder of the Company, is the Chief Technical Officer of Lucent
Technologies, Inc. (the "Vendor") from which the Company purchased approximately
$427 in equipment through December 31, 1998 and $17,600 in products and services
during the year ended December 31, 1999.
Linsang, an affiliate of the Chairman, loaned $1,000 to the Company for
the purchase of certain network equipment in December 31, 1997. During 1998, the
affiliate made further advances of $10,000 under this agreement. The unsecured
notes had a stated rate of interest of 9.75% and provided for monthly interest
payments beginning February 1, 1998, with the principal due on demand after
December 31, 1998, and maturing December 31, 2002. The Notes were refinanced in
July 1998, in connection with the Senior Notes offering (Note 5).
A former director of the Company exercised a option to purchase 563,000
shares of the Company Common Stock for $1,100 in June 1998 and 11,260 shares of
the Company common stock for $22 in August 1999.
In September 1997, Orient Star Holdings, a wholly-owned subsidiary of
Carso Global Telecom, S.A. de C.V. (the controlling stockholder of Prodigy)
purchased 11,260,000 shares of the Company for $1.11 per share and paid $0.10,
for a warrant to purchase an additional 2,815,000 shares of the Company through
September 18, 1998 for $1.11 per share. The warrants were exercised in September
1998.
11. Subsequent Events
In February 2000, the Company revised its agreement with Prodigy to
convert the pricing formula from a subscriber based arrangement to a fixed
hourly fee for usage effective January 1, 2000. As part of this amendment, the
term of the contract was extended to December 31, 2001.
On March 30, 2000, the Company was acquired by a wholly-owned
subsidiary of McLeodUSA Incorporated ("McLeodUSA") pursuant to the Amended Plan
of Merger dated February 11, 2000. The acquisition of Splitrock Services by
McLeodUSA was effected through two separate but related transactions:
- a holding company reorganization, in which Splitrock Services,
Inc. became a wholly-owned subsidiary of its former subsidiary,
Splitrock Holdings, resulting in reductions to the number of
authorized shares and the number of shares issued and outstanding;
and
- a merger of Southside Acquisition Corporation, a Delaware
corporation and wholly-owned subsidiary of McLeodUSA, with and
into Splitrock Holdings in which Splitrock Holdings was the
surviving corporation and became a wholly-owned subsidiary of
McLeodUSA.
Pursuant to these transactions, each of the Company's shareholders
ultimately received 0.5347 shares of McLeodUSA Class A common stock in exchange
for each share of Splitrock common stock owned. A substantial portion of the
Company's outstanding stock options became fully vested upon the merger pursuant
to a change of control provision in the Company's stock option plans. At the
time of the merger, each right to purchase a share of the Company's common stock
pursuant to an outstanding option or warrant was converted into an option or
warrant with a right to purchase 0.5347 of a share of McLeodUSA Class A common
stock.
In connection with the acquisition of the Company's stock by McLeodUSA,
the common stock of Splitrock Services, Inc. was delisted from The Nasdaq Stock
Market.
During March 2000, the Company issued 792,235 shares of its common
stock representing the shares underlying the common stock warrants outstanding
as of that date. These shares were issued to the warrant agent to
F-15
<PAGE>
be held in reserve until the warrants are exercised by the warrant holders.
Upon issuance of the shares, the Company recorded the value of the warrants
as common stock and additional paid in capital. Upon the merger these shares
converted to McLeodUSA Class A common stock based on the 0.5347 exchange
ratio. In connection with the merger and conversion, McLeodUSA assumed the
Company's obligations under the Warrant Agreement dated July 24, 1998, as
amended.
During March 2000, the Company settled its contract dispute with
Ericsson, Inc.
In July, 2000, the $261 million Splitrock Senior Notes were retired.
The total payment for these notes was approximately $316 million.
* * *
F-16
<PAGE>
$210,000,000
McLeodUSA
Incorporated
11 1/2% Senior Notes
Due 2009
LOGO
PROSPECTUS
Dated October ___, 2000
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not issue these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting offers to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated October 19, 2000
PROSPECTUS LOGO
$150,000,000
MCLEODUSA INCORPORATED
OFFER TO EXCHANGE
MCLEODUSA 12% SENIOR NOTES DUE JULY 15, 2008
FOR ALL OUTSTANDING
CAPROCK COMMUNICATIONS CORP. 12% SENIOR NOTES DUE JULY 15, 2008
INTEREST PAYABLE JANUARY 15 AND JULY 15, COMMENCING ON JANUARY 15, 2001
MATERIAL TERMS OF THE EXCHANGE OFFER
- We are offering to exchange all outstanding CapRock 12% senior notes due
July 15, 2008 that are validly tendered and not validly withdrawn for an
equal amount of a new series of McLeodUSA 12% senior notes due July 15,
2008.
- The exchange offer will expire at 5:00 P.M., New York City time, on
November ___, 2000, unless extended.
- We will accept the CapRock notes for exchange only if holders of at
least a majority of the aggregate principal amount of the CapRock notes
have consented to certain amendments to the indenture governing the
CapRock notes and if the merger of CapRock with a wholly-owned subsidiary
of McLeodUSA is consummated.
- The exchange offer is further subject to customary conditions, including
that the exchange offer not violate applicable law.
- You may withdraw the tender of your CapRock notes at any time before the
expiration of the exchange offer.
- We will not receive any proceeds from the exchange offer.
- You may tender your CapRock notes only in denominations of $1,000 and
multiples of $1,000.
- The exchange of notes should not result in recognition of gain or loss
to exchanging noteholders for U.S. federal income tax purposes.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 17 FOR A DISCUSSION OF FACTORS
YOU SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER.
WE ARE NOT MAKING THIS EXCHANGE OFFER IN ANY STATE OR JURISDICTION WHERE IT
IS NOT PERMITTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER,
NOR HAVE ANY OF THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this prospectus is October ___, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... 1
Risk Factors............................................................... 17
Cautionary Note Regarding Forward-Looking Statements....................... 25
The Exchange Offer......................................................... 26
Use of Proceeds............................................................ 36
Information About McLeodUSA................................................ 37
Selected Consolidated Financial Data of McLeodUSA.......................... 40
Pro Forma Financial Data................................................... 44
Description of the McLeodUSA Notes......................................... 49
Other McLeodUSA Indebtedness............................................... 82
Information About CapRock.................................................. 84
Selected Consolidated Financial Data of CapRock............................ 86
Description of the CapRock Notes........................................... 89
Legal Matters.............................................................. 126
Experts.................................................................... 126
Where You Can Find More Information........................................ 127
Index to Consolidated Financial Statements of Splitrock Services, Inc...... F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT
OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT MAKING AN
OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS
PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON THE FRONT COVER OF THIS
PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
WE HAVE NOT TAKEN NOR WILL WE TAKE ANY ACTION IN ANY JURISDICTION TO
PERMIT A PUBLIC OFFERING OF THE MCLEODUSA NOTES OR THE POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS OTHER THAN IN THE UNITED STATES.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED IN OR DELIVERED WITH THIS PROSPECTUS. THIS INFORMATION IS AVAILABLE
TO YOU WITHOUT CHARGE UPON YOUR ORAL OR WRITTEN REQUEST. YOUR REQUESTS SHOULD
BE DIRECTED TO MCLEODUSA INCORPORATED, MCLEODUSA TECHNOLOGY PARK, 6400 C
STREET SW, POST OFFICE BOX 3177, CEDAR RAPIDS, IOWA 52406-3177, ATTENTION:
GENERAL COUNSEL (TELEPHONE (319) 790-7775). IN ORDER TO ENSURE DELIVERY OF
THE DOCUMENTS IN ADVANCE OF THE EXPIRATION OF THE EXCHANGE OFFER, ANY REQUEST
SHOULD BE MADE AT LEAST FIVE BUSINESS DAYS PRIOR TO THE DATE OF SUCH
EXPIRATION.
<PAGE>
SUMMARY
THIS DOCUMENT IS A PROSPECTUS OF MCLEODUSA. THIS SUMMARY HIGHLIGHTS
SELECTED INFORMATION FROM THIS PROSPECTUS. IT DOES NOT CONTAIN ALL OF THE
INFORMATION THAT MAY BE IMPORTANT TO YOU. YOU SHOULD CAREFULLY READ THIS
ENTIRE PROSPECTUS AND THE OTHER DOCUMENTS TO WHICH THIS DOCUMENT REFERS YOU,
INCLUDING THE LETTER OF TRANSMITTAL. IN ADDITION, YOU SHOULD CAREFULLY
CONSIDER THE FACTORS SET FORTH UNDER THE CAPTION "RISK FACTORS." SEE "WHERE
YOU CAN FIND MORE INFORMATION."
THE COMPANIES
MCLEODUSA INCORPORATED
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, Iowa 52406-3177
(319) 790-7800
McLeodUSA provides selected telecommunications services to customers
nationwide. We provide integrated communications services, including local
services, in many Midwest and Rocky Mountain states and long distance and
advanced data services in all 50 states. We are a facilities-based
telecommunications provider with 361 ATM switches, 37 voice switches, nearly
824,000 local lines and more than 9,000 employees. We expanded our
marketplace for advanced data and Internet services to all 50 states through
our March 30, 2000 acquisition of Splitrock Services, Inc. The network
acquired in the Splitrock transaction is capable of transmitting integrated
next-generation data, video and voice services, reaching 800 cities and 90%
of the U.S. population. In the next 12 months, we plan to distribute 30
million telephone directories in 26 states, serving a population of 52
million. We are a Nasdaq-100 company traded under the symbol "MCLD."
We offer local, long distance, Internet access, data, voice mail and paging
services from a single company on a single bill. We believe we are the first
company in many of our markets to offer one-stop shopping for communications
services tailored to customers' specific needs.
Our core business is providing communications services in competition with
existing local telephone companies, including:
- local and long distance services
- dial and dedicated Internet access
- higher bandwidth Internet access 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
- facilities and services dedicated for a particular customer's use
- telephone and computer sales, leasing, networking, service and
installation
- other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
We also derive revenue from the following services related to our core
business:
- sale of advertising in print and electronic telephone directories
- traditional local telephone company services in east central Illinois
and southeast South Dakota
- telemarketing 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 facilities and by leasing capacity from others. We are actively
developing fiber optic communications networks in many of our target local
markets to carry additional communications traffic on our own network. We are
actively developing enhancements to our national network and associated
next-generation services.
CAPROCK COMMUNICATIONS CORP.
15601 Dallas Parkway, Suite 700
Dallas, Texas 75001
1
<PAGE>
(972) 982-9596
CapRock is a facilities-based integrated communications service provider
primarily to small and medium-sized business and communications carrier
customers in the Southwestern United States. CapRock offers business
customers an integrated bundle of communications products and services
including local exchange, domestic and international long distance, enhanced
voice, data, Internet, DSL and dedicated private line services. Additionally,
CapRock offers its communications-intensive business and carrier customers
dark fiber, high bandwidth dedicated fiber infrastructure, terminating access
for domestic and international long distance and ATM, frame relay and IP data
transport services.
CapRock's communications services are provided through resale and over its
fiber, voice and data networks. As of June 30, 2000, the CapRock network
covered approximately 4,500 route miles (including 22 metro fiber loops in
key markets). Additionally, as of June 30, 2000, CapRock provided
switch-based competitive local exchange services in 13 markets. As of June
30, 2000, CapRock had 12 voice and 17 data switches installed and operational
on its network.
THE MERGER
On October 2, 2000, CapRock and McLeodUSA entered into a definitive agreement
and plan of merger pursuant to which McLeodUSA, through a newly-formed,
wholly-owned subsidiary, will acquire 100% of the voting securities of
CapRock. In the transaction, each share of CapRock common stock will be
exchanged for 0.3876 of a share of McLeodUSA Class A common stock. The merger
agreement provides that the McLeodUSA subsidiary will merge with and into
CapRock so that CapRock will be the surviving corporation and will be
wholly-owned by McLeodUSA. In connection with the proposed merger, McLeodUSA
has agreed to file and use its commercially reasonable efforts to cause to
become effective with the SEC a registration statement with respect to the
exchange of the CapRock 12% senior notes due 2008 for McLeodUSA 12% senior
notes due 2008 and with respect to the exchange of the CapRock 11 1/2% senior
notes due 2009 for McLeodUSA 11 1/2% senior notes due 2009.
2
<PAGE>
SUMMARY OF THE EXCHANGE OFFER
<TABLE>
<S> <C>
THE EXCHANGE OFFER...................... We are offering to exchange $1,000
principal amount of McLeodUSA 12%
senior notes due July 15, 2008,
which we refer to as the McLeodUSA
notes, for each $1,000 principal
amount of CapRock's outstanding 12%
senior notes due July 15, 2008,
which we refer to as the CapRock
notes.
In order for your CapRock notes to
be exchanged, you must properly
tender them before the exchange
offer expires. All CapRock notes
that are validly tendered and not
validly withdrawn will be exchanged.
We will issue the McLeodUSA notes
promptly after the exchange offer
expires.
You may tender your CapRock notes
for exchange in whole or in part in
integral multiples of $1,000
principal amount.
THE MERGER AGREEMENT.................... In connection with the proposed
merger of CapRock with a
wholly-owned subsidiary of
McLeodUSA, we have agreed to file
and to use our commercially
reasonable efforts to cause to
become effective with the SEC a
registration statement with respect
to the exchange of the CapRock notes
for McLeodUSA notes. We are making
the exchange offer to satisfy our
contractual obligations under the
merger agreement. After the exchange
offer is completed, you will no
longer be entitled to any exchange
with respect to your CapRock notes.
CONSEQUENCES OF FAILURE TO
EXCHANGE YOUR CAPROCK NOTES.............. Any CapRock notes that are not
tendered to us or are not accepted
for exchange will remain outstanding
and will continue to accrue interest
in accordance with and otherwise be
entitled to all of the rights and
privileges under the indenture
governing the CapRock notes. CapRock
is soliciting consents, however, to
amend this indenture to, among other
things, eliminate most of the
restrictive covenants and reporting
requirements contained in the
indenture. If CapRock obtains the
requisite number of consents from
the CapRock noteholders, the
indenture will be so amended and the
holders of any CapRock notes that
remain outstanding after the offer
has been completed will be without
the protection that the deleted
restrictive covenants and reporting
requirements gave them. The receipt
by CapRock of the requisite consents
to approve the amendments to the
indenture is a condition to the
consummation of the exchange offer.
See "The Exchange Offer--Consent
Solicitation; Consequences of
Failure to Tender Your CapRock
Notes."
EXPIRATION DATE......................... The exchange offer will expire at
5:00 p.m., New York City time, on
November ___, 2000 unless extended
by us, in which case the term
"expiration date" will mean the
latest date and time to which the
exchange offer is extended. See "The
Exchange Offer--Expiration Date;
Extensions; Amendments."
CONDITIONS TO THE EXCHANGE OFFER......... The exchange offer is subject to the
conditions that:
3
<PAGE>
- CapRock receives the consent
of the holders of at least a
majority of the aggregate
principal amount of the CapRock
notes to certain amendments to
the indenture governing the
CapRock notes
- the proposed merger of CapRock
with a wholly-owned subsidiary
of McLeodUSA is consummated
The exchange offer is further
subject to several customary
conditions which we may waive. There
is no guarantee that these
conditions will be satisfied.
The exchange offer is not
conditioned upon any minimum
principal amount of CapRock notes
being tendered for exchange. See
"The Exchange Offer--Conditions to
the Exchange Offer."
We reserve the right, subject to
applicable law, at any time and from
time to time:
- to delay the acceptance of the
CapRock notes
- to terminate the exchange offer
if specified conditions have
not been satisfied
- to extend the expiration date
of the exchange offer and
retain all tendered CapRock
notes subject, however, to the
right of tendering holders to
withdraw their tender of
CapRock notes
- to waive any condition or
otherwise amend the terms of
the exchange offer in any
respect
See "The Exchange Offer--Expiration
Date; Extensions; Amendments."
PROCEDURES FOR TENDERING
CAPROCK NOTES........................... If you wish to tender your CapRock
notes for exchange, you must:
- complete and sign a Letter of
Transmittal according to the
instructions contained in the
Letter of Transmittal
- forward the Letter of
Transmittal by mail, facsimile
transmission or hand delivery,
together with any other
required documents, to the
exchange agent, either with the
CapRock notes that you tender
or in compliance with the
specified procedures for
guaranteed delivery of your
CapRock notes
Some brokers, dealers, commercial
banks, trust companies and other
nominees may also effect tenders by
book-entry transfer. Please do not
send your Letter of Transmittal or
certificates representing your
CapRock notes to us. You should send
those documents only to the exchange
agent. You should direct any
information requests or questions
regarding how to tender your CapRock
notes to the exchange agent. See
"The Exchange Offer--Exchange
Agent."
4
<PAGE>
SPECIAL PROCEDURES FOR BENEFICIAL
OWNERS.................................. If your CapRock notes are registered
in the name of a broker, dealer,
commercial bank, trust company or
other nominee, we urge you to
contact such person promptly if you
wish to tender your CapRock notes
pursuant to the exchange offer. See
"The Exchange Offer--Procedures for
Tendering CapRock Notes."
WITHDRAWAL RIGHTS....................... You may withdraw the tender of your
CapRock notes at any time before the
expiration date by delivering a
written notice of your withdrawal to
the exchange agent according to the
withdrawal procedures described
under the heading "The Exchange
Offer--Withdrawal Rights."
EXCHANGE AGENT.......................... The exchange agent for the exchange
offer is United States Trust Company
of New York. The address, telephone
number and facsimile number of the
exchange agent are set forth in "The
Exchange Offer--Exchange Agent" and
in the Letter of Transmittal.
USE OF PROCEEDS......................... We will not receive any cash
proceeds from the issuance of the
McLeodUSA notes offered by this
prospectus. See "Use of Proceeds."
UNITED STATES FEDERAL INCOME
TAX CONSEQUENCES........................ Your acceptance of the exchange
offer and the related exchange of
your CapRock notes for McLeodUSA
notes should not cause you to
recognize any taxable gain or loss
for federal income tax purposes. See
"The Exchange Offer--United States
Federal Income Tax Consequences."
CONSENT SOLICITATION..................... On October 11, 2000, CapRock
commenced a solicitation of consents
from the holders of the CapRock
notes to amend the indenture under
which the CapRock notes were issued
to:
- modify certain restrictive
covenants contained in the
indenture in order to permit
the merger of CapRock with a
wholly-owned subsidiary of
McLeodUSA
- allow the merger of CapRock
and the McLeodUSA subsidiary
to be consummated without
triggering the change of
control provisions of the
indenture
- eliminate most of the
restrictive covenants and
reporting requirements
contained in the indenture
CONCURRENT EXCHANGE OFFER................ Concurrently with this exchange
offer and by a separate prospectus,
we are offering to exchange our
11 1/2% senior notes due 2009 for
CapRock's 11 1/2% senior notes due
2009. The completion of the exchange
offer contemplated by this
prospectus and the concurrent
offering of our 11 1/2% senior notes
due 2009 are not dependent on one
another.
</TABLE>
See "The Exchange Offer" for more detailed information concerning the terms
of the exchange offer.
5
<PAGE>
SUMMARY OF TERMS OF THE MCLEODUSA NOTES
The exchange offer relates to the exchange of up to $150,000,000
principal amount of McLeodUSA 12% senior notes due July 15, 2008 for up to an
equal principal amount of CapRock 12% senior notes due July 15, 2008.
<TABLE>
<S> <C>
SECURITIES OFFERED...................... $150 million principal amount of
McLeodUSA 12% senior notes due July
15, 2008.
INTEREST................................ Interest on the McLeodUSA notes will
accrue at the rate of 12% per year
and will be payable in cash
semi-annually in arrears on January
15 and July 15, commencing on
January 15, 2001. Interest on the
McLeodUSA notes will be deemed to
accrue from July 15, 2000.
RANKING................................. The McLeodUSA notes will not be
secured by any assets and:
- will be subordinated to all of
our existing and future secured
indebtedness, including our
Senior Secured Credit
Facilities and any other Senior
Credit Facility or Qualified
Receivable Facility, each as
defined in this prospectus,
- will be subordinated to all
liabilities of our
subsidiaries, including trade
payables
- will be effectively
subordinated in certain
respects to any CapRock notes
and any CapRock 11 1/2% senior
notes due 2009 that remain
outstanding after this exchange
offer and our concurrent
exchange offer for CapRock's
11 1/2% senior notes due 2009
- will rank equal in right of
payment with all of our
existing and future senior
unsecured indebtedness
- will rank senior in right of
payment to all of our existing
and future subordinated
indebtedness
As of June 30, 2000:
- we had total secured
indebtedness of $631.7 million
- our subsidiaries had total
liabilities of $700.9 million
- we had $1.7 billion of
outstanding senior unsecured
indebtedness that will rank
equal in right of payment with
the McLeodUSA notes
- we had no outstanding
subordinated indebtedness
See "Description of the McLeodUSA
Notes--General."
OPTIONAL REDEMPTION..................... We may redeem the McLeodUSA notes at
our option, in whole or in part, at
any time on or after July 15, 2003
at the redemption prices set forth
in this prospectus, plus accrued and
unpaid interest, if any, to the date
of redemption. See "Description of
the McLeodUSA Notes--Optional
Redemption."
6
<PAGE>
CHANGE OF CONTROL....................... Upon a Change of Control, as defined
in this prospectus, you will have
the right to require us to
repurchase all or any part of your
McLeodUSA notes at a purchase price
equal to 101% of their principal
amount plus accrued and unpaid
interest. However, we cannot assure
you we will have the financial
resources necessary to repurchase
the McLeodUSA notes upon a Change of
Control. See "Description of the
McLeodUSA Notes--Repurchase at the
Option of Holders upon a Change of
Control."
RESTRICTIVE COVENANTS................... The indenture governing the
McLeodUSA notes contains several
covenants which, among other things,
restrict our ability and the ability
of our subsidiaries to:
- incur additional indebtedness
- pay dividends
- make distributions in respect
of our or our subsidiaries'
capital stock
- make other restricted payments
- enter into sale and leaseback
transactions
- pledge or mortgage assets
- enter into transactions with
affiliates
- sell assets
- consolidate, merge or sell all
or substantially all of our or
our subsidiaries' assets
These covenants are subject to
important exceptions and
qualifications. See "Description of
the McLeodUSA Notes--Covenants."
</TABLE>
7
<PAGE>
COMPARISON OF MCLEODUSA NOTES AND CAPROCK NOTES
<TABLE>
<CAPTION>
McLeodUSA Notes CapRock Notes
--------------- -------------
<S> <C> <C>
AGGREGATE PRINCIPAL AMOUNT $150 million $150 million
INTEREST RATE 12% 12%
MATURITY July 15, 2008 July 15, 2008
PAYMENT DATES January 15 and January 15 and
July 15 July 15
RANKING The McLeodUSA notes will not be The CapRock notes are not secured by
secured by any assets and will be any assets and are subordinated to all
subordinated to all of McLeodUSA's of CapRock's existing and future
existing and future secured secured indebtedness and to all
indebtedness and to all liabilities liabilities of CapRock's subsidiaries.
of McLeodUSA's subsidiaries. The The CapRock notes rank equal in right
McLeodUSA notes will rank equal in of payment with all of CapRock's
right of payment with all of existing and future senior unsecured
McLeodUSA's existing and future indebtedness and rank senior in right
senior unsecured indebtedness and of payment to all of CapRock's
will rank senior in right of payment existing and future subordinated
to all of McLeodUSA's existing and indebtedness.
future subordinated indebtedness. The
McLeodUSA notes will be effectively
subordinated in certain respects to any
CapRock notes and any CapRock 11 1/2%
senior notes due 2009 that remain
outstanding after this exchange offer and
our concurrent exchange offer for
CapRock's 11 1/2% senior notes due 2009.
OPTIONAL REDEMPTION McLeodUSA may redeem the CapRock may redeem the CapRock
McLeodUSA notes at any time on or notes at any time on or after July 15,
after July 15, 2003 at the redemption 2003 at the redemption prices set forth
prices set forth in this prospectus. in this prospectus.
MANDATORY REDEMPTION None None
CHANGE OF CONTROL Upon a change of control, a McLeodUSA Upon a change of control, a CapRock
noteholder will be able to require noteholder can require CapRock to
McLeodUSA to repurchase all or any repurchase all or any part of its
part of its McLeodUSA notes at a CapRock notes at a purchase price
purchase price equal to 101% of their equal to 101% of their principal
principal amount plus accrued and amount plus accrued and unpaid
unpaid interest. interest.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
PUBLIC EQUITY OFFERING AND
STRATEGIC EQUITY SALE OPTIONAL
REDEMPTION None None
RESTRICTIVE COVENANTS Subject to important exceptions and Subject to important exceptions and
qualifications, the indenture qualifications, the indenture
governing the McLeodUSA notes governing the CapRock notes contains
contains several covenants which, several covenants which, among other
among other things, restrict the things, restrict the ability of
ability of McLeodUSA and its CapRock and its subsidiaries to:
subsidiaries to:
- incur additional indebtedness
- incur additional indebtedness
- pay dividends
- pay dividends
- make distributions in respect of
- make distributions in respect of capital stock of CapRock or its
capital stock of McLeodUSA or subsidiaries
its subsidiaries
- make other restricted payments
- make other restricted payments
- enter into sale and leaseback
- enter into sale and leaseback transactions
transactions
- pledge or mortgage assets
- pledge or mortgage assets
- enter into transactions with
- enter into transactions with affiliates
affiliates
- sell assets
- sell assets
- consolidate, merge or sell all or
- consolidate, merge or sell all substantially all assets of
or substantially all assets of CapRock or its subsidiaries
McLeodUSA or its subsidiaries
</TABLE>
On October 11, 2000, CapRock commenced a solicitation of consents from the
holders of the CapRock notes to amend the indenture under which the CapRock
notes were issued to (a) modify certain restrictive covenants contained in the
indenture in order to permit the merger of CapRock with a wholly-owned
subsidiary of McLeodUSA, (b) allow the merger of CapRock and the McLeodUSA
subsidiary to be consummated without triggering the change of control provisions
of the indenture and (c) eliminate most of the restrictive covenants and
reporting requirements contained in the indenture.
RISK FACTORS
You should carefully consider the factors set forth under the caption "Risk
Factors" before tendering your CapRock notes for McLeodUSA notes.
9
<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,
1999 and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.
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, 1999, 1998 and
1997, and for each of the three years in the period ended December 31, 1999 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-STAR-USA Publishing Group, Inc............................ September 20, 1996
Consolidated Communications, Inc.................................. September 24, 1997
Ovation Communications, Inc....................................... March 31, 1999
Splitrock Services, Inc........................................... March 30, 2000
</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, Splitrock
and CapRock as if they had been acquired at the beginning of the periods
presented and the as adjusted information in the balance sheet data in the table
includes the Ovation, Splitrock and CapRock financial position as of the date
presented. The 1999 pro forma amounts include adjustments to the CapRock 1999
historical financial statements to give effect to the issuance by CapRock in May
1999 of $210 million of its 11 1/2% senior notes as if the note issuance had
occurred at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has outstanding:
<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
Senior Secured Credit Facilities $575 million May 30, 2000
</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 8-1/8% senior notes, the Series A, B and C
preferred stock and the Senior Secured Credit Facilities as if they had occurred
at the beginning of 1999.
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
10
<PAGE>
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. On February 29, 2000, McLeodUSA
announced that its board of directors had declared a three-for-one stock split
to be effected in the form of a stock dividend. The record date for the stock
split was April 4, 2000. Stockholders of record at the market close on that date
received two additional shares of McLeodUSA Class A common stock for each share
held. Distribution of the additional shares took place on April 24, 2000. All
information in the selected consolidated financial data has been adjusted to
reflect the two-for-one stock split and the three-for-one stock split.
The ratio of earnings to fixed charges is calculated as follows: earnings
consist of net loss before income taxes plus fixed charges (excluding
capitalized interest). Fixed charges consist of interest on all debt (including
capitalized interest), amortization of debt discount and deferred loan costs and
the portion of rental expense that is representative of the interest component
of rental expense (deemed to be one-third of rental expense which management
believes is a reasonable approximation of the interest component). For each of
the years ended December 31, 1995, 1996, 1997, 1998 and 1999, earnings were
insufficient to cover fixed charges by $11.4 million, $22.6 million, $84.4
million, $135.5 million, and $243.3 million, respectively. For the six months
ended June 30, 1999 and 2000, earnings were insufficient to cover fixed charges
by $118.5 million and $207.7 million, respectively. On a pro forma basis,
earnings would not have been sufficient to cover fixed charges by $523.3 million
and $313.5 million for the year ended December 31, 1999 and the six months ended
June 30, 2000, respectively.
(TABLE BEGINS ON THE NEXT PAGE)
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
PRO FORMA
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ............................. $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 908,792 $ 1,210,667
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of service ................... 19,667 52,624 151,190 323,208 457,085 699,401
Selling, general and administrative 18,054 46,044 148,158 260,931 392,687 481,488
Depreciation and amortization ..... 1,835 8,485 33,275 89,107 190,695 346,131
Other ............................. -- 2,380 4,632 5,575 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 39,556 109,533 337,255 678,821 1,040,467 1,527,020
Operating loss ...................... (10,558) (28,210) (69,369) (74,675) (131,675) (316,353)
Interest income (expense), net ...... (771) 5,369 (11,967) (52,234) (94,244) (191,068)
Other income ........................ -- 495 1,426 1,997 5,637 7,163
Income taxes ........................ -- -- -- -- -- --
Net loss ............................ (11,329) (22,346) (79,910) (124,912) (220,282) (500,528)
Preferred stock dividends ........... -- -- -- -- (17,727) (54,375)
----------- ----------- ----------- ----------- ----------- -----------
Loss applicable to common stock ..... $ (11,329) $ (22,346) $ (79,910) $ (124,912) $ (238,009) $ (554,633)
=========== =========== =========== =========== =========== ===========
Loss per common share ............... $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
=========== =========== =========== =========== =========== ===========
Weighted average common shares
outstanding ....................... 168,024 243,036 329,844 376,842 443,130 559,751
=========== =========== =========== =========== =========== ===========
Ratio of earnings to fixed charges .. -- -- -- -- -- --
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------------
PRO FORMA
1999 2000 2000
--------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ................................ $ 403,771 $ 620,082 $ 769,055
--------- --------- ---------
Operating expenses:
Cost of service ........................ 205,507 344,426 466,226
Selling, general and administrative .... 178,339 256,563 309,973
Depreciation and amortization .......... 78,708 163,193 213,415
Other .................................. -- -- 872
--------- --------- ---------
Total operating expenses ............... 462,554 764,182 990,486
Operating loss ........................... (58,783) (144,100) (221,431)
Interest income (expense), net ........... (50,666) (42,077) (70,486)
Other income ............................. 562 1,971 1,996
Income taxes ............................. -- -- --
--------- --------- ---------
Net loss ................................. (108,887) (184,206) (289,921)
Preferred stock dividends ................ -- (27,204) (27,204)
--------- --------- ---------
Loss applicable to common stock .......... $(108,887) $(211,410) $(317,125)
========= ========= =========
Loss per common share .................... $ (.26) $ (.40) $ (.54)
========= ========= =========
Weighted average common shares outstanding 423,210 529,109 590,221
========= ========= =========
Ratio of earnings to fixed charges ...... -- -- --
========= ========= =========
</TABLE>
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 2000
--------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ................. $ 8,507 $ 224,401 $ 517,869 $ 793,192 $ 1,569,473 $ 1,647,070 $ 1,879,002
Working capital (deficit) ...... $ (1,208) $ 185,968 $ 378,617 $ 316,236 $ 1,272,794 $ 859,997 $ 913,955
Property and equipment, net .... $ 16,119 $ 92,123 $ 373,804 $ 629,746 $ 1,270,032 $ 1,897,962 $ 2,321,001
Total assets ................... $ 28,986 $ 452,994 $ 1,345,652 $ 1,925,197 $ 4,203,147 $ 7,069,543 $ 7,791,496
Long-term debt ................. $ 3,600 $ 2,573 $ 613,384 $ 1,245,170 $ 1,763,725 $ 2,370,370 $ 2,718,588
Redeemable convertible preferred
stock ........................ $ -- $ -- $ -- $ -- $ 1,000,000 $ 1,000,000 $ 1,000,000
Stockholders' equity ........... $ 14,958 $ 403,429 $ 559,379 $ 462,806 $ 1,108,542 $ 2,878,436 $ 3,074,207
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
PRO FORMA
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment $ 6,364 $ 79,845 $ 179,255 $ 289,923 $ 580,003 $ 820,756
Business acquisitions ....... $ 8,333 $ 93,937 $ 421,882 $ 49,737 $ 736,626 $3,376,180
EBITDA(1) ...................... $ (8,723) $ (17,345) $ (31,462) $ 20,007 $ 59,020 $ 29,778
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
PRO FORMA
1999 2000 2000
---------- ---------- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment........................................ $220,390 $559,834 $804,163
Business acquisitions................................................ $525,161 $2,052,925 $2,415,523
EBITDA(1)............................................................... $19,925 $19,093 $(7,144)
</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.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth financial data as of and for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999 and as of and for the six
months ended June 30, 1999 and 2000. The business combination among CapRock's
predecessor companies was completed on August 26, 1998 and was accounted for as
a pooling of interests. Accordingly, these Consolidated Financial Statements
include CapRock's three predecessor companies (CapRock Telecommunications Corp.,
CapRock Fiber Network, LTD. and IWL Communications, Incorporated) as though
these entities were always a part of CapRock.
In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................................... $ 29,407 $ 50,970 $ 75,349 $ 121,774 $ 192,623
Costs of Services ...................................... 21,185 39,357 52,471 83,221 115,676
--------- --------- --------- --------- ---------
Gross profit ..................................... 8,222 11,613 22,878 38,553 76,947
Operating expenses:
Selling, general and administrative ................ 7,326 8,983 14,074 23,528 56,535
Merger related expenses ............................ -- -- -- 2,313 --
Depreciation and amortization ...................... 1,186 1,536 3,346 4,887 9,698
--------- --------- --------- --------- ---------
Total operating expenses ........................ 8,512 10,519 17,420 30,728 66,233
--------- --------- --------- --------- ---------
Operating income (loss) ................................ (290) 1,094 5,458 7,825 10,714
Interest expense, net .................................. (484) (585) (1,603) (6,441) (17,861)
Other income (expense) ................................. 151 42 220 106 1,526
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item ................................. (623) 551 4,075 1,490 (5,621)
Income tax expense (benefit) ........................... 48 227 1,513 1,267 (2,080)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ................ (671) 324 2,562 223 (3,541)
Extraordinary item - extinguishment of debt ............ 645 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ (26) $ 324 $ 2,562 $ 223 $ (3,541)
========= ========= ========= ========= =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item ................................. $ (623) $ 551 $ 4,075 $ 1,490 $ (5,621)
Pro forma income taxes, as if CapRock
Fiber were a C corporation ......................... (211) 143 1,475 1,267 (2,080)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ............ (412) 408 2,600 223 (3,541)
Extraordinary item, net of taxes ................... 397 -- -- -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss) ...................... $ (15) $ 408 $ 2,600 $ 223 $ (3,541)
========= ========= ========= ========= =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item ............ $ (0.02) $ 0.01 $ 0.09 $ 0.01 $ (0.11)
Extraordinary item, net of tax ..................... $ 0.02 -- -- -- --
--------- --------- --------- --------- ---------
Basic and diluted .................................. $ -- $ 0.01 $ 0.09 $ 0.01 $ (0.11)
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic .............................................. 25,926 27,146 27,984 28,899 31,727
Diluted ............................................ 25,936 27,156 28,481 30,028 31,727
</TABLE>
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 2000
-------- --------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................................... $ 74,596 $ 113,936
Costs of Services ...................................... 44,919 79,220
--------- ---------
Gross profit ..................................... 29,677 34,716
Operating expenses:
Selling, general and administrative ................ 25,012 43,398
Merger related expenses ............................ -- --
Depreciation and amortization ...................... 3,337 9,077
--------- ---------
Total operating expenses ........................ 28,349 52,475
--------- ---------
Operating income (loss) ................................ 1,328 (17,759)
Interest expense, net .................................. (7,134) (7,021)
Other income (expense) ................................. (135) 25
--------- ---------
Income (loss) before income taxes and
extraordinary item ................................. (5,941) (24,755)
Income tax expense (benefit) ........................... (2,335) (9,118)
--------- ---------
Income (loss) before extraordinary item ................ (3,606) (15,637)
Extraordinary item - extinguishment of debt ............ -- --
--------- ---------
Net income (loss) ................................ $ 3,606 $ (15,637)
========= =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item ................................. $ (5,941) $ (24,755)
Pro forma income taxes, as if CapRock
Fiber were a C corporation ......................... (2,335) (9,118)
--------- ---------
Income (loss) before extraordinary item ............ (3,606) (15,637)
Extraordinary item, net of taxes ................... -- --
--------- ---------
Pro forma net income (loss) ...................... $ (3,606) $ (15,637)
========= =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item ............ $ (0.12) $ (0.47)
Extraordinary item, net of tax ..................... -- --
--------- ---------
Basic and diluted .................................. $ (0.12) $ (0.47)
========= =========
Weighted average shares outstanding:
Basic .............................................. 30,321 33,406
Diluted ............................................ 30,321 33,406
</TABLE>
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .................. $ (797) $ (2,153) $ (305) $ 102,489 $ 216,145
Property, plant and equipment, net ......... 6,705 15,901 27,341 59,607 228,601
Total assets ............................... 13,198 28,522 49,389 191,966 548,835
Long-term debt and capital lease obligations 2,443 13,254 21,062 145,187 347,502
Stockholders' equity ....................... 3,552 3,886 14,086 16,062 96,030
OPERATING DATA:
EBITDA(1) .................................. $ 896 $ 2,630 $ 8,804 $ 15,025 $ 20,412
Cash flows provided by (used in) operations 827 781 4,112 7,125 (13,302)
Cash flows used in investing activities .... (1,919) (9,350) (12,987) (134,350) (264,623)
Cash flows provided by financing activities 903 8,605 12,114 123,990 283,338
Capital expenditures ....................... (2,282) (10,212) (13,631) (36,855) (201,289)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 2000
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .................. $ 337,555 $ 104,312
Property, plant and equipment, net ......... 97,360 423,039
Total assets ............................... 479,533 676,174
Long-term debt and capital lease obligations 347,012 348,218
Stockholders' equity ....................... 94,939 177,738
OPERATING DATA:
EBITDA(1) .................................. $ (4,665) $ (8,682)
Cash flows provided by (used in) operations (14,897) 50,799
Cash flows used in investing activities .... (258,169) (159,910)
Cash flows provided by financing activities 283,872 107,113
Capital expenditures ....................... (45,717) (216,263)
</TABLE>
(1) EBITDA consists of operating income or loss before interest, income
taxes, depreciation and amortization and other nonrecurring operating expenses.
EBITDA is a measure commonly used in the communications industry. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as a
measure of performance nor as an alternative to cash flow as a measure of
liquidity.
16
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS BEFORE TENDERING
YOUR CAPROCK NOTES FOR MCLEODUSA NOTES. YOU SHOULD ALSO CONSIDER THE OTHER
INFORMATION IN THIS PROSPECTUS INCLUDING THE SEC REPORTS ON FORMS 10-K, 10-Q AND
8-K AND IN THE OTHER DOCUMENTS CONSIDERED A PART OF THIS PROSPECTUS. SEE "WHERE
YOU CAN FIND MORE INFORMATION." THE TERMS "WE," "US," "OUR" OR OTHER VARIATIONS
THEREOF, AS USED IN THIS "RISK FACTORS" SECTION, REFER TO MCLEADUSA AND ITS
SUBSIDIARIES UNLESS THE CONTEXT REQUIRES A DIFFERENT MEANING.
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES, INCLUDING
CAPROCK, INTO OUR OPERATIONS, WHICH COULD SLOW OUR GROWTH.
The integration of acquired companies, including the proposed acquisition
of CapRock, into our operations 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
our service offerings
- inability to maintain uniform standards, controls, procedures and
policies
- impairment of relationships with employees, customers or vendors
Failure to overcome these risks or any other problems encountered in
connection with the merger or other similar transactions could slow our growth
or lower the quality of our services, which could reduce customer demand and
have a negative impact upon the price at which the McLeodUSA notes trade after
this exchange offer.
CONTINUED RAPID GROWTH OF OUR NETWORK, SERVICES AND SUBSCRIBERS COULD BE SLOWED
IF WE CANNOT MANAGE THIS GROWTH.
We have rapidly expanded and developed our network, services and
subscribers. This has placed and will continue to place, in part as a result
of the merger, significant demands on our management, operational and
financial systems and procedures and controls. We may not be able to manage
our anticipated growth effectively, which would harm our 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, legislative and other governmental developments
- changes in the competitive climate in which we operate
- development of customer billing, order processing and network
management systems
- availability of financing
- technological developments - availability of rights-of-way,
franchises, building access and antenna sites
- existence of strategic alliances or relationships
- emergence of future opportunities
We will need to continue to improve our operational and financial systems
and our procedures and controls as we grow. We must also develop, train and
manage our employees.
WE EXPECT TO INCUR SIGNIFICANT LOSSES OVER THE NEXT SEVERAL YEARS.
If we do not become profitable in the future, we could have difficulty
obtaining funds to continue our operations or repay the McLeodUSA notes. We have
incurred net losses every year since we began operations. Since January 1, 1995,
our net losses applicable to common stock have been as follows:
17
<PAGE>
<TABLE>
<CAPTION>
PERIOD AMOUNT
------ -------------
<S> <C>
1995......................... $ 11.3 million
1996......................... $ 22.3 million
1997......................... $ 79.9 million
1998......................... $124.9 million
1999......................... $238.0 million
First 6 months of 2000....... $211.4 million
</TABLE>
We expect to incur significant operating losses during the next several
years while we develop our business and expand our fiber optic communications
network.
FAILURE TO RAISE NECESSARY CAPITAL COULD RESTRICT OUR ABILITY TO DEVELOP OUR
NETWORK AND SERVICES AND ENGAGE IN STRATEGIC ACQUISITIONS.
We need significant capital to continue to expand our operations,
facilities, network and services including, following the merger, the expansion
and operation of CapRock. We cannot assure you that our capital resources will
permit us to fund our planned network deployment and operations or achieve
operating profitability. Failure to generate or raise sufficient funds may
require us to delay or abandon some of our expansion plans or expenditures,
which could harm our business and competitive position.
As of June 30, 2000, based on the combined McLeodUSA and CapRock business
plan, capital requirements and growth projections as of that date, we estimated
that we would require approximately $1.5 billion through 2002 to fund our
planned capital expenditures and operating expenses. We expect to meet these
funding needs through the existing cash balances of McLeodUSA and CapRock, our
existing lines of credit and income from future operations.
Our estimated aggregate capital requirements 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 in limited markets
- funding general corporate expenses
- completing recent acquisitions, including the merger
- constructing, acquiring, developing or improving telecommunications
assets
Our estimate of future capital requirements is a "forward-looking
statement" within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The actual amount and timing of our
future capital requirements may differ substantially from our estimate due to
factors such as:
- strategic acquisition costs and effects of acquisitions on our
business plan, capital requirements and growth projections
- unforeseen delays
- cost overruns
- engineering design changes
- changes in demand for our services
- regulatory, technological or competitive developments
- new opportunities
We also expect to evaluate potential acquisitions, joint ventures and
strategic alliances on an ongoing basis. We may require additional financing if
we pursue any of these opportunities.
Our projected funding plan assumes that (a) the indentures governing the
CapRock notes and the CapRock 11 1/2% senior notes due 2009 are amended to
provide that the acquisition of CapRock does not constitute a change of control
and (b) such notes will either remain outstanding as amended to remove various
covenants or be exchanged for our notes pursuant to the terms of the exchange
offers.
We may meet any additional capital needs by issuing additional debt or
equity securities or borrowing funds from one or more lenders. We cannot assure
you that we will have timely access to additional financing sources on
acceptable terms. If we do not, we may not be able to expand our markets,
operations, facilities, network and services as we intend. See "Information
About McLeodUSA."
18
<PAGE>
OUR HIGH LEVEL OF DEBT COULD LIMIT OUR FLEXIBILITY IN RESPONDING TO BUSINESS
DEVELOPMENTS AND PUT US AT A COMPETITIVE DISADVANTAGE.
We have substantial debt, which could adversely affect us in a number of
ways, including:
- limiting our ability to obtain necessary financing in the future
- limiting our flexibility to plan for, or react to, changes in our
business
- requiring us to use a substantial portion of our cash flow from
operations to pay debt rather than for other purposes, such as working
capital or capital expenditures
- making us more highly leveraged than some of our competitors, which
may place us at a competitive disadvantage
- making us more vulnerable to a downturn in our business
As of June 30, 2000, we had $2.4 billion of long-term debt, including $1.7
billion of debt under our senior notes and $575 million under our credit
facilities. We also had $1.0 billion of redeemable convertible preferred stock
and $2.9 billion of stockholders' equity. In addition, upon completion of the
merger and the exchange offers, we expect to have $360 million of long-term debt
resulting from the exchange of McLeodUSA notes for the CapRock notes and the
exchange of our 11 1/2% senior notes due 2009 for the CapRock 11 1/2% senior
notes due 2009. As a result, we expect our fixed charges to exceed our earnings
for the foreseeable future.
COVENANTS IN DEBT INSTRUMENTS RESTRICT OUR CAPACITY TO BORROW AND INVEST, WHICH
COULD IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR OPERATIONS.
The indentures governing the terms of our long-term debt impose operating
and financial restrictions. In addition, under the terms of our credit
facilities, we have granted a security interest in substantially all of our and
our subsidiaries' assets. These restrictions and encumbrances limit our
discretion in some business matters, which could make it more difficult for us
to expand, finance our operations or engage in other business activities that
may be in our interest. These restrictions limit or prohibit our ability to:
- incur additional debt
- pay dividends or make other distributions
- make investments or other restricted payments
- enter into sale and leaseback transactions
- pledge, mortgage or permit liens upon assets
- enter into transactions with affiliates
- sell assets
- consolidate, merge or sell all or substantially all of our assets
If we fail to comply with these restrictions, all of our long-term debt
could become immediately due and payable.
OUR DEPENDENCE ON THE MEGABELLS TO PROVIDE MOST OF OUR COMMUNICATIONS SERVICES
COULD MAKE IT MORE DIFFICULT FOR US TO OFFER OUR SERVICES AT A PROFIT.
The original seven regional Bell operating companies that resulted from the
divestiture by AT&T in 1984 of its local telephone systems are now concentrated
into four large incumbent "MegaBells." We depend on these MegaBells to provide
most of our core local and some of our long distance services. Today, without
using the communications facilities of these companies, we could not provide
bundled local and long distance services to most of our customers. Because of
this dependence, the McLeodUSA communications services are highly susceptible to
changes in the conditions for access to these facilities and to inadequate
service quality provided by the MegaBells, and therefore we may have difficulty
offering our services on a profitable and competitive basis.
Qwest Communications International Inc. (successor to U S WEST
Communications, Inc.) and SBC Communications Inc. (including its wholly-owned
subsidiary Ameritech Corporation) are our primary suppliers of local lines to
our customers and communications services that allow us to transfer and connect
calls. Upon completion of the merger, BellSouth will also become our supplier.
The communications facilities of our suppliers allow us to provide local
service, long distance service and private lines dedicated to our customers'
use. If these suppliers or other companies deny or limit our access to their
communications network elements or
19
<PAGE>
wholesale services, we may not be able to offer our communications services
at profitable rates.
Our plan to provide local service using our own communications network
equipment also depends on the MegaBells. In order to interconnect our network
equipment and other communications facilities to network elements controlled
by the MegaBells, we must first negotiate and enter into interconnection
agreements with them. Interconnection obligations imposed on the MegaBells by
the Telecommunications Act of 1996 have been and continue to be subject to a
variety of legal proceedings, the outcome of which could affect our ability
to obtain interconnection agreements on acceptable terms. There can be no
assurance that we will succeed in obtaining interconnection agreements on
terms that would permit us to offer local services using our own
communications network facilities at profitable and competitive rates.
ACTIONS BY THE MEGABELLS MAY MAKE IT MORE DIFFICULT FOR US TO OFFER OUR
COMMUNICATIONS SERVICES.
The MegaBells have pursued several measures that may make it more
difficult for us to offer our communications services. For example, in
February 1996, U S WEST, which has since been acquired by Qwest, filed
tariffs and other notices with the public utility commissions in its
fourteen-state service region to limit future Centrex access to its switches.
Centrex access allows us to aggregate lines, have control over several
characteristics of those lines and provide a set of standard features on
those lines. We use Qwest's Centrex services to provide most of our local
communications services in Qwest's service territories.
In January 1997, U S WEST proposed interconnection surcharges in several
of the states in its service region, which would increase our costs in
providing communications services in those states.
In addition, during the past year Qwest filed proposals with the Iowa
Utilities Board to reduce the retail prices charged by Qwest for various
business services which, if approved, would have the effect of reducing our
margins on competitive local business services in Iowa.
We have challenged or are challenging these actions before the FCC or
applicable state public utility commissions. We cannot assure you we will
succeed in our challenges to these or other actions by Qwest that would
prevent or deter us from using Qwest's Centrex service or communications
network elements. If Qwest successfully withdraws or limits our access to
Centrex services in any jurisdiction, we may not be able to offer
communications services in that jurisdiction, which could harm our business.
We anticipate that Qwest will also pursue legislation in states within
our target market area to reduce state regulatory oversight over its rates
and operations. If adopted, these initiatives could make it more difficult
for us to challenge Qwest's actions in the future.
SBC/Ameritech has also introduced measures that may make it more
difficult for us to offer certain types of communications services. For
example, in 1998 and 1999, Ameritech assessed extra special construction
charges to install service for customers when we leased a line from them.
Ameritech did not assess comparable charges to retail customers that ordered
service directly from SBC/Ameritech, which put us at a disadvantage. We have
challenged or are challenging these actions by SBC/Ameritech before the
applicable state public utility commissions. Though we have succeeded in
three such challenges, there can be no assurance that we will succeed in our
challenges to these or other actions by SBC/Ameritech that would prevent or
deter us from competing with them. If SBC/Ameritech can successfully charge
us extraordinary costs to install service when it does not assess the same
charges to retail customers, we may not be able to offer communications
services in that location, which would harm our business.
COMPETITION IN THE COMMUNICATIONS SERVICES INDUSTRY COULD CAUSE US TO LOSE
CUSTOMERS AND REVENUE AND COULD MAKE IT MORE DIFFICULT FOR US TO ENTER NEW
MARKETS.
We face intense competition in all of our markets. This competition
could result in loss of customers and lower our revenue. It could also make
it more difficult for us to enter new markets. Existing local telephone
companies, including Qwest, SBC/Ameritech, BellSouth and Verizon, currently
dominate their local telecommunications markets. Three major competitors,
AT&T, WorldCom and Sprint, dominate the long distance market. Hundreds of
other companies also compete in the long distance
20
<PAGE>
marketplace. AT&T, WorldCom and Sprint also offer local telecommunications
services in many locations.
Our 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 we focus our sales
efforts, which may create downward pressure on the prices for our services
and negatively affect our returns. Many of our existing and potential
competitors have financial and other resources far greater than ours. In
addition, the trend toward mergers and strategic alliances in the
communications industry may strengthen some of our competitors and could put
us at a significant competitive disadvantage.
IF THE MEGABELLS ARE ALLOWED TO OFFER BUNDLED LOCAL AND LONG DISTANCE
SERVICES IN OUR MARKETS IT COULD CAUSE US TO LOSE CUSTOMERS AND REVENUES AND
COULD MAKE IT MORE DIFFICULT FOR US TO ENTER NEW MARKETS.
Presently the MegaBells are prohibited from offering interLATA long
distance services to customers in their regions until they have shown
compliance with the Telecommunications Act of 1996. The MegaBells are
attempting to show compliance and are seeking authority to offer in-region
interLATA long distance service. Southwestern Bell has obtained such
authority in Texas.
If the MegaBells, which have resources far greater than ours, are
authorized to bundle interLATA long distance service and local service in our
markets before the MegaBell local markets are effectively open to
competition, such an offering by the MegaBells could cause McLeodUSA to lose
customers and revenues and make it more difficult for us to compete in those
markets.
WE MAY NOT SUCCEED IN DEVELOPING OR MAKING A PROFIT FROM WIRELESS SERVICES.
Our effort to offer wireless services involves a high degree of risk and
will impose significant demands on our management and financial resources.
Developing wireless services may require us to, among other things, spend
substantial time and money to acquire, build and test a wireless
infrastructure and enter into roaming arrangements with wireless operators in
other markets. Our business plan does not currently include substantial funds
for the development of wireless services. In order to offer wireless services
on a widespread basis, we would need to obtain additional funding by issuing
additional debt or equity securities or by borrowing funds from one or more
lenders. We may not succeed in developing wireless services. Even if we spend
substantial amounts to develop wireless services, we may not make a profit
from wireless operations.
Our ability to successfully offer wireless services will also depend on
a number of factors beyond our control, including:
- changes in communications service rates charged by other companies
- changes in the supply and demand for wireless services due to
competition with other wireline and wireless operators in the same
geographic area
- changes in the federal, state or local regulatory requirements
affecting the operation of wireless systems
- changes in wireless technologies that could render obsolete the
technology and equipment we choose for our wireless services
COMPETITION IN THE WIRELESS TELECOMMUNICATIONS INDUSTRY COULD MAKE IT MORE
DIFFICULT FOR US TO SUCCESSFULLY OFFER WIRELESS SERVICES.
The wireless telecommunications industry is experiencing increasing
competition and significant technological change. This will make it more
difficult for us to gain a share of the wireless communications market. We
expect up to eight wireless competitors in each of our potential target
wireless markets. We could face additional competition from mobile satellite
services.
21
<PAGE>
Many of our potential wireless competitors have financial and other
resources far greater than ours and have more experience testing new or
improved products and services. In addition, several wireless competitors
operate or plan to operate wireless telecommunications systems that encompass
most of the United States, which could give them a significant competitive
advantage, particularly if we offer only regional wireless services.
THE SUCCESS OF OUR COMMUNICATIONS SERVICES WILL DEPEND ON OUR ABILITY TO KEEP
PACE WITH RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.
Communications technology is changing rapidly. These changes influence
the demand for our services. We need to be able to anticipate these changes
and to develop new and enhanced products and services quickly enough for the
changing market. This will determine whether we can continue to increase our
revenue and number of subscribers and remain competitive.
THE LOSS OF KEY PERSONNEL COULD WEAKEN OUR TECHNICAL AND OPERATIONAL
EXPERTISE, DELAY OUR INTRODUCTION OF NEW SERVICES OR ENTRY INTO NEW MARKETS
AND LOWER THE QUALITY OF OUR SERVICES.
We may not be able to attract, develop, motivate and retain experienced
and innovative personnel. There is intense competition for qualified
personnel in our lines of business. The loss of the services of key
personnel, or the inability to attract additional qualified personnel, could
cause us to make less successful strategic decisions, which could hinder the
introduction of new services or the entry into new markets. We could also be
less prepared for technological or marketing problems, which could reduce our
ability to serve its customers and lower the quality of our services. As a
result, our financial condition could be adversely affected.
Our future success depends on the continued employment of our senior
management team, particularly Clark E. McLeod, the Chairman and Chief
Executive Officer of McLeodUSA, Stephen C. Gray, the President and Chief
Operating Officer of McLeodUSA and the President and Chief Executive Officer
of the Local Services operations of McLeodUSA, and Roy A. Wilkens, the Chief
Technology Officer of McLeodUSA and the President and Chief Executive Officer
of the Network and Data Services operations of McLeodUSA.
FAILURE TO OBTAIN AND MAINTAIN NECESSARY PERMITS AND RIGHTS-OF-WAY COULD
DELAY INSTALLATION OF OUR NETWORKS AND INTERFERE WITH OUR OPERATIONS.
To obtain access to rights-of-way needed to install our fiber optic
cable, we must reach agreements with state highway authorities, local
governments, transit authorities, local telephone companies and other
utilities, railroads, long distance carriers and other parties. The failure
to obtain or maintain any rights-of-way could delay our planned network
expansion, interfere with our operations and harm our business. For example,
if we lose access to a right-of-way, we may need to spend significant sums to
remove and relocate our facilities.
GOVERNMENT REGULATION MAY INCREASE OUR COST OF PROVIDING SERVICES, SLOW OUR
EXPANSION INTO NEW MARKETS AND SUBJECT OUR SERVICES TO ADDITIONAL COMPETITIVE
PRESSURES.
Our facilities and services are subject to federal, state and local
regulations. The time and expense of complying with these regulations could
slow down our expansion into new markets, increase our costs of providing
services and subject us to additional competitive pressures. One of the
primary purposes of the Telecommunications Act of 1996 was to open the local
telephone services market to competition. While this has presented us with
opportunities to enter local telephone markets, it also 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, we need to obtain and
maintain licenses, permits and other regulatory approvals in connection with
some of our services. Any of the following could harm our business:
- failure to maintain proper federal and state tariffs
- failure to maintain proper state certifications
- failure to comply with federal, state or local laws and regulations
- failure to obtain and maintain required licenses and permits
22
<PAGE>
- burdensome license or permit requirements to operate in public
rights-of-way
- burdensome or adverse regulatory requirements
- delays in obtaining or maintaining required authorizations
WE DEPEND UPON PAYMENTS FROM OUR SUBSIDIARIES TO PAY PRINCIPAL AND INTEREST
ON OUR DEBT OBLIGATIONS.
We are a holding company, which means we conduct all of our operations
and derive all of our operating income from our subsidiaries. Our ability to
pay our obligations, including our obligation to pay principal and interest
on our notes, depends on receiving dividends and other payments from our
subsidiaries, raising additional funds in a public or private equity or debt
offering or selling assets. Our subsidiaries constitute separate legal
entities and have no obligation to pay any amounts due on our notes or to
make funds available to us. Our subsidiaries' ability to pay dividends or
make other payments or advances to us will depend on their operating results
and the requirements of applicable law.
THE MCLEODUSA NOTES ARE SUBORDINATE TO OUR SUBSIDIARIES' OBLIGATIONS AND OUR
OWN SECURED OBLIGATIONS.
The McLeodUSA notes will be effectively subordinated in right of payment
to all liabilities of our subsidiaries. This means that in the event of a
bankruptcy, liquidation or reorganization, our subsidiaries must pay their
creditors in full before we could use their assets to pay you. As of June 30,
2000, our subsidiaries had total liabilities after the elimination of loans
and advances from us to our subsidiaries of approximately $700.9 million. In
addition, the indenture governing the McLeodUSA notes and the indentures
governing our 10-1/2% senior discount notes, 9-1/4% senior notes, 8-3/8%
senior notes, 9-1/2% senior notes and 8-1/8% senior notes, which we refer to
collectively as our indentures, permit us and our subsidiaries to incur
additional debt.
The McLeodUSA notes will be unsecured and will be subordinated to our
secured debt. This means if we default on any of our secured debt, our
secured creditors could foreclose on their collateral and receive payment out
of the proceeds of that collateral before we could use those assets to pay
you. If the value of the collateral is less than the amount owed, our secured
creditors will have equal rights with you to our remaining assets. As of June
30, 2000, we had total secured debt of approximately $631.7 million. The
indentures permit us and our subsidiaries to incur additional secured debt,
including unlimited purchase money debt.
THERE IS NO ESTABLISHED TRADING MARKET FOR THE MCLEODUSA NOTES WHICH COULD
MAKE IT MORE DIFFICULT FOR YOU TO SELL MCLEODUSA NOTES AND COULD ADVERSELY
AFFECT THEIR PRICE.
The McLeodUSA notes constitute a new issue of securities for which no
established trading market exists. Consequently, it may be more difficult for
you to sell McLeodUSA notes. If McLeodUSA notes are traded after their
initial issuance, they may trade at a discount, depending upon:
- our financial condition
- prevailing interest rates
- the market for similar securities
- other factors beyond our control, including general economic
conditions
We do not intend to apply for a listing or quotation of McLeodUSA notes
on any securities exchange. We cannot assure you of the development or
liquidity of any trading market for the McLeodUSA notes following the
exchange offer.
HOLDERS OF CAPROCK NOTES WHO FAIL TO TENDER MAY EXPERIENCE DIMINISHED
LIQUIDITY AFTER THE EXCHANGE OFFER.
We have not conditioned the exchange offer on receipt of any minimum or
maximum principal amount of CapRock notes. As CapRock notes are tendered and
accepted in the exchange offer, the principal amount of remaining CapRock
notes will decrease. This decrease will reduce the liquidity of the trading
market for the CapRock notes which may make it more difficult for you to sell
them. We cannot assure you of the liquidity, or even the continuation, of the
trading market for the CapRock notes following the exchange offer.
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HOLDERS OF CAPROCK NOTES WHO FAIL TO TENDER WILL HAVE FEWER RIGHTS UNDER THE
CAPROCK INDENTURE FOLLOWING EFFECTIVENESS OF THE PROPOSED AMENDMENTS TO THE
CAPROCK INDENTURE.
On October 11, 2000, CapRock commenced a solicitation of consents from
the holders of the CapRock notes to amend the indenture under which the
CapRock notes were issued. If the required consents with respect to the
CapRock notes are received and the amendments to the CapRock indenture become
operative, both of which are a condition to consummation of the exchange
offer, the CapRock notes will no longer be entitled to the benefits of
certain restrictive covenants and certain other provisions of the indenture
that will have been eliminated by the amendments. The CapRock indenture, as
so amended, will continue to govern the terms of all CapRock notes that
remain outstanding after the amendments are operative. The elimination of
these restrictive covenants and other provisions will permit CapRock to,
among other things, incur indebtedness, pay dividends and make other
restricted payments, incur liens and make investments which would otherwise
not have been permitted under the CapRock indenture. It is possible that any
such actions that CapRock will be permitted to take as a result of the
changes to the CapRock indenture will increase the risk with respect to
CapRock.
THE OBLIGATION TO MAKE PAYMENTS UNDER THE CAPROCK NOTES THAT REMAIN
OUTSTANDING AFTER THE EXCHANGE OFFER WILL REMAIN WITH CAPROCK.
As a result of the proposed merger of our wholly-owned subsidiary into
CapRock, CapRock will become our wholly-owned subsidiary. In addition,
notwithstanding the merger, CapRock will remain the obligor under the CapRock
indenture and any CapRock notes that remain outstanding after consummation of
the exchange offer. Neither we nor any of our subsidiaries, other than
CapRock, will guarantee or otherwise agree to pay the interest on or repay
the principal amount of the CapRock notes. Holders will have no direct claim
against us or any of our subsidiaries, other than CapRock, for payment under
the CapRock indenture and the CapRock notes.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it
include "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans, our future capital requirements, forecasted demographic and
economic trends relating to our industry, our ability to complete
acquisitions, including the merger of CapRock with a subsidiary of McLeodUSA,
to realize anticipated cost savings and other benefits from acquisitions and
to recover acquisition-related costs, and similar matters are forward-looking
statements. These statements are subject to known and unknown risks,
uncertainties and other factors that could cause events or our actual results
to differ materially from the statements. The forward-looking information is
based on various factors and was derived using numerous assumptions. In some
cases, you can identify these statements by our use of forward-looking words
such as "may," "will," "should," "anticipate," "estimate," "expect," "plan,"
"believe," "predict," "potential" or "intend." You should be aware that these
statements only reflect our predictions. Actual events or results may differ
substantially. Important factors that could cause our actual results to be
materially different from our expectations include those discussed in this
prospectus under the caption "Risk Factors" and those discussed in documents
incorporated by reference in this prospectus. 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 EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
In connection with the proposed merger of CapRock with a wholly-owned
subsidiary of McLeodUSA, we have agreed to file and to use our commercially
reasonable efforts to cause to become effective with the SEC a registration
statement with respect to the exchange of the CapRock notes for McLeodUSA
notes. A copy of the merger agreement has been filed as an exhibit to the
registration statement of which this prospectus is a part. We are making the
exchange offer to satisfy our contractual obligations under the merger
agreement.
If you tender your CapRock notes in exchange for McLeodUSA notes, you
will represent to us that:
- you have full power and authority to tender, exchange, sell, assign
and transfer the tendered CapRock notes
- we will acquire good, marketable and unencumbered title to the CapRock
notes you tender, free and clear of all liens, restrictions, charges
and encumbrances
- the CapRock notes you tender for exchange are not subject to any
adverse claims or proxies (other than consents or proxies granted in
connection with the consent solicitation currently being conducted by
CapRock)
You also will warrant and agree that you will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and
transfer of the CapRock notes you tender in the exchange offer.
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of CapRock notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" or "noteholder"
with respect to the exchange offer means any person in whose name the CapRock
notes are registered on CapRock's books or any other person who has obtained
a properly completed bond power from the registered holder, or any
participant in DTC whose name appears on a security position listing as a
holder of CapRock notes, which, for purposes of the exchange offer, include
beneficial interests in the CapRock notes held by direct or indirect
participants in DTC and CapRock notes held in definitive form.
TERMS OF THE EXCHANGE OFFER
We hereby offer, upon the terms and subject to the conditions set forth
in this prospectus and in the accompanying Letter of Transmittal, to exchange
$1,000 principal amount of McLeodUSA notes for each $1,000 principal amount
of CapRock notes properly tendered prior to the expiration date and not
properly withdrawn according to the procedures described below. Holders may
tender their CapRock notes in whole or in part in integral multiples of
$1,000 principal amount.
The exchange offer is not conditioned upon any minimum principal amount
of CapRock notes being tendered for exchange. We reserve the right to
purchase or make offers for any CapRock notes that remain outstanding after
the expiration date or, as set forth under "--Conditions to the Exchange
Offer," to terminate the exchange offer and, to the extent permitted by
applicable law, purchase CapRock notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or
offers could differ from the terms of the exchange offer. As of the date of
this prospectus, $150 million principal amount of CapRock notes is
outstanding.
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Holders of CapRock notes do not have any appraisal or dissenters' rights
in connection with the exchange offer. CapRock notes which are not tendered
for, or are tendered but not accepted in connection with, the exchange offer
will remain outstanding. For a description of the consequences of not
tendering CapRock notes for exchange see "--Consent Solicitation; Consequences
of Failure to Tender Your CapRock Notes."
If any tendered CapRock notes are not accepted for exchange because of
an invalid tender, the occurrence of other events set forth in this
prospectus or otherwise, certificates for the unaccepted CapRock notes will
be returned, without expense, to the tendering holder of those notes promptly
after the expiration date.
Holders who tender CapRock notes in connection with the exchange offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of CapRock notes in connection with the exchange offer. We will pay
all charges and expenses, other than applicable taxes described below, in
connection with the exchange offer. See "--Fees and Expenses" for a
description of the fees and expenses that we will pay in connection with the
exchange offer.
Neither the McLeodUSA nor the CapRock board of directors makes any
recommendation to holders of CapRock notes as to whether to tender or refrain
from tendering all or any portion of their CapRock notes in the exchange
offer. In addition, no one has been authorized to make any similar
recommendation. Holders of CapRock notes must make their own decision whether
to tender in the exchange offer and, if so, the aggregate amount of CapRock
notes to tender after reading this prospectus and the Letter of Transmittal
and consulting with their advisers, if any, based on their financial position
and requirements.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "expiration date" means 5:00 p.m., New York City time, on
November ____, 2000, unless we extend the exchange offer, in which case the
term "expiration date" shall mean the latest date and time to which the
exchange offer is extended.
We expressly reserve the right in our sole discretion, subject to
applicable law, at any time and from time to time,
- to delay the acceptance of the CapRock notes for exchange
- to terminate the exchange offer, whether or not any CapRock notes have
been accepted for exchange, if we determine, in our sole discretion,
that any of the events or conditions referred to under "-Conditions to
the Exchange Offer" has occurred or exists or has not been satisfied
- to extend the expiration date of the exchange offer and retain all
CapRock notes tendered in the exchange offer, subject, however, to the
right of holders of CapRock notes to withdraw their tendered CapRock
notes as described under "--Withdrawal Rights"
- to waive any condition or otherwise amend the terms of the exchange
offer in any respect
If the exchange offer is amended in a manner that we determine to
constitute a material change, or if we waive a material condition of the
exchange offer, we will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered holders of
the CapRock notes, and we will extend the exchange offer to the extent
required by Rule 14e-1 under the Securities Exchange Act.
Any delay in acceptance, termination, extension or amendment will be
followed promptly by:
- oral or written notice of the change to the exchange agent, with any
such oral notice to be promptly confirmed in writing
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- a public announcement of the change, which announcement, in the case
of an extension, will be made no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled
expiration date
Without limiting the manner in which we may choose to make any public
announcement, and subject to applicable laws, we shall have no obligation to
publish, advertise or otherwise communicate any such public announcement
other than by issuing a release to an appropriate news agency.
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF MCLEODUSA NOTES
Upon the terms and subject to the conditions of the exchange offer,
promptly after the expiration date we will exchange, and will issue to the
exchange agent, McLeodUSA notes for CapRock notes validly tendered and not
withdrawn as described under "--Withdrawal Rights."
In all cases, delivery of McLeodUSA notes in exchange for CapRock notes
tendered and accepted for exchange in the exchange offer will be made only
after timely receipt by the exchange agent of:
- CapRock notes or a book-entry confirmation of a book-entry transfer of
CapRock notes into the exchange agent's account at DTC
- the Letter of Transmittal, or a facsimile of the letter, properly
completed and duly executed, with any required signature guarantees
- any other documents required by the Letter of Transmittal
Accordingly, the delivery of McLeodUSA notes might not be made to all
tendering holders at the same time, and will depend upon when CapRock notes,
book-entry confirmations with respect to CapRock notes and other required
documents are received by the exchange agent.
The term "book-entry confirmation" means a timely confirmation of a
book-entry transfer of CapRock notes into the exchange agent's account at DTC.
Subject to the terms and conditions of the exchange offer, we will be
deemed to have accepted for exchange, and thereby exchanged, CapRock notes
validly tendered and not withdrawn as, if and when we give oral or written
notice to the exchange agent of our acceptance of those CapRock notes for
exchange in the exchange offer. Any such oral notice shall be promptly
confirmed in writing. Our acceptance for exchange of CapRock notes tendered
through any of the procedures described above will constitute a binding
agreement between the tendering holder and us upon the terms and subject to
the conditions of the exchange offer. The exchange agent will act as our
agent for the purpose of receiving tenders of CapRock notes, Letters of
Transmittal and related documents, and as agent for tendering holders for the
purpose of receiving CapRock notes, Letters of Transmittal and related
documents and transmitting McLeodUSA notes to holders who validly tendered
CapRock notes. The exchange will be made promptly after the expiration date.
If for any reason whatsoever the acceptance for exchange or the exchange of
any CapRock notes tendered in the exchange offer is delayed, whether before
or after our acceptance for exchange of CapRock notes, or we extend the
exchange offer or are unable to accept for exchange or exchange CapRock notes
tendered in the exchange offer, then, without prejudice to our rights set
forth in this prospectus, the exchange agent may, nevertheless, on our behalf
and subject to Rule 14e-1(c) under the Securities Exchange Act, retain
tendered CapRock notes and such CapRock notes may not be withdrawn except to
the extent tendering holders are entitled to withdrawal rights as described
under "--Withdrawal Rights."
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CONSENT SOLICITATION; CONSEQUENCES OF FAILURE TO TENDER YOUR CAPROCK NOTES
On October 11, 2000, CapRock commenced a solicitation of consents from
the holders of the CapRock notes to amend the indenture under which the
CapRock notes were issued to (a) modify certain restrictive covenants
contained in the indenture in order to permit the merger of CapRock with a
wholly-owned subsidiary of McLeodUSA, (b) allow the merger of CapRock and the
McLeodUSA subsidiary to be consummated without triggering the change of
control provisions of the indenture and (c) eliminate most of the restrictive
covenants and reporting requirements contained in the indenture.
Any CapRock notes that are not tendered to us or are not accepted for
exchange will remain outstanding and will continue to accrue interest in
accordance with and otherwise be entitled to all of the rights and privileges
under the indenture governing the CapRock notes. If CapRock obtains the
requisite number of consents from the CapRock noteholders, however, the
indenture will be amended as summarized in the preceding paragraph and the
holders of any CapRock notes that remain outstanding after the exchange offer
will be without the protection that the deleted restrictive covenants and
reporting requirements gave them. The elimination of these restrictive
covenants and other provisions will permit CapRock to, among other things,
incur indebtedness, pay dividends and make other restricted payments, incur
liens and make investments which would otherwise not have been permitted
under the CapRock indenture. It is possible that any such actions that
CapRock will be permitted to take as a result of the changes to the CapRock
indenture will increase the risk with respect to the CapRock notes. The
receipt by CapRock of the requisite consents to approve the amendments to the
CapRock indenture is a condition to the consummation of the exchange offer.
Notwithstanding the merger, CapRock will remain the obligor under the
CapRock indenture and any CapRock notes that remain outstanding after
consummation of the exchange offer.
CONCURRENT EXCHANGE OFFER
Concurrently with this exchange offer and by a separate prospectus, we
are offering to exchange our 11 1/2% senior notes due 2009 for CapRock's 11
1/2% senior notes due 2009. We refer to this exchange offer as the
"Concurrent Exchange Offer." The completion of the exchange offer
contemplated by this prospectus and the Concurrent Exchange Offer are not
dependent on one another.
PROCEDURES FOR TENDERING CAPROCK NOTES
VALID TENDER. Except as set forth below, in order for CapRock notes to
be validly tendered in the exchange offer, either:
1. before the expiration date,
- a properly completed and duly executed Letter of Transmittal, or
facsimile of the letter with any required signature guarantees
and any other required documents, must be received by the
exchange agent at the address set forth under "-Exchange Agent,"
and
- tendered CapRock notes must be received by the exchange agent, or
such CapRock notes must be tendered according to the procedures
for book-entry transfer described below and a book-entry
confirmation must be received by the exchange agent, or
2. the guaranteed delivery procedures set forth below must be complied
with.
If less than all of the CapRock notes are being tendered, a tendering
holder should fill in the amount of CapRock notes being tendered in the
appropriate box on the Letter of Transmittal. The entire amount of CapRock
notes delivered to the exchange agent will be deemed to have been tendered
unless otherwise indicated.
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If any Letter of Transmittal, endorsement, bond power, power of
attorney, or any other document required by the Letter of Transmittal is
signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or
representative capacity, such person should so indicate when signing, and
unless waived by us, evidence satisfactory to us, in our sole discretion, of
such person's authority to so act must be submitted.
Any beneficial owner of CapRock notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee
or custodian is urged to contact such entity promptly if such beneficial
owner wishes to participate in the exchange offer.
The method of delivery of CapRock notes, the Letter of Transmittal and
all other required documents is at the option and sole risk of the tendering
holder, and delivery will be deemed made only when actually received by the
exchange agent. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure timely delivery and should obtain proper insurance.
No Letter of Transmittal or CapRock notes should be sent to McLeodUSA.
Holders may request their respective brokers, dealers, commercial banks,
trust companies or nominees to effect these transactions for them.
BOOK-ENTRY TRANSFER. The exchange agent will make a request to establish
an account with respect to the CapRock notes at DTC for purposes of the
exchange offer within two business days after the date of this prospectus.
Any financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the CapRock notes by
causing DTC to transfer those CapRock notes into the exchange agent's account
at DTC according to DTC's procedures for transfers. However, although
delivery of CapRock notes may be effected through book-entry transfer into
the exchange agent's account at DTC, the Letter of Transmittal, or facsimile
of the letter, properly completed and duly executed, with any required
signature guarantees and any other required documents, must in any case be
delivered to and received by the exchange agent at its address set forth
under "-Exchange Agent" before the expiration date, or the guaranteed
delivery procedure set forth below must be complied with.
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT
SIGNATURE GUARANTEES. Tendering holders do not need to endorse their
certificates for CapRock notes and signature guarantees on a Letter of
Transmittal or a notice of withdrawal, as the case may be, are unnecessary
unless:
1. a certificate for CapRock notes is registered in a name other than
that of the person surrendering the certificate, or
2. a registered holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal
In either of these cases, the certificates for CapRock notes must be duly
endorsed or accompanied by a properly executed bond power, with the
endorsement or signature on the bond power and on the Letter of Transmittal
or the notice of withdrawal, as the case may be, guaranteed by a firm or
other entity identified in Rule 17Ad-15 under the Securities Exchange Act as
an "eligible guarantor institution," including, as such terms are defined in
that rule:
- a bank
- a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer
- a credit union
- a national securities exchange, registered securities association or
clearing agency
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- a savings association that is a participant in a Securities Transfer
Association
unless surrendered on behalf of such eligible institution. See the
instructions to the Letter of Transmittal.
GUARANTEED DELIVERY. If a holder desires to tender CapRock notes in the
exchange offer and the certificates for the CapRock notes are not immediately
available or time will not permit all required documents to reach the
exchange agent before the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis, the CapRock notes may
nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
- the tenders are made by or through an eligible institution
- before the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter
of Transmittal, stating the name and address of the holder of CapRock
notes and the amount of CapRock notes tendered, stating that the
tender is being made by the notice and guaranteeing that within three
New York Stock Exchange trading days after the date of execution of
the Notice of Guaranteed Delivery, the certificates for all physically
tendered CapRock notes, in proper form for transfer, or a book-entry
confirmation, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the eligible
institution with the exchange agent. The Notice of Guaranteed Delivery
may be delivered by hand, or transmitted by facsimile or mail to the
exchange agent and must include a guarantee by an eligible institution
in the form set forth in the Notice of Guaranteed Delivery
- the certificates (or book-entry confirmation) representing all
tendered CapRock notes, in proper form for transfer, together with a
properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the exchange agent within three
New York Stock Exchange trading days after the date of execution of
the Notice of Guaranteed Delivery
DETERMINATION OF VALIDITY. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange
of any tendered CapRock notes will be determined by us, and that
determination shall be final and binding on all parties. We reserve the right
to reject any and all tenders that we determine are not in proper form or the
acceptance for exchange of which may, in the view of our counsel, be
unlawful. We also reserve the right, subject to applicable law, to waive any
of the conditions of the exchange offer as set forth under "-Conditions to
the Exchange Offer" or any defect or irregularity in any tender of CapRock
notes of any particular holder whether or not we waive similar defects or
irregularities in the case of other holders.
Our interpretation of the terms and conditions of the exchange offer,
including the Letter of Transmittal and its instructions, will be final and
binding on all parties. No tender of CapRock notes will be deemed to have
been validly made until all defects or irregularities with respect to such
tender have been cured or waived. Neither we, any of our affiliates, the
exchange agent or any other person shall be under any duty to give any
notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of CapRock notes may be
withdrawn at any time before the expiration date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received
by the exchange agent at its address set forth under "-Exchange Agent" before
the expiration date. Any notice of withdrawal must specify the name of the
person who tendered the CapRock notes to be withdrawn, the principal amount
of CapRock notes to be withdrawn and, if certificates for such CapRock notes
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have been tendered, the name of the registered holder of the CapRock notes as
set forth on the CapRock notes, if different from that of the person who
tendered the CapRock notes.
If certificates for CapRock notes have been delivered or otherwise
identified to the exchange agent, the notice of withdrawal must specify the
serial numbers on the particular certificates for the CapRock notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by
an eligible institution, except in the case of CapRock notes tendered for the
account of an eligible institution.
If CapRock notes have been tendered by the procedures for book-entry
transfer set forth in "-Procedures for Tendering CapRock Notes," the notice
of withdrawal must specify the name and number of the account at DTC to be
credited with the withdrawal of CapRock notes and must otherwise comply with
the procedures of DTC. Withdrawals of tenders of CapRock notes may not be
rescinded. CapRock notes properly withdrawn will not be deemed validly
tendered for purposes of the exchange offer, but may be retendered at any
subsequent time before the expiration date by following any of the procedures
described above under "-Procedures for Tendering CapRock Notes."
All questions as to the validity, form and eligibility, including time
of receipt, of such withdrawal notices will be determined by us, which
determination shall be final and binding on all parties. Neither we, any of
our affiliates, the exchange agent or any other person shall be under any
duty to give any notification of any defects or irregularities in any notice
of withdrawal or incur any liability for failure to give any such
notification. Any CapRock notes which have been tendered but which are
withdrawn will be returned to the holder of those notes promptly after
withdrawal.
INTEREST ON THE MCLEODUSA NOTES
Interest on the McLeodUSA notes will be payable semi-annually in arrears
on January 15 and July 15 of each year at a rate of 12% per annum, commencing
January 15, 2001. Interest on the McLeodUSA notes will be deemed to accrue
from July 15, 2000.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provisions of the exchange offer or any
extension of the exchange offer, we will not be required to accept for
exchange, or to exchange, any CapRock notes for any McLeodUSA notes and will
not be required to issue McLeodUSA notes in exchange for any CapRock notes
and, as described below, may, at any time and from time to time, terminate or
amend the exchange offer, whether or not any CapRock notes have been accepted
for exchange, or may waive any conditions to or amend the exchange offer, if
any of the following conditions have occurred or exists or have not been
satisfied before the expiration date:
- CapRock has not received sufficient consents to amend the indenture
governing the CapRock notes to (a) modify certain restrictive
covenants contained in the indenture in order to permit the merger of
CapRock with a wholly-owned subsidiary of McLeodUSA, (b) allow the
merger of CapRock and the McLeodUSA subsidiary to be consummated
without triggering the change of control provisions of the indenture
and (c) eliminate most of the restrictive covenants and reporting
requirements contained in the indenture
- the merger of CapRock with the wholly-owned subsidiary of McLeodUSA
has not occurred
- any action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency or body with respect to the
exchange offer or the acquisition of CapRock which, in our judgment, would
reasonably be expected to impair our ability to proceed with the exchange
offer
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- any law, statute, rule or regulation shall have been adopted or enacted
which, in our judgment, would reasonably be expected to impair our ability
to proceed with the exchange offer or the acquisition of CapRock
- a stop order shall have been issued by the SEC or any state securities
authority suspending the effectiveness of the registration statement of
which this prospectus is a part, or proceedings shall have been initiated
or, to our knowledge, threatened for that purpose
- any governmental approval has not been obtained, which approval we shall,
in our judgment, deem necessary for the consummation of the exchange offer
as contemplated hereby or the acquisition of CapRock
- any change, or any development involving a prospective change, in our
business or financial affairs has occurred which, in our judgment, might
materially impair our ability to proceed with the exchange offer or the
acquisition of CapRock
If we determine that any of the foregoing events or conditions has
occurred or exists or has not been satisfied at any time prior to the
expiration date, we may, subject to applicable law, terminate the exchange
offer, whether or not any CapRock notes have been accepted for exchange, or
may waive any such condition or otherwise amend the terms of the exchange
offer in any respect. If such waiver or amendment constitutes a material
change to the exchange offer, we will promptly disclose such waiver or
amendment by means of a prospectus supplement that will be distributed to the
registered holders of the CapRock notes, and we will extend the exchange
offer to the extent required by Rule 14e-1 under the Securities Exchange Act.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes, subject to the limitations set
forth below, certain U.S. federal income tax consequences of the exchange
offer. The discussion is based upon provisions of the U.S. Internal Revenue
Code of 1986, as amended (the "Code"), its legislative history, judicial
authority, current administrative rulings and practice, and existing and
proposed Treasury Regulations, all as in effect and existing on the date of
this prospectus. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the validity of
the statements and conclusions set forth below. Any such changes or
interpretations may be retroactive and could adversely affect an exchanging
noteholder. This discussion assumes that the CapRock notes and the McLeodUSA
notes are held as capital assets (as defined in Section 1221 of the Code) by
the noteholders. This discussion applies only to a person who is (a) a
citizen or resident of the United States for United States federal income tax
purposes, (b) treated as a corporation, partnership or other entity created
or organized in or under the laws of the United States or of any political
subdivision thereof, (c) an estate the income of which is subject to United
States federal income taxation regardless of its source, (d) a trust that is
subject to the primary supervision of a court within the United States and
the control of a United States person as described in Section 7701(a)(30) of
the Code, or (e) a trust that has a valid election in effect under applicable
Treasury Regulations to be treated as a United States person (each, a "U.S.
Holder"). This discussion does not purport to deal with all aspects of U.S.
federal income taxation that might be relevant to particular noteholders in
light of their personal investment circumstances or status, nor does it
discuss the U.S. federal income tax consequences to certain types of
noteholders subject to special treatment under the U.S. federal income tax
laws, such as certain financial institutions, insurance companies,
corporations that accumulate earnings to avoid federal income tax, dealers in
securities or foreign currency, traders in securities that elect to apply a
mark-to-market method of accounting, tax-exempt organizations, or persons
that hold CapRock notes that are a hedge against, or that are hedged against,
currency risk or that are part of a straddle or conversion transaction, or
persons whose functional currency is not the U.S. dollar. Moreover, the
effect of any applicable state, local or foreign tax laws is not discussed.
If CapRock notes are held by a partnership, the tax treatment of a
partner will generally depend upon the status of the partner and the
activities of the partnership. Partners of partnerships holding CapRock notes
should consult their tax advisors.
33
<PAGE>
THE FOLLOWING DISCUSSION IS FOR GENERAL INFORMATION ONLY. EACH
HOLDER OF CAPROCK NOTES IS STRONGLY URGED TO CONSULT WITH ITS OWN TAX
ADVISORS TO DETERMINE THE IMPACT OF SUCH NOTEHOLDER'S PERSONAL TAX SITUATION
ON THE ANTICIPATED TAX CONSEQUENCES, INCLUDING THE TAX CONSEQUENCES UNDER
STATE, LOCAL, FOREIGN OR OTHER TAX LAWS, OF THE EXCHANGE OFFER.
THE MERGER. As explained above, in connection with the proposed
merger of CapRock with a wholly-owned subsidiary of McLeodUSA, we have
entered into a merger agreement pursuant to which we agreed to file and use
our commercially reasonable efforts to cause to become effective with the SEC
a registration statement with respect to the exchange of the CapRock notes
for McLeodUSA notes. For federal income tax purposes, we believe that the
merger and the exchange offer should be treated as occurring under a single
integrated plan.
The obligation of CapRock to consummate the merger is conditioned
upon the receipt by CapRock of the opinion of Munsch Hardt Kopf & Harr, P.C.,
counsel to CapRock, that on the basis of the facts, representations and
assumptions set forth or referred to in such opinion, for U.S. federal income
tax purposes, the merger will qualify as a tax free reorganization under
Section 368(a) of the Code, and that each of McLeodUSA and CapRock will be a
party to the reorganization within the meaning of Section 368(b) of the Code.
However, CapRock has not requested nor will it request an advance ruling from
the Internal Revenue Service as to the tax consequences of the merger, and
there can be no assurance that the Internal Revenue Service will agree with
the conclusions set forth in this opinion.
FEDERAL INCOME TAX CONSEQUENCES TO EXCHANGING NOTEHOLDERS. The
federal income tax consequences to CapRock noteholders who exchange their
CapRock notes for McLeodUSA notes will depend in part upon whether their
CapRock notes and the McLeodUSA notes constitute "securities." The term
"security" is not defined in the Code or applicable regulations and has not
been clearly defined by court decisions. Although there are a number of
factors that may affect the determination of whether a debt instrument is a
"security," one of the most important factors is the original term of the
instrument, or the length of time between the issuance of the instrument and
its maturity. In general, instruments with an original term of more than ten
years are likely to be treated as "securities," and instruments with an
original term of less than five years are unlikely to be treated as
"securities." Although it is not entirely free from doubt, we believe that
the CapRock notes and the McLeodUSA notes should be treated as "securities"
for federal income tax purposes.
Assuming that (a) the CapRock notes and the McLeodUSA notes constitute
"securities" for federal income tax purposes, and (b) consistent with the tax
opinion discussed above, the merger qualifies as a "reorganization" under
Section 368(a) of the Code and each of McLeodUSA and CapRock will be parties
to the reorganization within the meaning of Section 368(b) of the Code, the
exchange of outstanding CapRock notes for McLeodUSA notes pursuant to the
exchange offer should qualify as an exchange of securities issued by parties
to a reorganization occurring pursuant to the merger agreement under Section
354 of the Code. In such case, the exchanging noteholder will not recognize
gain or loss on the exchange because the principal amount of McLeodUSA notes
received in the exchange will equal the principal amount of the CapRock notes
exchanged for such McLeodUSA notes. A CapRock noteholder who participates in
the exchange will generally have a tax basis in the McLeodUSA notes received
equal to the noteholder's adjusted tax basis in the CapRock notes exchanged,
and the exchanging noteholder's holding period for the McLeodUSA notes will
include the holding period for the CapRock notes exchanged. Notwithstanding
the foregoing, an exchanging noteholder will recognize ordinary income
attributable to any consideration received as payment for accrued interest on
the CapRock notes that was not previously included in the noteholder's income.
EXCHANGE AGENT
We have appointed United States Trust Company of New York as exchange
agent for the exchange offer. Delivery of the Letters of Transmittal and any
other required documents, questions, requests for assistance, and requests
for additional copies of this prospectus or of the Letter of Transmittal
should be directed to the exchange agent as follows:
34
<PAGE>
BY REGISTERED OR CERTIFIED MAIL
United States Trust Company of New York
P.O. Box 112
Bowling Green Station
New York, New York 10274-0112
BY HAND DELIVERY TO 4:30 P.M.
United States Trust Company of New York
30 Broad Street, B-Level
New York, New York 10004-2304
BY OVERNIGHT COURIER AND BY HAND DELIVERY AFTER 4:30 P.M. ON
EXPIRATION DATE
United States Trust Company of New York
30 Broad Street, 14th Floor
New York, New York 10004-2304
BY FACSIMILE
(212) 422-0183 or (646) 458-8111
Confirm by telephone: (800) 548-6565
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
FEES AND EXPENSES
We will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail. Additional solicitation may be made
personally or by telephone or other means by our officers, directors or
employees.
We have not retained any dealer-manager or similar agent in connection
with the exchange offer and will not make any payments to brokers, dealers or
others soliciting acceptances of the exchange offer. We have agreed to pay
the exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the
reasonable out-of-pocket expenses incurred by them in forwarding copies of
this prospectus and related documents to the beneficial owners of CapRock
notes, and in handling or tendering for their customers.
Holders who tender their CapRock notes for exchange will not be
obligated to pay any transfer taxes in connection with the tender, except
that if McLeodUSA notes are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of the CapRock notes
tendered, or if a transfer tax is imposed for any reason other than the
exchange of CapRock notes in connection with the exchange offer, then the
amount of any such transfer tax, whether imposed on the registered holder or
any other persons, will be payable by the tendering holder. If satisfactory
evidence of payment of such transfer tax or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer tax
will be billed directly to such tendering holder.
35
<PAGE>
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
merger agreement. We will not receive any cash proceeds from the issuance of
the McLeodUSA notes offered by this prospectus. In consideration for issuing
the McLeodUSA notes as contemplated in this prospectus, we will receive, in
exchange, an equal number of CapRock notes in like principal amount. The
CapRock notes surrendered in exchange for McLeodUSA notes will be retired and
canceled by us and cannot be reissued.
36
<PAGE>
INFORMATION ABOUT MCLEODUSA
GENERAL
We provide selected telecommunications services to customers nationwide.
We provide integrated communications services, including local services, in
many Midwest and Rocky Mountain states and long distance and advanced data
services in all 50 states. We are a facilities-based telecommunications
provider with 361 ATM switches, 37 voice switches, nearly 824,000 local lines
and more than 9,000 employees. We expanded our marketplace for advanced data
and Internet services to all 50 states through our March 30, 2000 acquisition
of Splitrock Services. The network acquired in the Splitrock transaction is
capable of transmitting integrated next-generation data, video and voice
services, reaching 800 cities and 90% of the U.S. population. In the next 12
months, we will distribute 30 million telephone directories in 26 states,
serving a population of 52 million. We are a Nasdaq-100 company traded under
the symbol "MCLD."
We offer local, long distance, Internet access, data, voice mail and
paging services from a single company on a single bill. We believe we are the
first company in many of our markets to offer one-stop shopping for
communications services tailored to customers' specific needs.
Our core business is providing communications services in competition
with existing local telephone companies, including:
- local and long distance services
- dial and dedicated Internet access
- higher bandwidth Internet access services, such as digital subscriber line
(DSL) and cable modem
- value-added services such as virtual private networks and web hosting
- bandwidth leasing and colocation services
- facilities and services dedicated for a particular customer's use
- telephone and computer sales, leasing, networking, service and installation
- other communications services, including video, cellular, operator,
payphone, mobile radio, wireless communications and paging services
We also derive revenue from the following services related to our core
business:
- sale of advertising in print and electronic telephone directories
- traditional local telephone company services in east central Illinois and
southeast South Dakota
- telemarketing services
In most of our local service markets, we compete with the existing local
phone company by leasing its lines and switches. In certain limited local
service markets in Illinois, Iowa, Minnesota and South Dakota, we operate our
own lines and switches. We provide long distance services by using our own
facilities and by leasing capacity from others.
37
<PAGE>
We have developed and continue to develop fiber optic communications
networks in many of our target local markets in the Midwest and Rocky
Mountain regions to carry additional communications traffic on our own
network. We are actively developing enhancements to our national network and
associated next-generation services.
We own and operate a broadband access network that is marketed to
various businesses throughout the United States. As part of our ongoing
efforts to enhance our network and data services, we are acquiring
indefeasible rights to use dark fiber optic strands in a nationwide network
that will cover more than 15,000 route miles. This national network allows us
to transmit integrated next-generation data, video and voice services on both
a retail and wholesale basis.
We want to be the leading and most admired provider of integrated
communications services in our markets. To achieve this goal, We are:
- aggressively capturing customer share and generating revenue using
leased communications network capacity
- concurrently building our own communications network
- migrating customers to our own communications network to provide
enhanced services and reduce operating costs
The principal elements of our business strategy are to:
PROVIDE INTEGRATED COMMUNICATIONS SERVICES. We believe we can rapidly
penetrate our target markets and build customer loyalty by providing an
integrated product offering to business and residential customers.
BUILD CUSTOMER SHARE THROUGH BRANDING. We believe we can create and
strengthen brand awareness in our target markets by branding our
communications services with the trade name McLeodUSA in combination with the
distinctive black-and-yellow motif of our telephone directories.
PROVIDE OUTSTANDING CUSTOMER SERVICE. Our customer service
representatives are available 24 hours a day, seven days a week, to answer
customer calls. Our customer-focused software and systems allow our
representatives immediate access to our customer and network data, enabling a
rapid and effective response to customer requests.
EMPHASIZE SMALL AND MEDIUM SIZED BUSINESSES. We primarily target small
and medium sized businesses because we believe we can rapidly capture
customer share by providing face-to-face business sales and strong service
support to these customers.
EXPAND OUR FIBER OPTIC COMMUNICATIONS NETWORK. We are building a
state-of-the-art fiber optic communications network to deliver multiple
services and reduce operating costs.
EXPAND INTRA-CITY FIBER OPTIC COMMUNICATIONS NETWORK. Within selected
cities, we plan to extend our network directly to our customers' locations.
This will allow us to provide expanded services and reduce the expense of
leasing communications facilities from the local exchange carrier.
EXPLORE ACQUISITIONS AND STRATEGIC ALLIANCES. We plan to pursue
acquisitions, joint ventures and strategic alliances to expand or complement
our business.
LEVERAGE PROVEN MANAGEMENT TEAM. Our executive management team consists
of veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
As of June 30, 2000, we estimated, based on the combined McLeodUSA and
CapRock business plans, capital requirements and growth projections as of
that date, that we would require $1.5 billion through 2002 to fund our
38
<PAGE>
planned capital expenditures and operating expenses. We expect to meet these
funding needs through the existing cash balances of McLeodUSA and CapRock,
our existing lines of credit and income from future operations. Our estimated
aggregate capital requirements include the projected cost of:
- expanding our fiber optic communications network, including
national and intra-city fiber optic communications networks
- adding voice and ATM switches
- expanding operations in existing and new markets
- developing wireless services in limited markets
- funding general corporate purposes
- completing recent acquisitions, including the merger
- constructing, acquiring, developing or improving
telecommunications assets
Our projected funding plan assumes that (a) the indentures governing the
CapRock notes and the CapRock 11 1/2% senior notes due 2009 are amended to
provide that the acquisition of CapRock does not constitute a change of
control and (b) such notes will either remain outstanding as amended to
remove various covenants or be exchanged for our notes pursuant to the terms
of the exchange offers. We 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 our future capital requirements are
subject to risks and uncertainties and may differ materially from our
estimates. Accordingly, we may need additional capital to continue to expand
our markets, operations, facilities, network and services. See "Risk
Factors--Failure to Raise Necessary Capital Could Restrict Our Ability to
Develop Our Network and Services and Engage in Strategic Acquisitions."
Our principal executive offices are located at McLeodUSA Technology
Park, 6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our
phone number is (319) 790-7800.
ADDITIONAL INFORMATION
A detailed description of our business, executive compensation, various
benefit plans, including stock option plans, voting securities and the
principal holders of these securities, relationships and transactions between
us and our directors, executive officers and principal stockholders,
financial statements and other matters related to us is incorporated by
reference or set forth in our Annual Report on Form 10-K for the year ended
December 31, 1999 and our Quarterly Reports on Form 10-Q for the quarters
ended March 31, 2000 and June 30, 2000, incorporated by reference into this
prospectus. Holders of CapRock notes desiring copies of these documents may
contact us at our address or telephone number indicated under "Where You Can
Find More Information."
39
<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, 1999 and the Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000. 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, 1999, 1998 and 1997, and for each of the three years in
the period ended December 31, 1999 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-STAR- USA Publishing Group, Inc............................ September 20, 1996
Consolidated Communications, Inc.................................. September 24, 1997
Ovation Communications, Inc....................................... March 31, 1999
Splitrock Services, Inc........................................... March 30, 2000
</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,
Splitrock and CapRock as if they had been acquired at the beginning of the
periods presented and the as adjusted information in the balance sheet data
in the table includes the Ovation, Splitrock and CapRock financial position
as of the date presented. The 1999 pro forma amounts include adjustments to
the CapRock 1999 historical financial statements to give effect to the
issuance by CapRock in May 1999 of $210 million of its 11 1/2% senior notes
as if the note issuance had occurred at the beginning of such period.
The information in the table also reflects the following debt and equity
securities that McLeodUSA has outstanding:
<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
Senior Secured Credit Facilities $575 million May 30, 2000
</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 8-1/8% senior notes, the
Series A, B and C preferred stock and the Senior Secured Credit Facilities as
if they had occurred at the beginning of 1999.
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
40
<PAGE>
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. On February 29, 2000,
McLeodUSA announced that its board of directors had declared a three-for-one
stock split to be effected in the form of a stock dividend. The record date
for the stock split was April 4, 2000. Stockholders of record at the market
close on that date received two additional shares of McLeodUSA Class A common
stock for each share held. Distribution of the additional shares took place
on April 24, 2000. All information in the selected consolidated financial
data has been adjusted to reflect the two-for-one stock split and the
three-for-one stock split.
The ratio of earnings to fixed charges is calculated as follows:
earnings consist of net loss before income taxes plus fixed charges
(excluding capitalized interest). Fixed charges consist of interest on all
debt (including capitalized interest), amortization of debt discount and
deferred loan costs and the portion of rental expense that is representative
of the interest component of rental expense (deemed to be one-third of rental
expense which management believes is a reasonable approximation of the
interest component). For each of the years ended December 31, 1995, 1996,
1997, 1998 and 1999, earnings were insufficient to cover fixed charges by
$11.4 million, $22.6 million, $84.4 million, $135.5 million and $243.3
million, respectively. For the six months ended June 30, 1999 and 2000,
earnings were insufficient to cover fixed charges by $118.5 million and
$207.7 million, respectively. On a pro forma basis, earnings would not have
been sufficient to cover fixed charges by $523.3 million and $313.5 million
for the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively.
(TABLE BEGINS ON THE NEXT PAGE)
41
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PRO FORMA
---------------------------------------------------------------------- -----------
1995 1996 1997 1998 1999 1999
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ............................. $ 28,998 $ 81,323 $ 267,886 $ 604,146 $ 908,792 $ 1,210,667
----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of service ................... 19,667 52,624 151,190 323,208 457,085 699,401
Selling, general and administrative 18,054 46,044 148,158 260,931 392,687 481,488
Depreciation and amortization ..... 1,835 8,485 33,275 89,107 190,695 346,131
Other ............................. -- 2,380 4,632 5,575 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses .......... 39,556 109,533 337,255 678,821 1,040,467 1,527,020
Operating loss ...................... (10,558) (28,210) (69,369) (74,675) (131,675) (316,353)
Interest income (expense), net ...... (771) 5,369 (11,967) (52,234) (94,244) (191,068)
Other income ........................ -- 495 1,426 1,997 5,637 7,163
Income taxes ........................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net loss ............................ (11,329) (22,346) (79,910) (124,912) (220,282) (500,528)
Preferred stock dividends ........... -- -- -- -- (17,727) (54,375)
----------- ----------- ----------- ----------- ----------- -----------
Loss applicable to common stock ..... $ (11,329) $ (22,346) $ (79,910) $ (124,912) $ (238,009) $ (554,633)
=========== =========== =========== =========== =========== ===========
Loss per common share ............... $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
=========== =========== =========== =========== =========== ===========
Weighted average common shares
outstanding ....................... 168,024 243,036 329,844 376,842 443,130 559,751
=========== =========== =========== =========== =========== ===========
Ratio of earnings to fixed charges .. -- -- -- -- -- --
=========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
PRO FORMA
----------
1999 2000 2000
----------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ................................ $ 403,771 $ 620,082 $ 769,055
--------- --------- ---------
Operating expenses:
Cost of service ........................ 205,507 344,426 466,226
Selling, general and administrative .... 178,339 256,563 309,973
Depreciation and amortization .......... 78,708 163,193 213,415
Other .................................. -- -- 872
--------- --------- ---------
Total operating expenses ............... 462,554 764,182 990,486
Operating loss ........................... (58,783) (144,100) (221,431)
Interest income (expense), net ........... (50,666) (42,077) (70,486)
Other income ............................. 562 1,971 1,996
Income taxes ............................. -- -- --
--------- --------- ---------
Net loss ................................. (108,887) (184,206) (289,921)
Preferred stock dividends ................ -- (27,204) (27,204)
--------- --------- ---------
Loss applicable to common stock .......... $(108,887) $(211,410) $(317,125)
========= ========= =========
Loss per common share .................... $ (.26) $ (.40) $ (.54)
========= ========= =========
Weighted average common shares outstanding 423,210 529,109 590,221
========= ========= =========
Ratio of earnings to fixed charges ...... -- -- --
========= ========= =========
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA OF MCLEODUSA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, JUNE 30, 2000
------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
-------- -------- -------- -------- -------- ---------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets ................. $ 8,507 $ 224,401 $ 517,869 $ 793,192 $ 1,569,473 $ 1,647,070 $ 1,879,002
Working capital (deficit) ...... $ (1,208) $ 185,968 $ 378,617 $ 613,236 $ 1,272,794 $ 859,997 $ 913,955
Property and equipment, net .... $ 16,119 $ 92,123 $ 373,804 $ 629,746 $ 1,270,032 $ 1,897,962 $ 2,321,001
Total assets ................... $ 28,986 $ 452,994 $ 1,345,652 $ 1,925,197 $ 4,203,147 $ 7,069,543 $ 7,791,496
Long-term debt ................. $ 3,600 $ 2,573 $ 613,384 $ 1,245,170 $ 1,763,725 $ 2,370,370 $ 2,718,588
Redeemable convertible preferred
stock ........................ $ -- $ -- $ -- $ -- $ 1,000,000 $ 1,000,000 $ 1,000,000
Stockholders' equity ........... $ 14,958 $ 403,429 $ 559,379 $ 462,806 $ 1,108,542 $ 2,878,436 $ 3,074,207
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
PRO FORMA
---------
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment. $ 6,364 $ 79,845 $ 179,255 $ 289,923 $ 580,003 $ 820,756
Business acquisitions ........ $ 8,333 $ 93,937 $ 421,882 $ 49,737 $ 736,626 $3,376,180
EBITDA(1) ....................... $ (8,723) $ (17,345) $ (31,462) $ 20,007 $ 59,020 $ 29,778
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------
PRO FORMA
----------
1999 2000 2000
---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures
Property, plant and equipment........................................ $220,390 $ 559,834 $ 804,163
Business acquisitions................................................ $525,161 $2,052,925 $2,415,523
EBITDA(1)............................................................... $ 19,925 $ 19,093 $ (7,144)
</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.
43
<PAGE>
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial information has been
prepared to give effect to:
- 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 acquisition of Splitrock Services, Inc. in March 2000
- the completion of the Senior Secured Credit Facilities in May 2000
- the merger
For purposes of this pro forma presentation, the issuance of the 8-1/8%
senior notes is referred to as the "Notes Offering" 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 June
30, 2000.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
include the operations of Ovation Communications, Inc., the operations of
Splitrock Services, Inc., and the operations of CapRock as if the acquisition
of Ovation and Splitrock and the merger with CapRock were consummated on
January 1, 1999 and the related weighted average share amounts have been
adjusted to give effect to the shares issued in the transactions as if they
had been issued on January 1, 1999. The CapRock results have been adjusted to
give effect to the issuance in May 1999 by CapRock of $210 million of its
11 1/2% senior notes due 2009 as if the issuance was consummated on January 1,
1999. It also assumes that interest related to the Notes Offering and the
Senior Secured Credit Facilities, dividends related to the Preferred Stock
Issuances and the additional depreciation and amortization due to the
increased value of tangible and intangible assets acquired through the
acquisition of Ovation, Splitrock and the merger with CapRock, using the
purchase method of accounting, began January 1, 1999. The unaudited pro forma
financial information is derived from and should be read in conjunction with
the Consolidated Financial Statements of McLeodUSA and the related notes
thereto included in the McLeodUSA Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. The pro forma adjustments for the acquisitions
of Ovation and Splitrock, the Notes Offering and the Preferred Stock
Issuances are incorporated by reference from a Current Report on Form 8-K/A
filed with the SEC on June 13, 2000.
For purposes of allocating the net purchase price among the various
assets to be acquired, McLeodUSA has preliminarily considered the carrying
value of the acquired assets to approximate their fair value, with all of the
excess of the net purchase price being attributed to intangible assets,
primarily goodwill. McLeodUSA intends to more fully evaluate the acquired
assets following consummation of the merger and, as a result, the allocation
of the net purchase price among the acquired tangible and intangible assets
may change.
The 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 1999, nor is it necessarily indicative of future operating
results or financial position.
(TABLE BEGINS ON THE NEXT PAGE)
44
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
ADJUSTMENTS FOR PRO FORMA FOR
CAPROCK CAPROCK
MCLEODUSA CAPROCK TRANSACTION TRANSACTION
------------ ----------- --------------- --------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............. $ 931,318 $ 3,680 $ -- $ 934,998
Other current assets ................... 715,752 245,596 (17,344)(2) 944,004
----------- ----------- ----------- -----------
TOTAL CURRENT ASSETS .............. 1,647,070 249,276 (17,344) 1,879,002
Property and Equipment, net ................. 1,897,962 423,039 -- 2,321,001
Intangible assets ........................... 3,373,029 -- 63,123(1) 3,436,152
Other assets ................................ 151,482 3,859 -- 155,341
----------- ----------- ----------- -----------
TOTAL ASSETS ...................... $ 7,069,543 $ 676,174 $ 45,779 $ 7,791,496
=========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities ......................... $ 787,083 $ 144,964 $ 33,000(3) $ 965,047
Long-term debt, less current maturities ..... 2,370,370 348,218 -- 2,718,588
Other long-term liabilities ................. 33,654 5,254 (5,254)(2) 33,654
----------- ----------- ----------- -----------
TOTAL LIABILITIES ................. 3,191,107 498,436 27,746 3,717,289
----------- ----------- ----------- -----------
Redeemable convertible preferred stock ...... 1,000,000 -- -- 1,000,000
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock ........................ 12 -- -- 12
Common stock ........................... 5,817 387 (237) 5,967
Additional paid-in capital ............. 3,497,346 191,808 3,813 3,692,967
Treasury Stock, at cost ................ -- (678) 678 --
Retained earnings (deficit) ............ (706,669) (13,570) 13,570 (706,669)
Accumulated other comprehensive income . 81,930 (209) 209 81,930
----------- ----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY ........ 2,878,436 177,738 18,033 3,074,207
----------- ----------- ----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY ......................... $ 7,069,543 $ 676,174 $ 45,779 $ 7,791,496
=========== =========== =========== ===========
</TABLE>
(1) The adjustment for the merger reflects the preliminary allocation of the
net purchase price of CapRock to the net assets of CapRock that are to be
acquired, including intangible assets, and records the issuance of
15,023,318 shares of McLeodUSA Class A common stock valued at $13.77 per
share. The value of $13.77 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, October 2, 2000, and ending four days after such announcement.
The net purchase price of approximately $579 million is equal to (1) the
product of (A) the total number of shares of CapRock common stock
attributable to outstanding CapRock common stock and options with exercise
prices below the closing price of $5.063 (totaling 39,001,954) as of
October 2, 2000, MULTIPLIED BY (B) the conversion ratio of 0.3876,
MULTIPLIED BY (C) $13.77, the value of a share of McLeodUSA Class A common
stock (calculated as described above), MINUS (2) the aggregate option
proceeds to be received (approximately $0.3 million) PLUS (3) the principal
amount of outstanding CapRock senior notes ($360 million) and the cost
directly attributable to the merger ($11 million). The allocation of the
net purchase price to the net assets, excluding debt, (approximately $516
million) and debt ($360 million) of CapRock as of June 30, 2000, results in
goodwill of approximately $63 million.
(2) To eliminate CapRock's deferred tax assets and deferred tax liabilities.
McLeodUSA expects to continue to be in a net deferred tax asset position
after the merger and will continue to provide a valuation allowance on the
net deferred tax assets.
(3) Reflects an increase in current liabilities related to banking, legal and
accounting fees, write-off of debt issuance costs and unaccreted discount
on CapRock's senior notes and other matters directly attributable to the
merger under EITF 95-3.
45
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
TWELVE MONTHS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
FOR ADJUSTMENT PRO FORMA ADJUSTMENTS FOR
SPLITROCK FOR CREDIT FOR CREDIT CAPROCK FOR CAPROCK CAPROCK
ACQUISITION(2) FACILITIES FACILITIES AS ADJUSTED(4) ACQUISITION ACQUISITION
----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ......................... $ 1,018,044 $ -- $ 1,018,044 $ 192,623 $ -- $ 1,210,667
----------- --------- ----------- ----------- ----------- -----------
Operating expenses:
Cost of service ............... 583,725 -- 583,725 115,676 -- 699,401
Selling, general and
administrative ................ 424,953 -- 424,953 56,535 -- 481,488
Depreciation and amortization . 333,277 -- 333,277 9,698 3,156(5) 346,131
Other ......................... -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- -----------
Total operating expenses ..... 1,341,955 -- 1,341,955 181,909 3,156 1,527,020
----------- --------- ----------- ----------- ----------- -----------
Operating income (loss) ....... (323,911) -- (323,911) 10,714 (3,156) (316,353)
Interest income (expense), net. (127,456) (36,493)(3) (163,949) (27,119) -- (191,068)
Other nonoperating income
(expense) ..................... 5,637 -- 5,637 1,526 -- 7,163
Income taxes .................. -- -- -- 5,505 (5,505)(6) --
----------- --------- ----------- ----------- ----------- -----------
Net income (loss) ............. (445,730) (36,493) (482,223) (9,374) (8,661) (500,258)
Preferred stock dividends ..... (54,375) -- (54,375) -- -- (54,375)
----------- --------- ----------- ----------- ----------- -----------
Earnings applicable to common
stock ......................... $ (500,105) $ (36,493) $ (536,598) $ (9,374) $ (8,661) $ (554,633)
=========== ========= =========== =========== =========== ===========
Loss per common and common
equivalent share ............. $ (0.92) $ (0.99) $ (0.99)
=========== =========== ===========
Weighted average common and
common equivalent shares
outstanding ................... 544,728 544,728 15,023 559,751
=========== =========== =========== ===========
OTHER FINANCIAL DATA:
EBITDA(1) ....................... $ 9,366 $ -- $ 9,366 $ 20,412 $ -- $ 29,778
</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.
(2) The "Pro Forma for Splitrock Acquisition" information is derived from the
Pro Forma Financial Statements that were filed by McLeodUSA with the SEC on
a Current Report on Form 8-K/A on June 13, 2000.
(3) McLeodUSA used cash on hand and funds drawn from its Senior Secured Credit
Facilities to retire the outstanding Splitrock 11-3/4% senior notes in July
2000. This adjustment records the pro forma annual interest expense of
approximately $66 million on the Senior Secured Credit Facilities, reduced
by the interest expense on the Splitrock 11 3/4% senior notes as previously
reported in the "Pro Forma for Splitrock Acquisition."
(4) As adjusted financial information gives effect to the issuance by CapRock
of $210 million of its 11 1/2% senior notes due 2009 in May 1999 as if such
issuance had occurred on January 1, 1999. See "CapRock Communications Corp.
- Unaudited Pro Forma Condensed Statements of Operations."
(5) To amortize intangibles acquired in the merger over 20 years.
(6) To eliminate CapRock's income tax benefit.
46
<PAGE>
MCLEODUSA INCORPORATED AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------------------------------------
ADJUSTMENTS PRO FORMA ADJUSTMENTS
FOR SPLITROCK FOR SPLITROCK FOR CREDIT
MCLEODUSA SPLITROCK(2) ACQUISITION(2) ACQUISITION FACILITIES
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ....................... $ 620,082 $ 35,037 $ -- $ 655,119 $ --
--------- --------- --------- --------- -------------
Operating expenses:
Cost of service ............. 344,426 42,580 -- 387,006 --
Selling, general and
administrative ............ 256,563 10,012 -- 266,575 --
Depreciation and
amortization .............. 163,193 12,470 27,097 202,760 --
Other ....................... -- 872 -- 872 --
--------- --------- --------- --------- -------------
Total operating expenses .. 764,182 65,934 27,097 857,213 --
--------- --------- --------- --------- -------------
Operating income (loss) ..... (144,100) (30,897) (27,097) (202,094) --
Interest income (expense),
net ....................... (42,077) (6,302) -- (48,379) (15,086)(3)
Other nonoperating income
(expense) ................. 1,971 -- -- 1,971 --
Income taxes ................ -- -- -- -- --
--------- --------- --------- --------- -------------
Net income (loss) ........... (184,206) (37,199) (27,097) (248,502) (15,086)
Preferred stock dividends ... (27,204) -- -- (27,204) --
--------- --------- --------- --------- -------------
Earnings applicable to common
stock ..................... $(211,410) $ (37,199) $ (27,097) $(275,706) $ (15,086)
========= ========= ========= ========= =============
Loss per common and common
equivalent share .......... $ (0.40) (0.48)
========= =========
Weighted average common and
common equivalent shares
outstanding ............... 529,109 46,089 575,198
========= ========= =========
OTHER FINANCIAL DATA:
EBITDA(1) ................... $ 19,093 $ (17,555) $ -- $ 1,538 $ --
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------
PRO FORMA ADJUSTMENTS PRO FORMA
FOR CREDIT FOR CAPROCK FOR CAPROCK
FACILITIES CAPROCK ACQUISITION ACQUISITION
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue ....................... $ 655,119 $ 113,936 $ -- $ 769,055
--------- --------- --------- ---------
Operating expenses:
Cost of service ............. 387,006 79,220 -- 466,226
Selling, general and
administrative ............ 266,575 43,398 -- 309,973
Depreciation and
amortization .............. 202,760 9,077 1,578(4) 213,415
Other ....................... 872 -- -- 872
--------- --------- --------- ---------
Total operating expenses .. 857,213 131,695 1,578 990,486
--------- --------- --------- ---------
Operating income (loss) ..... (202,094) (17,759) (1,578) (221,431)
Interest income (expense),
net ....................... (63,465) (7,021) -- (70,486)
Other nonoperating income
(expense) ................. 1,971 25 -- 1,996
Income taxes ................ -- 9,118 (9,118)(5) --
--------- --------- --------- ---------
Net income (loss) ........... (263,588) (15,637) (10,696) (289,921)
Preferred stock dividends ... (27,204) -- -- (27,204)
--------- --------- --------- ---------
Earnings applicable to common
stock ..................... $(290,792) $ (15,637) $ (10,696) $(317,125)
========= ========= ========= =========
Loss per common and common
equivalent share .......... $ (0.51) $ (0.54)
========= =========
Weighted average common and
common equivalent shares
outstanding ............... 575,198 15,023 590,221
========= ========= =========
OTHER FINANCIAL DATA:
EBITDA(1) ................... $ 1,538 $ (8,682) $ -- $ (7,144)
</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.
(2) The "Splitrock" column represents Splitrock's Statement of Operations for
the period of January 1, 2000 through March 30, 2000, the date of the
acquisition of SplitRock by McLeodUSA. The Splitrock financial statements
and the information in the "Adjustments for Splitrock Acquisition" column
are derived from the Pro Forma Financial Statements that were filed by
McLeodUSA with the SEC on a Current Report on Form 8-K/A on June 13, 2000.
(3) McLeodUSA used cash on hand and funds drawn from its Senior Secured Credit
Facilities to retire the outstanding Splitrock 11 3/4% senior notes in July
2000. This adjustment records the pro forma interest expense on the Senior
Secured Credit Facilities reduced by the interest expense on the Splitrock
11 3/4% senior notes as previously reported in the "Pro Forma for Splitrock
Acquisition" column.
(4) To amortize intangibles acquired in the merger over 20 years.
(5) To eliminate CapRock's income tax benefit.
47
<PAGE>
CAPROCK COMMUNICATIONS CORP.
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 CapRock of $210 million of its
11 1/2% senior notes due 2009 in May 1999 as if such issuance had occurred on
January 1, 1999. The unaudited pro forma financial information is derived
from and should be read in conjunction with the financial statements of
CapRock and the related notes thereto included in the CapRock Annual Report
on Form 10-K for the fiscal year ended December 31, 1999, which is
incorporated by reference into this prospectus. The pro forma adjustments are
based upon available information and assumptions that management believes to
be reasonable.
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31, 1999
------------------------------------------------------
ADJUSTMENTS PRO FORMA
----------- ---------
CAPROCK FOR MAY 1999 NOTES FOR MAY 1999 NOTES
--------- ------------------ ------------------
<S> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Revenue $ 192,623 $ -- $ 192,623
--------- --------- ---------
Operating expenses:
Cost of service 115,676 -- 115,676
Selling, general and administrative 56,535 -- 56,535
Depreciation and amortization 9,698 -- 9,698
Other -- -- --
--------- --------- ---------
Total operating expenses 181,909 -- 181,909
Operating income (loss) 10,714 -- 10,714
Interest income (expense), net (17,861) (9,258) (27,119)
Other nonoperating income (expense) 1,526 -- 1,526
Income tax benefit (expense) 2,080 3,425 5,505
--------- --------- ---------
Net income (loss) (3,541) (5,833) (9,374)
Preferred stock dividends -- -- --
--------- --------- ---------
Earnings applicable to common stock $ (3,541) $ (5,833) $ (9,374)
========= ========= =========
Loss per common and common equivalent
share $ (0.11) $ (0.30)
========= =========
Weighted average common and common
equivalent shares outstanding 31,727 31,727
========= =========
</TABLE>
48
<PAGE>
DESCRIPTION OF THE MCLEODUSA NOTES
GENERAL
The McLeodUSA notes will be issued under an indenture between
McLeodUSA and United States Trust Company of New York, as trustee, which we
refer to as the McLeodUSA indenture. For purposes of this description of the
McLeodUSA notes, references to "McLeodUSA," "we," "our" or "us" refers to
McLeodUSA Incorporated and does not include its subsidiaries except for
purposes of financial data determined on a consolidated basis.
The terms of the McLeodUSA notes include those stated in the
McLeodUSA indenture and those made a part of the McLeodUSA indenture by
reference to the Trust Indenture of 1939 as in effect on the date of the
McLeodUSA indenture. The McLeodUSA notes are subject to all of those terms,
and holders of the McLeodUSA notes should refer to the McLeodUSA indenture
and the Trust Indenture Act for a complete statement of the applicable terms.
A copy of the McLeodUSA indenture is available from McLeodUSA on request. The
statements and definitions of terms under this caption relating to the
McLeodUSA notes and the McLeodUSA indenture are summaries and do not purport
to be complete. These summaries make use of terms defined in the McLeodUSA
indenture and are qualified in their entirety by express reference to the
McLeodUSA indenture. Some of the terms used in this description are defined
below under "--Definitions."
The McLeodUSA notes will rank equal in right of payment with our 10
1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2%
senior notes, 8 1/8% senior notes, any of our notes to be issued pursuant to
the Concurrent Exchange Offer and all other existing and future senior
unsecured indebtedness of McLeodUSA and will rank senior in right of payment
to all existing and future subordinated indebtedness of McLeodUSA. As of June
30, 2000, McLeodUSA had no outstanding subordinated indebtedness and, other
than our 10 1/2% senior discount notes, 9 1/4% senior notes, 8 3/8% senior
notes, 9 1/2% senior notes and 8 1/8% senior notes, had no outstanding
indebtedness that would rank equal with the McLeodUSA notes. The McLeodUSA
notes will not be secured by any assets and will be effectively subordinated
to any existing and future secured indebtedness of McLeodUSA and its
subsidiaries, including the Senior Secured Credit Facilities (as defined in
"Other McLeodUSA Indebtedness"), and any other Senior Credit Facility or
Qualified Receivable Facility we enter into, to the extent of the value of
the assets securing such indebtedness. As of June 30, 2000, the total secured
indebtedness of McLeodUSA and its subsidiaries was approximately
$631.7 million. For a description of these notes and other outstanding
indebtedness of McLeodUSA, see "Other McLeodUSA Indebtedness."
The operations of McLeodUSA are conducted through its subsidiaries
and, therefore, McLeodUSA depends upon cash flow from those entities to meet
its obligations. McLeodUSA's subsidiaries will have no direct obligation to
pay amounts due on the McLeodUSA notes and will not guarantee the McLeodUSA
notes. As a result, the McLeodUSA notes will be effectively subordinated to
all existing and future third-party indebtedness, including the Senior
Secured Credit Facilities, any other Senior Credit Facility or any applicable
Qualified Receivable Facility we enter into, and other liabilities of
McLeodUSA's subsidiaries, including trade payables. As of June 30, 2000, the
total liabilities of McLeodUSA's subsidiaries, after the elimination of loans
and advances by McLeodUSA to its subsidiaries, were approximately $700.9
million. In addition, the McLeodUSA notes will be effectively subordinated in
certain respects to any CapRock notes and any CapRock 11 1/2% senior notes
due 2009 that remain outstanding after this exchange offer and the Concurrent
Exchange Offer for which CapRock will remain the obligor. Any rights of
McLeodUSA and its creditors, including the holders of McLeodUSA notes, to
participate in the assets of any of McLeodUSA's subsidiaries upon any
liquidation or reorganization of any such subsidiary will be subject to the
prior claims of that subsidiary's creditors, including trade creditors.
PRINCIPAL, MATURITY AND INTEREST
The McLeodUSA notes will be limited in principal amount to $150
million and will mature on July 15, 2008. Interest on the McLeodUSA notes
will accrue at the rate of 12% per annum and will be payable in cash
semi-annually in arrears on January 15 and July 15 of each year, commencing
January 15, 2001. Interest will be computed
49
<PAGE>
on the basis of a 360-day year comprised of twelve 30-day months. Interest on
the McLeodUSA notes will be deemed to accrue from July 15, 2000.
Principal and interest will be payable at the office of the Paying
Agent but, at the option of McLeodUSA, interest may be paid by check mailed
to the registered holders at their registered addresses. The McLeodUSA notes
will be issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and any integral multiples of $1,000 in excess
thereof. Unless otherwise designated by McLeodUSA, McLeodUSA's office or
agency in New York will be the office of the trustee maintained for such
purpose.
BOOK-ENTRY SYSTEM
The McLeodUSA notes will initially be issued in the form of one or
more Global Securities, as defined in the McLeodUSA indenture, held in
book-entry form. The McLeodUSA notes will be deposited with the trustee as
custodian for the Depository, and the Depository or its nominee will
initially be the sole registered holder of the McLeodUSA notes for all
purposes under the McLeodUSA indenture. Except as set forth below, a Global
Security may not be transferred except as a whole by the Depository to a
nominee of the Depository or by a nominee of the Depository to the Depository.
The McLeodUSA notes that are issued as described below under
"--Certificated Notes" will be issued in definitive form.
Upon the transfer of a McLeodUSA note in definitive form, such
McLeodUSA note will, unless the Global Security has previously been exchanged
for McLeodUSA notes in definitive form, be exchanged for an interest in the
Global Security representing the principal amount McLeodUSA notes being
transferred.
Upon the issuance of a Global Security, the Depository or its
nominee will credit, on its internal system, the accounts of persons holding
through it with the individual beneficial interests in such Global Security
representing the respective principal amounts of the McLeodUSA notes held by
such persons. Ownership of beneficial interests in a Global Security will be
limited to persons that have accounts with the Depository ("participants") or
persons that may hold interests through participants. Ownership of beneficial
interests by participants in a Global Security will be shown on, and the
transfer of that ownership interest will be effected only through, records
maintained by the Depository or its nominee for such Global Security.
Ownership of beneficial interests in such Global Security by persons that
hold through participants will be shown on, and the transfer of that
ownership interest within such participant will be effected only through,
records maintained by such participant. The laws of some jurisdictions
require that some purchasers of securities take physical delivery of such
securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a Global Security.
Payment of principal of, premium, if any, on and interest on
McLeodUSA notes represented by any such Global Security will be made to the
Depository or its nominee, as the case may be, as the sole registered owner
and the sole holder of the McLeodUSA notes represented thereby for all
purposes under the McLeodUSA indenture. None of McLeodUSA, the trustee or any
agent of McLeodUSA will have any responsibility or liability for:
1. any aspect of the Depository's reports relating to or payments
made on account of beneficial ownership interests in a Global
Security representing any McLeodUSA notes or for maintaining,
supervising or reviewing any of the Depository's records
relating to such beneficial ownership interests or
2. any other matter relating to the actions and practices of the
Depository or any of its participants.
McLeodUSA has been advised by the Depository that upon receipt of
any payment of principal of, premium, if any, on or interest on any Global
Security, the Depository will immediately credit, on its book-entry
registration and transfer system, the accounts of participants with payments
in amounts proportionate to their respective beneficial interests in the
principal or face amount of such Global Security, as shown on the records of
the
50
<PAGE>
Depository. McLeodUSA expects that payments by participants to owners of
beneficial interests in a Global Security held through such participants will
be governed by standing instructions and customary practices as is now the
case with securities held for customer accounts registered in "street name"
and will be the sole responsibility of such participants.
So long as the Depository or its nominee is the registered owner or
holder of such Global Security, the Depository or such nominee, as the case
may be, will be considered the sole owner or holder of the McLeodUSA notes
represented by such Global Security for the purposes of receiving payment on
the McLeodUSA notes, receiving notices and for all other purposes under the
McLeodUSA indenture and the McLeodUSA notes. Beneficial interests in
McLeodUSA notes will be evidenced only by, and transfers thereof will be
effected only through, records maintained by the Depository and its
participants. Except as provided above, owners of beneficial interests in a
Global Security will not be entitled to, and will not be considered the
holders of, such Global Security for any purposes under the McLeodUSA
indenture. Accordingly, each person owning a beneficial interest in a Global
Security must rely on the procedures of the Depository and, if such person is
not a participant, on the procedures of the participant through which such
person owns its interest, to exercise any rights of a holder under the
McLeodUSA indenture. McLeodUSA understands that, under existing industry
practices, in the event that McLeodUSA requests any action of holders or that
an owner of a beneficial interest in a Global Security desires to give or
take any action that a holder is entitled to give or take under the McLeodUSA
indenture, the Depository would authorize the participants holding the
relevant beneficial interest to give or take such action, and such
participants would authorize beneficial owners owning through such
participants to give or take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
The Depository has advised McLeodUSA that it will take any action
permitted to be taken by a holder of McLeodUSA notes, including the
presentation of McLeodUSA notes for exchange as described below, only at the
direction of one or more participants to whose account with the Depository
interests in the Global Security are credited and only in respect of such
portion of the aggregate principal amount of the McLeodUSA notes as to which
such participant or participants has or have given such direction.
The Depository has advised McLeodUSA that the Depository is a
limited-purpose trust company organized under the Banking Law of the State of
New York, a "banking organization" within the meaning of New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the Securities Exchange Act. The Depository was created to
hold the securities of its participants and to facilitate the clearance and
settlement of securities transactions among its participants in such
securities through electronic book-entry changes in accounts of the
participants, thereby eliminating the need for physical movement of
securities certificates. The Depository's participants include securities
brokers and dealers including banks, trust companies, clearing corporations
and various other organizations some of whom, and/or their representatives,
own the Depository. Access to the Depository's book-entry system is also
available to others, such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly, and dealers including banks, trust companies,
clearing corporations and various other organizations some of whom, and/or
their representatives, own the Depository. Access to the Depository's
book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
The information in this section concerning the Depository and the
Depository's book-entry system has been obtained from sources that McLeodUSA
believes to be reliable, but McLeodUSA takes no responsibility for the
accuracy thereof.
CERTIFICATED NOTES
The McLeodUSA notes represented by a Global Security are
exchangeable for certificated McLeodUSA notes only if:
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- the Depository notifies McLeodUSA that it is unwilling or unable
to continue as a depository for such Global Security or if at any
time the Depository ceases to be a clearing agency registered
under the Securities Exchange Act, and a successor depository is
not appointed by McLeodUSA within 90 days,
- McLeodUSA executes and delivers to the trustee a notice that such
Global Security shall be so transferable, registrable and
exchangeable, and such transfer shall be registrable or
- there shall have occurred and be continuing an Event of Default
with respect to the McLeodUSA notes represented by such Global
Security.
Any Global Security that is exchangeable for certificated McLeodUSA notes
pursuant to the preceding sentence will be transferred to, and registered and
exchanged for, certificated McLeodUSA notes in authorized denominations and
registered in such names as the Depository or its nominee holding such Global
Security may direct. Subject to the foregoing, a Global Security is not
exchangeable, except for a Global Security of like denomination to be
registered in the name of the Depository or its nominee. In the event that a
Global Security becomes exchangeable for certificated McLeodUSA notes:
- certificated McLeodUSA notes will be issued only in fully
registered form in denominations of $1,000 or integral multiples
thereof,
- payment of principal, any repurchase price, and interest on the
certificated McLeodUSA notes will be payable, and the transfer of
the certificated McLeodUSA notes will be registrable, at the
office or agency of McLeodUSA maintained for such purposes, and
- no service charge will be made for any issuance of the
certificated McLeodUSA notes, although McLeodUSA may require
payment of a sum sufficient to cover any tax or governmental
charge imposed in connection therewith.
OPTIONAL REDEMPTION
The McLeodUSA notes will be subject to redemption at the option of
McLeodUSA, in whole or in part, at any time on or after July 15, 2003 and
prior to maturity, upon not less than 30 nor more than 60 days' prior notice,
in amounts of $1,000 or an integral multiple of $1,000, at the redemption
prices, expressed as percentages of principal amount, set forth below, plus
accrued and unpaid interest thereon, if any, if redeemed during the twelve
month periods beginning July 15 of the years indicated below:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2003............................................. 106.000%
2004............................................. 104.000%
2005............................................. 102.000%
2006 and after................................... 100.000%
</TABLE>
If less than all of the McLeodUSA notes are to be redeemed at any
time, the trustee will select the McLeodUSA notes, or portions thereof, for
redemption on a pro rata basis, by lot or by such other method as the trustee
in its sole discretion shall deem to be fair and appropriate; provided that
no McLeodUSA note of $1,000 in principal amount or less shall be redeemed in
part. If any McLeodUSA note is to be redeemed in part only, the notice of
redemption relating to such McLeodUSA note shall state the portion of the
principal amount thereof to be redeemed. A new McLeodUSA note in principal
amount equal to the unredeemed portion thereof will be issued in the name of
the holder thereof upon cancellation of the original McLeodUSA note.
MANDATORY REDEMPTION
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Except as set forth under "--Repurchase at the Option of Holders upon
a Change of Control" and "--Asset Sales," McLeodUSA is not required to make
mandatory redemption payments or sinking fund payments with respect to the
McLeodUSA notes.
REPURCHASE AT THE OPTION OF HOLDERS UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder shall have
the right to require McLeodUSA to repurchase all or any part, equal to $1,000
principal amount or an integral multiple thereof, of such holder's McLeodUSA
notes pursuant to the offer described below (the "Change of Control Offer")
at a purchase price (the "Change of Control Purchase Price") in cash equal to
101% of the principal amount of the McLeodUSA notes plus accrued and unpaid
interest, if any, to any Change of Control Payment Date.
Within 30 days following any Change of Control, McLeodUSA or the
trustee, at the request and expense of McLeodUSA, shall mail a notice to each
holder stating:
- that a Change of Control Offer is being made pursuant to the
covenant described under "--Repurchase at the Option of Holders
upon a Change of Control" and that all McLeodUSA notes timely
tendered will be accepted for payment;
- the Change of Control Purchase Price and the purchase date (the
"Change of Control Payment Date"), which shall be no earlier than
30 days nor later than 60 days from the date such notice is
mailed;
- that any McLeodUSA notes or portions thereof not tendered or
accepted for payment will continue to accrue interest;
- that, unless McLeodUSA defaults in the payment of the Change of
Control Purchase Price, all McLeodUSA notes or portions thereof
accepted for payment pursuant to the Change of Control Offer shall
cease to accrue interest from and after the Change of Control
Payment Date;
- that holders electing to have any McLeodUSA notes or portions
thereof purchased under a Change of Control Offer will be required
to surrender their McLeodUSA notes before the close of business on
the third Business Day preceding the Change of Control Payment
Date;
- that holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the
second Business Day preceding the Change of Control Payment Date,
a telegram, telex, facsimile transmission or letter setting forth
the name of the holder, the principal amount of McLeodUSA notes
delivered for purchase, and a statement that such holder is
withdrawing its election to have such McLeodUSA notes or portions
thereof purchased;
- that holders electing to have McLeodUSA notes purchased under the
Change of Control Offer must specify the principal amount that is
being tendered for purchase, which principal amount must be $1,000
or an integral multiple thereof;
- that holders whose McLeodUSA notes are being purchased only in
part will be issued new McLeodUSA notes equal in principal amount
to the unpurchased portion of the McLeodUSA note or McLeodUSA
notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof; and
- any other information necessary to enable any holder to tender
McLeodUSA notes and to have such McLeodUSA notes purchased
pursuant to the McLeodUSA indenture.
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McLeodUSA will comply with the requirements of Section 14(e) under
the Securities Exchange Act and any other securities laws or regulations, to
the extent such laws and regulations are applicable, in connection with the
repurchase of McLeodUSA notes under a Change of Control Offer.
On the Change of Control Payment Date, McLeodUSA will:
- accept for payment McLeodUSA notes or portions thereof properly
tendered under the Change of Control Offer;
- irrevocably deposit with the Paying Agent in immediately available
funds an amount equal to the Change of Control Purchase Price in
respect of all McLeodUSA notes or portions thereof so accepted;
and
- deliver, or cause to be delivered, to the trustee the McLeodUSA
notes so accepted together with an Officers' Certificate listing
the McLeodUSA notes or portions thereof tendered to McLeodUSA and
accepted for payment.
The Paying Agent shall promptly mail to each holder of McLeodUSA notes so
accepted payment in an amount equal to the Change of Control Purchase Price
for such McLeodUSA notes, and the trustee shall promptly authenticate and
mail to each holder a new McLeodUSA note equal in principal amount to any
unpurchased portion of the McLeodUSA notes surrendered, if any; provided that
each such new McLeodUSA note shall be in a principal amount of $1,000 or any
integral multiple thereof.
The existence of the holders' right to require, subject to several
conditions, McLeodUSA to repurchase McLeodUSA notes upon a Change of Control
may deter a third party from acquiring McLeodUSA in a transaction that
constitutes a Change of Control. If a Change of Control Offer is made, there
can be no assurance that McLeodUSA will have sufficient funds to pay the
Change of Control Purchase Price for all McLeodUSA notes tendered by holders
seeking to accept the Change of Control Offer. In addition, the Senior
Secured Credit Facilities of McLeodUSA prohibit and the instruments governing
other indebtedness of McLeodUSA may prohibit McLeodUSA from purchasing any
McLeodUSA notes prior to their Stated Maturity, including under a Change of
Control Offer. In the event that a Change of Control Offer occurs at a time
when McLeodUSA does not have sufficient available funds to pay the Change of
Control Purchase Price for all McLeodUSA notes tendered pursuant to such
offer or at a time when McLeodUSA is prohibited from purchasing the McLeodUSA
notes, and McLeodUSA is unable either to obtain the consent of the holders of
the relevant indebtedness or to repay such indebtedness, an Event of Default
would occur under the McLeodUSA indenture. In addition, one of the events
that constitutes a Change of Control under the McLeodUSA indenture is a sale,
conveyance, transfer or lease of all or substantially all of the property of
McLeodUSA. The McLeodUSA indenture is governed by New York law, and there is
no established definition under New York law of "substantially all" of the
assets of a corporation. Accordingly, if McLeodUSA were to engage in a
transaction in which it disposed of less than all of its assets, a question
of interpretation could arise as to whether such disposition was of
"substantially all" of its assets and whether McLeodUSA was required to make
a Change of Control Offer.
Except as described herein with respect to a Change of Control, the
McLeodUSA indenture does not contain any other provisions that permit holders
of McLeodUSA notes to require that McLeodUSA repurchase or redeem McLeodUSA
notes in the event of a takeover, recapitalization or similar restructuring.
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ASSET SALES
McLeodUSA will not, and will not permit any Restricted Subsidiary
to, consummate an Asset Sale unless:
- McLeodUSA or such Restricted Subsidiary, as the case may be,
receives consideration for such Asset Sale at least equal to the
Fair Market Value, as evidenced by a Board Resolution delivered to
the trustee, of the Property or assets sold or otherwise disposed
of;
- at least 75% of the consideration received by McLeodUSA or such
Restricted Subsidiary for such Property or assets consists of (a)
cash, readily-marketable cash equivalents, or Telecommunications
Assets; (b) shares of publicly-traded Voting Stock of any Person
engaged in the Telecommunications Business in the United States;
or (c) the assumption of Indebtedness of McLeodUSA or such
Restricted Subsidiary, other than Indebtedness that is
subordinated to the McLeodUSA notes, and the release of McLeodUSA
or the Restricted Subsidiary, as the case may be, from all
liability on the Indebtedness assumed; and
- McLeodUSA or such Restricted Subsidiary, as the case may be, uses
the Net Cash Proceeds from such Asset Sale in the manner set forth
in the next paragraph.
Within 360 days after any Asset Sale, McLeodUSA or such Restricted
Subsidiary, as the case may be, may at its option:
- reinvest an amount equal to the Net Cash Proceeds, or any portion
thereof from such Asset Sale in Telecommunications Assets or in
Capital Stock of any Person engaged in the Telecommunications
Business and/or
- apply an amount equal to such Net Cash Proceeds, or remaining Net
Cash Proceeds, to the permanent reduction of Indebtedness of
McLeodUSA, other than Indebtedness to a Restricted Subsidiary,
that is senior to or PARI PASSU with the McLeodUSA notes or to the
permanent reduction of Indebtedness or preferred stock of any
Restricted Subsidiary, other than Indebtedness to, or preferred
stock owned by, McLeodUSA or another Restricted Subsidiary.
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or to reduce senior or PARI PASSU
Indebtedness of McLeodUSA or Indebtedness or preferred stock of its
Restricted Subsidiaries shall constitute Excess Proceeds.
If at any time the aggregate amount of Excess Proceeds calculated as
of such date exceeds $25 million, McLeodUSA shall, within 30 days, use such
Excess Proceeds to make an offer to purchase (an "Asset Sale Offer") on a pro
rata basis, from all holders, McLeodUSA notes in an aggregate principal
amount equal to the maximum principal amount that may be purchased out of
Excess Proceeds, at a purchase price (the "Asset Sale Purchase Price") in
cash equal to 100% of the principal amount thereof plus accrued and unpaid
interest, if any, to the purchase date, in accordance with the procedures set
forth in the McLeodUSA indenture. Upon completion of an Asset Sale Offer,
including payment of the Asset Sale Purchase Price, any surplus Excess
Proceeds that were the subject of such offer shall cease to be Excess
Proceeds, and McLeodUSA may then use such amounts for general corporate
purposes.
McLeodUSA will comply with the requirements of Section 14(e) under
the Securities Exchange Act and any other securities laws or regulations, to
the extent such laws and regulations are applicable, in connection with the
repurchase of McLeodUSA notes pursuant to an Asset Sale Offer.
55
<PAGE>
COVENANTS
Set forth below are several covenants that are contained in the
McLeodUSA indenture:
LIMITATION ON CONSOLIDATED INDEBTEDNESS
McLeodUSA will not, and will not permit any Restricted Subsidiary
to, Incur any Indebtedness after the Issue Date unless either:
1. the ratio of:
- the aggregate consolidated principal amount of
Indebtedness of McLeodUSA outstanding as of the most
recent available quarterly or annual balance sheet,
after giving pro forma effect to the Incurrence of
such Indebtedness and any other Indebtedness Incurred
since such balance sheet date and the receipt and
application of the proceeds thereof, to
- Consolidated Cash Flow Available for Fixed Charges
for the four full fiscal quarters immediately
preceding the Incurrence of such Indebtedness for
which consolidated financial statements of McLeodUSA
have been filed with the SEC or have otherwise become
publicly available, determined on a pro forma basis
as if any such Indebtedness had been Incurred and the
proceeds thereof had been applied at the beginning of
such four fiscal quarters
would be less than 5.5 to 1.0 for such four-quarter periods
ending prior to December 31, 2000 and 5.0 to 1.0 for such
periods ending thereafter, or
2. McLeodUSA's Consolidated Capital Ratio as of the most
recent quarterly or annual balance sheet of McLeodUSA that has been filed
with the SEC or has otherwise become publicly available, after giving pro
forma effect to:
- the Incurrence of such Indebtedness and any other
Indebtedness Incurred since such balance sheet date,
and
- paid-in capital received since such balance sheet
date or concurrently with the Incurrence of such
Indebtedness, and in each case the receipt and
application of the proceeds thereof,
is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, McLeodUSA and any
Restricted Subsidiary may Incur each and all of the following:
1. Indebtedness under Senior Credit Facilities in an aggregate
principal amount outstanding or available at any one time not to exceed $100
million, and any renewal, extension, refinancing or refunding thereof in an
amount which, together with any principal amount remaining outstanding or
available under all Senior Credit Facilities, does not exceed the aggregate
principal amount outstanding or available under all Senior Credit Facilities
immediately before such renewal, extension, refinancing or refunding;
2. Indebtedness under Qualified Receivable Facilities in an
aggregate principal amount outstanding or available at any one time not to
exceed the greater of (x) $150 million or (y) an amount equal to 85% of net
Receivables determined in accordance with GAAP, and any renewal, extension,
refinancing or refunding thereof in an amount which, together with any
principal amount remaining outstanding or available under all Qualified
Receivable Facilities, does not exceed the aggregate principal amount
outstanding or available under all Qualified Receivable Facilities
immediately before such renewal, extension, refinancing or refunding;
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3. Purchase Money Indebtedness, provided that the amount of such
Purchase Money Indebtedness does not exceed 90% of the cost of the
construction, acquisition or improvement of the applicable Telecommunications
Assets;
4. Indebtedness owed by McLeodUSA to any Wholly-Owned Restricted
Subsidiary of McLeodUSA or Indebtedness owed by a Restricted Subsidiary of
McLeodUSA to McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA;
provided that upon either (x) the transfer or other disposition by such
Wholly-Owned Restricted Subsidiary or McLeodUSA of any Indebtedness so
permitted to a Person other than McLeodUSA or another Wholly-Owned Restricted
Subsidiary of McLeodUSA or (y) the issuance, other than directors' qualifying
share, sale, lease, transfer or other disposition of shares of Capital Stock,
including by consolidation or merger, of such Wholly-Owned Restricted
Subsidiary to a Person other than McLeodUSA or another such Wholly-Owned
Restricted Subsidiary, the provisions of this clause 4 shall no longer be
applicable to such Indebtedness and such Indebtedness shall be deemed to have
been Incurred at the time of such transfer or other disposition;
5. Indebtedness Incurred to renew, extend, refinance or refund
(each, a "refinancing") the McLeodUSA notes or Indebtedness outstanding at
the date of the McLeodUSA indenture or Purchase Money Indebtedness Incurred
pursuant to clause 3 above in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Indebtedness so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Indebtedness so refinanced
or the amount of any premium reasonably determined by McLeodUSA as necessary
to accomplish such refinancing by means of a tender offer or privately
negotiated repurchase, plus the expenses of McLeodUSA incurred in connection
with such refinancing; provided that Indebtedness the proceeds of which are
used to refinance the McLeodUSA notes or Indebtedness which is PARI PASSU to
the McLeodUSA notes or Indebtedness which is subordinate in right of payment
to the McLeodUSA notes shall only be permitted under this clause 5 if (A) in
the case of any refinancing of the McLeodUSA notes or Indebtedness which is
PARI PASSU to the McLeodUSA notes, the refinancing Indebtedness is made PARI
PASSU to the McLeodUSA notes or constitutes Subordinated Indebtedness, and,
in the case of any refinancing of Subordinated Indebtedness, the refinancing
Indebtedness constitutes Subordinated Indebtedness and (B) in any case, the
refinancing Indebtedness by its terms, or by the terms of any agreement or
instrument pursuant to which such Indebtedness is issued, (x) does not
provide for payments of principal of such Indebtedness at stated maturity or
by way of a sinking fund applicable thereto or by way of any mandatory
redemption, defeasance, retirement or repurchase thereof by McLeodUSA,
including any redemption, retirement or repurchase which is contingent upon
events or circumstances, but excluding any retirement required by virtue of
the acceleration of any payment with respect to such Indebtedness upon any
event of default thereunder, in each case prior to the time the same are
required by the terms of the Indebtedness being refinanced and (y) does not
permit redemption or other retirement, including pursuant to an offer to
purchase made by McLeodUSA, of such Indebtedness at the option of the holder
thereof prior to the time the same are required by the terms of the
Indebtedness being refinanced, other than a redemption or other retirement at
the option of the holder of such Indebtedness, including pursuant to an offer
to purchase made by McLeodUSA, which is conditioned upon a change of control
pursuant to provisions substantially similar to those described under
"--Repurchase at the Option of Holders upon a Change of Control;"
6. Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
7. Indebtedness (A) in respect of performance, surety or appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for closing balance sheet changes within 90 days after closing, or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of McLeodUSA or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary of McLeodUSA, other than Guarantees of Indebtedness Incurred by
any Person acquiring all or any portion of such business, assets or
Restricted Subsidiary of McLeodUSA for the purpose of financing such
acquisition, and in an aggregate principal amount not to exceed the gross
proceeds actually received by McLeodUSA or any Restricted Subsidiary in
connection with such disposition; and
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8. Indebtedness not otherwise permitted to be Incurred pursuant to
clauses 1 through 7 above, which, together with any other outstanding
Indebtedness Incurred pursuant to this clause 8, has an aggregate principal
amount not in excess of $10 million at any time outstanding.
Notwithstanding any other provision of this "--Covenants--Limitation
on Consolidated Indebtedness" covenant, the maximum amount of Indebtedness
that McLeodUSA or a Restricted Subsidiary may incur pursuant to this
"--Covenants--Limitation on Consolidated Indebtedness" covenant shall not be
deemed to be exceeded due solely as the result of fluctuations in the
exchange rates of currencies.
For purposes of determining any particular amount of Indebtedness
under this "--Covenants--Limitation on Consolidated Indebtedness" covenant:
1. Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and
2. any Liens granted pursuant to the equal and ratable provisions
referred to in the "--Covenants--Limitation on Liens" covenant described
below shall not be treated as Indebtedness.
For purposes of determining compliance with this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, McLeodUSA, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
LIMITATION ON INDEBTEDNESS AND PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES
McLeodUSA will not permit any Restricted Subsidiary of McLeodUSA to
Incur any Indebtedness or issue any Preferred Stock except:
1. Indebtedness or Preferred Stock outstanding on the date of the
McLeodUSA indenture after giving effect to the application of the proceeds of
the McLeodUSA notes;
2. Indebtedness Incurred or Preferred Stock issued to and held by
McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA, provided that
such Indebtedness or Preferred Stock is at all times held by McLeodUSA or a
Wholly-Owned Restricted Subsidiary of McLeodUSA;
3. Indebtedness Incurred or Preferred Stock issued by a Person prior
to the time (A) such Person became a Restricted Subsidiary of McLeodUSA, (B)
such Person merges into or consolidates with a Restricted Subsidiary of
McLeodUSA or (C) another Restricted Subsidiary of McLeodUSA merges into or
consolidates with such Person in a transaction in which such Person becomes a
Restricted Subsidiary of McLeodUSA, which Indebtedness or Preferred Stock was
not Incurred or issued in anticipation of such transaction and was
outstanding prior to such transaction;
4. Indebtedness under a Senior Credit Facility which is permitted to
be outstanding under clause 1 of the second paragraph of
"--Covenants--Limitation on Consolidated Indebtedness;"
5. in the case of a Restricted Subsidiary that is a Qualified
Receivable Subsidiary, Indebtedness under a Qualified Receivable Facility
which is permitted to be outstanding under clause 2 of the second paragraph
of "--Covenants--Limitation on Consolidated Indebtedness;"
6. Indebtedness consisting of Permitted Interest Rate and Currency
Protection Agreements;
7. Indebtedness (A) in respect of performance, surety and appeal
bonds provided in the ordinary course of business or (B) arising from
customary agreements providing for indemnification, adjustment of purchase
price for
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closing balance sheet changes within 90 days after closing, or similar
obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligation of such Restricted Subsidiary pursuant
to such agreements, in each case Incurred in connection with the disposition of
any business, assets or Restricted Subsidiary of such Restricted Subsidiary,
other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition, and in an aggregate principal amount not to exceed
the gross proceeds actually received by such Restricted Subsidiary in connection
with such disposition;
8. Indebtedness or Preferred Stock which is exchanged for, or the
proceeds of which are used to refinance, refund or redeem, any Indebtedness or
Preferred Stock permitted to be outstanding pursuant to clauses 1 and 3 above or
any extension or renewal thereof (for purposes hereof, a "refinancing"), in an
aggregate principal amount, in the case of Indebtedness, or with an aggregate
liquidation preference in the case of Preferred Stock, not to exceed the
aggregate principal amount of the Indebtedness so refinanced or the aggregate
liquidation preference of the Preferred Stock so refinanced, plus the amount of
any premium required to be paid in connection with such refinancing pursuant to
the terms of the Indebtedness or Preferred Stock so refinanced or the amount of
any premium reasonably determined by McLeodUSA as necessary to accomplish such
refinancing by means of a tender offer or privately negotiated repurchase, plus
the amount of expenses of McLeodUSA and the applicable Restricted Subsidiary
Incurred in connection therewith and provided the Indebtedness or Preferred
Stock Incurred or issued upon such refinancing by its terms, or by the terms of
any agreement or instrument pursuant to which such Indebtedness or Preferred
Stock is Incurred or issued, (x) does not provide for payments of principal or
liquidation value at the stated maturity of such Indebtedness or Preferred Stock
or by way of a sinking fund applicable to such Indebtedness or Preferred Stock
or by way of any mandatory redemption, defeasance, retirement or repurchase of
such Indebtedness or Preferred Stock by McLeodUSA or any Restricted Subsidiary
of McLeodUSA, including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Indebtedness upon an event of default
thereunder, in each case prior to the time the same are required by the terms of
the Indebtedness or Preferred Stock being refinanced and (y) does not permit
redemption or other retirement, including under an offer to purchase made by
McLeodUSA or a Restricted Subsidiary of McLeodUSA, of such Indebtedness or
Preferred Stock at the option of the holder thereof prior to the stated maturity
of the Indebtedness or Preferred Stock being refinanced, other than a redemption
or other retirement at the option of the holder of such Indebtedness or
Preferred Stock, including pursuant to an offer to purchase made by McLeodUSA or
a Restricted Subsidiary of McLeodUSA, which is conditioned upon the change of
control of McLeodUSA pursuant to provisions substantially similar to those
described under "-Repurchase at the Option of Holders upon a Change of Control"
and provided, further, that in the case of any exchange or redemption of
Preferred Stock of a Restricted Subsidiary of McLeodUSA, such Preferred Stock
may only be exchanged for or redeemed with Preferred Stock of such Restricted
Subsidiary; and
9. Indebtedness Incurred or Preferred Stock issued by a Restricted
Subsidiary, provided that the Fair Market Value of McLeodUSA's Investment in all
Restricted Subsidiaries which Incur Indebtedness or issue Preferred Stock
pursuant to this clause 9 shall not exceed, at any time, $30 million in the
aggregate, provided further, that such Indebtedness Incurred is otherwise
permitted pursuant to the covenant described under "-Covenants-Limitation on
Consolidated Indebtedness."
LIMITATION ON RESTRICTED PAYMENTS
McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, make any Restricted Payment unless, at
the time of and after giving effect to such proposed Restricted Payment:
- no Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
- after giving effect, on a pro forma basis, to such Restricted
Payment and the incurrence of any Indebtedness the net proceeds of
which are used to finance such Restricted Payment, McLeodUSA
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could incur at least $1.00 of additional Indebtedness pursuant
to the first paragraph of "-Covenants-Limitation on Consolidated
Indebtedness"; and
- after giving effect to such Restricted Payment on a pro forma
basis, the aggregate amount expended (the amount so expended, if
other than cash, to be determined in good faith by a majority of
the disinterested members of the board of directors, whose
determination shall be conclusive and evidenced by a resolution
thereof) or declared for all Restricted Payments after February
22, 1999 does not exceed the sum of (A) 50% of the Consolidated
Net Income of McLeodUSA (or, if Consolidated Net Income shall be a
deficit, minus 100% of such deficit) for the period (taken as one
accounting period) beginning on the last day of the fiscal quarter
immediately preceding February 22, 1999 and ending on the last day
of the fiscal quarter for which McLeodUSA's financial statements
have been filed with the SEC or otherwise become publicly
available immediately preceding the date of such Restricted
Payment, plus (B) 100% of the net reduction in Investments,
subsequent to February 22, 1999, in any Person, resulting from
payments of interest on Indebtedness, dividends, repayments of
loans or advances, or other transfers of Property (but only to the
extent such interest, dividends, repayments or other transfers of
Property are not included in the calculation of Consolidated Net
Income), in each case to McLeodUSA or any Restricted Subsidiary
from any Person (including, without limitation, from Unrestricted
Subsidiaries) or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the
definition of "Investments"), not to exceed in the case of any
Person the amount of Investments previously made subsequent to
February 22, 1999 by McLeodUSA or any Restricted Subsidiary in
such Person and which was treated as a Restricted Payment;
PROVIDED that McLeodUSA or a Restricted Subsidiary of McLeodUSA
may make any Restricted Payment with the aggregate net proceeds
received after February 22, 1999, including the fair value of
property other than cash (determined in good faith by the board of
directors as evidenced by a resolution of the board of directors
filed with the trustee),
(x) as capital contributions to McLeodUSA,
(y) from the issuance (other than to a Restricted Subsidiary)
of Capital Stock (other than Disqualified Stock) of
McLeodUSA and warrants, rights or options on Capital Stock
(other than Disqualified Stock) of McLeodUSA, or
(z) from the conversion of Indebtedness of McLeodUSA into
Capital Stock (other than Disqualified Stock and other
than by a Restricted Subsidiary) of McLeodUSA after
February 22, 1999.
The foregoing limitations shall not prevent McLeodUSA from:
1. paying a dividend on its Capital Stock at any time within 60 days
after the declaration thereof if, on the declaration date, McLeodUSA could have
paid such dividend in compliance with the preceding paragraph;
2. retiring (A) any Capital Stock of McLeodUSA or any Restricted
Subsidiary of McLeodUSA, (B) Indebtedness of McLeodUSA that is subordinate to
the McLeodUSA notes, or (C) Indebtedness of a Restricted Subsidiary of
McLeodUSA, in exchange for, or out of the proceeds of the substantially
concurrent sale of Qualified Stock of McLeodUSA;
3. retiring any Indebtedness of McLeodUSA subordinated in right of
payment to the McLeodUSA notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of McLeodUSA (other than
Indebtedness to a Subsidiary of McLeodUSA), provided that such new Indebtedness
(A) is subordinated in right of payment to the McLeodUSA notes at least to the
same extent as, (B) has an Average Life at least as long as, and (C) has no
scheduled principal payments due in any amount earlier than, any equivalent
amount of principal under the Indebtedness so retired;
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4. retiring any Indebtedness of a Restricted Subsidiary of McLeodUSA in
exchange for, or out of the proceeds of, the substantially concurrent incurrence
of Indebtedness of McLeodUSA or any Restricted Subsidiary that is permitted
under the covenant described under "-Covenants- Limitation on Consolidated
Indebtedness" (in the case of Indebtedness of McLeodUSA) and
"-Covenants-Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries" (in the case of Indebtedness of Restricted Subsidiaries) and that
(A) is not secured by any assets of McLeodUSA or any Restricted Subsidiary to a
greater extent than the retired Indebtedness was so secured, (B) has an Average
Life at least as long as the retired Indebtedness, and (C) is subordinated in
right of payment to the McLeodUSA notes at least to the same extent as the
retired Indebtedness;
5. retiring any Capital Stock or options to acquire Capital Stock of
McLeodUSA or any Restricted Subsidiary of McLeodUSA held by any directors,
officers or employees of McLeodUSA or any Restricted Subsidiary, provided that
the aggregate price paid for all such retired Capital Stock shall not exceed, in
the aggregate, the sum of $2 million plus the aggregate cash proceeds received
by McLeodUSA subsequent to the Issue Date from issuances of Capital Stock or
options to acquire Capital Stock by McLeodUSA to directors, officers or
employees of McLeodUSA and its Subsidiaries;
6. making payments or distributions to dissenting stockholders pursuant
to applicable law in connection with a consolidation, merger or transfer of
assets permitted under "-Consolidation, Merger, Conveyance, Lease or Transfer;"
7. retiring any Capital Stock of McLeodUSA to the extent necessary (as
determined in good faith by a majority of the disinterested members of the board
of directors, whose determination shall be conclusive and evidenced by a
resolution thereof) to prevent the loss, or to secure the renewal or
reinstatement, of any license or franchise held by McLeodUSA or any Restricted
Subsidiary from any governmental agency;
8. making Investments in any Person primarily engaged in the
Telecommunications Business; provided, that the aggregate amount of such
Investments does not exceed at any time the sum of (A) $30 million plus (B) the
amount of Net Cash Proceeds received by McLeodUSA after February 22, 1999 as a
capital contribution or from the sale of its Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary of McLeodUSA, except to
the extent such Net Cash Proceeds are used to make Restricted Payments permitted
pursuant to clauses (x), (y) and (z) of the first paragraph, or clause 2 above
or this clause 8, of this "Limitation on Restricted Payments" covenant, plus (C)
the net reduction in Investments made pursuant to this clause 8 resulting from
distributions on or repayments of such Investments or from the Net Cash Proceeds
from the sale of any such Investment (except in each case to the extent any such
payment or proceeds are included in the calculation of Consolidated Net Income)
or from such Person becoming a Restricted Subsidiary (valued in each case as
provided in the definition of "Investment"), provided that the net reduction in
any Investment shall not exceed the amount of such Investment; and
9. making Investments not otherwise permitted in an aggregate amount
not to exceed $15 million at any time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses 2, 3 and 4 above shall not be
included as Restricted Payments. Not later than the date of making any
Restricted Payment (including any Restricted Payment permitted to be made
pursuant to the two previous paragraphs), McLeodUSA shall deliver to the trustee
an Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the required calculations were computed,
which calculations may be based upon McLeodUSA's latest available financial
statements.
LIMITATION ON LIENS
McLeodUSA may not, and may not permit any Restricted Subsidiary of
McLeodUSA to, Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or hereafter acquired to secure any Indebtedness
without making, or causing such Restricted Subsidiary to make, effective
provision for securing the McLeodUSA notes (x) equally and ratably with such
Indebtedness as to such property for so long as such
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Indebtedness will be so secured or (y) in the event such Indebtedness is
Indebtedness of McLeodUSA which is subordinate in right of payment to the
McLeodUSA notes, prior to such Indebtedness as to such property for so long
as such Indebtedness will be so secured.
The foregoing restrictions shall not apply to:
1. Liens existing on the date of the McLeodUSA indenture and securing
Indebtedness outstanding on the date of the McLeodUSA indenture or Incurred on
or after the Issue Date pursuant to any Senior Credit Facility or Qualified
Receivable Facility;
2. Liens securing Indebtedness in an amount which, together with the
aggregate amount of Indebtedness then outstanding or available under all Senior
Credit Facilities (or under refinancings or amendments of such Senior Credit
Facilities), does not exceed 1.5 times McLeodUSA's Consolidated Cash Flow
Available for Fixed Charges for the four full fiscal quarters preceding the
Incurrence of such Lien for which McLeodUSA's consolidated financial statements
have been filed with the SEC or become publicly available, determined on a pro
forma basis as if such Indebtedness had been Incurred and the proceeds thereof
had been applied at the beginning of such four fiscal quarters;
3. Liens in favor of McLeodUSA or any Wholly-Owned Restricted
Subsidiary of McLeodUSA;
4. Liens on Property of McLeodUSA or a Restricted Subsidiary acquired,
constructed or constituting improvements made after the Issue Date of the
McLeodUSA notes to secure Purchase Money Indebtedness which is otherwise
permitted under the McLeodUSA indenture, provided that (a) the principal amount
of any Indebtedness secured by any such Lien does not exceed 100% of such
purchase price or cost of construction or improvement of the Property subject to
such Lien, (b) such Lien attaches to such property prior to, at the time of or
within 180 days after the acquisition, completion of construction or
commencement of operation of such Property and (c) such Lien does not extend to
or cover any Property other than the specific item of Property (or portion
thereof) acquired, constructed or constituting the improvements made with the
proceeds of such Purchase Money Indebtedness;
5. Liens to secure Acquired Indebtedness, provided that (a) such Lien
attaches to the acquired asset prior to the time of the acquisition of such
asset and (b) such Lien does not extend to or cover any other Property;
6. Liens to secure Indebtedness Incurred to extend, renew, refinance or
refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Indebtedness secured by any Lien referred to in the foregoing
clauses 1, 2, 4 and 5 so long as such Lien does not extend to any other Property
and the principal amount of Indebtedness so secured is not increased except as
otherwise permitted under clause 5 of the second paragraph of
"-Covenants-Limitation on Consolidated Indebtedness" (in the case of
Indebtedness of McLeodUSA) or clause 8 of "-Covenants-Limitation on Indebtedness
and Preferred Stock of Restricted Subsidiaries" (in the case of Indebtedness of
Restricted Subsidiaries);
7. Liens not otherwise permitted by the foregoing clauses 1 through 6
in an aggregate amount not to exceed 5% of McLeodUSA's Consolidated Tangible
Assets;
8. Liens granted after the Issue Date pursuant to the immediately
preceding paragraph to secure the McLeodUSA notes; and
9. Permitted Liens.
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS
McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, enter into, assume, Guarantee or
otherwise become liable with respect to any Sale and Leaseback Transaction
(other than
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a Sale and Leaseback Transaction between McLeodUSA or a Restricted Subsidiary
on the one hand and a Restricted Subsidiary or McLeodUSA on the other hand),
unless
1. McLeodUSA or such Restricted Subsidiary, as the case may be,
receives consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value, as evidenced by a Board Resolution
delivered to the trustee, of the Property subject to such transaction;
2. the Attributable Indebtedness of McLeodUSA or such Restricted
Subsidiary with respect thereto is included as Indebtedness and would be
permitted by the covenant described under "-Covenants-Limitation on Consolidated
Indebtedness" or "-Covenants-Limitation on Indebtedness and Preferred Stock of
Restricted Subsidiaries," as the case may be;
3. McLeodUSA or such Restricted Subsidiary would be permitted to create
a Lien on such Property without securing the McLeodUSA notes by the covenant
described under "-Covenants-Limitation on Liens"; and
4. the Net Cash Proceeds from such transaction are applied in
accordance with the covenant described under "-Asset Sales";
provided that McLeodUSA shall be permitted to enter into Sale and Leaseback
Transactions for up to $30 million with respect to construction of McLeodUSA's
headquarters buildings located in Cedar Rapids, Iowa, provided that any such
transaction is entered into within 180 days of the earlier of (x) substantial
completion or (y) occupation of the applicable phase of such headquarters
building.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, cause or suffer to exist or become effective, or enter
into, any encumbrance or restriction, other than by law or regulation, on the
ability of any Restricted Subsidiary to:
1. pay dividends or make any other distributions in respect of its
Capital Stock or pay any Indebtedness or other obligation owed to McLeodUSA or
any Restricted Subsidiary;
2. make loans or advances to McLeodUSA or any Restricted Subsidiary; or
3. transfer any of its Property to McLeodUSA or any other Restricted
Subsidiary, except:
(a) any encumbrance or restriction existing as of the Issue Date under
the McLeodUSA indenture or any other agreement relating to any Existing
Indebtedness or any Indebtedness under a Qualified Receivable Facility otherwise
permitted under the McLeodUSA indenture;
(b) any encumbrance or restriction under an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in any such
agreement relate solely to the Property so acquired;
(c) any encumbrance or restriction relating to any Indebtedness of any
Restricted Subsidiary existing on the date on which such Restricted Subsidiary
is acquired by McLeodUSA or another Restricted Subsidiary (other than any such
Indebtedness Incurred by such Restricted Subsidiary in connection with or in
anticipation of such acquisition);
(d) any encumbrance or restriction under an agreement effecting a
permitted refinancing of Indebtedness issued under an agreement referred to in
the foregoing clauses (a) through (c), so long as the
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encumbrances and restrictions contained in any such refinancing agreement are
not materially more restrictive than the encumbrances and restrictions
contained in such agreements;
(e) customary provisions (A) that restrict the subletting, assignment
or transfer of any property or asset that is a lease, license, conveyance or
contract or similar property or asset; (B) existing by virtue of any transfer
of, agreement to transfer, option or right with respect to, or Lien on, any
property or assets of McLeodUSA or any Restricted Subsidiary not otherwise
prohibited by the McLeodUSA indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of McLeodUSA or any Restricted Subsidiary in any manner material to McLeodUSA or
any Restricted Subsidiary;
(f) in the case of clause (3) above, restrictions contained in any
security agreement, including a Capital Lease Obligation, securing Indebtedness
of McLeodUSA or a Restricted Subsidiary otherwise permitted under the McLeodUSA
indenture, but only to the extent such restrictions restrict the transfer of the
property subject to such security agreement; and
(g) any restriction with respect to a Restricted Subsidiary of
McLeodUSA imposed by an agreement which has been entered into for the sale or
disposition of all or substantially all of the Capital Stock or assets of such
Restricted Subsidiary, provided that the consummation of such transaction would
not result in an Event of Default or an event that, with the passing of time or
the giving of notice or both, would constitute an Event of Default, that such
restriction terminates if such transaction is not consummated and that the
consummation or abandonment of such transaction occurs within one year of the
date such agreement was entered into.
Nothing contained in this "-Covenants-Limitation on Dividend and Other
Payment Restrictions Affecting Restricted Subsidiaries" covenant shall prevent
McLeodUSA or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted under the
"-Covenants-Limitation on Liens" covenant or (2) restricting the sale or other
disposition of property or assets of McLeodUSA or any of its Restricted
Subsidiaries that secure Indebtedness of McLeodUSA or any of its Restricted
Subsidiaries otherwise permitted under "-Covenants-Limitation on Consolidated
Indebtedness" or "-Covenants-Limitations on Indebtedness and Preferred Stock of
Restricted Subsidiaries," as the case may be.
LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
McLeodUSA (i) shall not permit any Restricted Subsidiary to issue any
Capital Stock other than to McLeodUSA or a Wholly-Owned Restricted Subsidiary
unless immediately after giving effect thereto such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment of McLeodUSA or
any other Restricted Subsidiary in such Restricted Subsidiary would have been
permitted under "-Covenants-Limitation on Restricted Payments" if made on the
date of such issuance and (ii) shall not permit any Person other than McLeodUSA
or a Wholly-Owned Restricted Subsidiary to own any Capital Stock of any
Restricted Subsidiary, other than directors' qualifying shares and except for:
(a) a sale of 100% of the Capital Stock of a Restricted Subsidiary sold
in a transaction not prohibited by the covenant described under "-Asset Sales";
(b) a sale of the Capital Stock of a Restricted Subsidiary sold in a
transaction not prohibited by the covenant described under "-Asset Sales" if,
after giving effect thereto, greater than 50% of the Capital Stock of such
Restricted Subsidiary is owned by McLeodUSA or by a Wholly-Owned Restricted
Subsidiary;
(c) Capital Stock of a Restricted Subsidiary issued and outstanding on
the Issue Date and held by Persons other than McLeodUSA or any Restricted
Subsidiary;
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(d) Capital Stock of a Restricted Subsidiary issued and outstanding
prior to the time that such Person becomes a Restricted Subsidiary so long as
such Capital Stock was not issued in anticipation or contemplation of such
Person's becoming a Restricted Subsidiary or otherwise being acquired by
McLeodUSA;
(e) any Preferred Stock permitted to be issued under
"-Covenants-Limitation on Indebtedness and Preferred Stock of Restricted
Subsidiaries"; and
(f) ownership by any Person other than McLeodUSA or a Subsidiary of
less than 50% of the Capital Stock of a Person (A) in which McLeodUSA or a
Restricted Subsidiary has made a Permitted Investment pursuant to clause (3) of
the definition of "Permitted Investments," (B) of which more than 50% of such
Person's Capital Stock is owned, directly or indirectly, by McLeodUSA and (C) as
to which McLeodUSA has the power to direct the policies, management and affairs.
TRANSACTIONS WITH AFFILIATES
McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, sell, lease, transfer, or otherwise
dispose of, any of its Properties or assets to, or purchase any Property or
assets from, or enter into any contract, agreement, understanding, loan, advance
or Guarantee with or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless:
(a) such Affiliate Transaction or series of Affiliate Transactions is
on terms that are no less favorable to McLeodUSA or such Restricted Subsidiary
than those that would have been obtained in a comparable arm's-length
transaction by McLeodUSA or such Restricted Subsidiary with a Person that is not
an Affiliate (or, in the event that there are no comparable transactions
involving Persons who are not Affiliates of McLeodUSA or the relevant Restricted
Subsidiary to apply for comparative purposes, is otherwise on terms that, taken
as a whole, McLeodUSA has determined to be fair to McLeodUSA or the relevant
Restricted Subsidiary) and
(b) McLeodUSA delivers to the trustee (i) with respect to any Affiliate
Transaction involving aggregate payments in excess of $1 million, a certificate
of the chief executive, operating or financial officer of McLeodUSA evidencing
such officer's determination that such Affiliate Transaction or series of
Affiliate Transactions complies with clause (a) above and is in the best
interests of McLeodUSA or such Restricted Subsidiary and (ii) with respect to
any Affiliate Transaction or series of Affiliate Transactions involving
aggregate payments in excess of $5 million, a Board Resolution certifying that
such Affiliate Transaction or series of Affiliate Transactions complies with
clause (a) above and that such Affiliate Transaction or series of Affiliate
Transactions has been approved by a majority of the disinterested members of the
board of directors who have determined that such Affiliate Transaction or series
of Affiliate Transactions is in the best interest of McLeodUSA or such
Restricted Subsidiary;
provided that the following shall not be deemed Affiliate Transactions:
1. any employment agreement entered into by McLeodUSA or any of
its Restricted Subsidiaries in the ordinary course of business and consistent
with industry practice;
2. any agreement or arrangement with respect to the compensation
of a director or officer of McLeodUSA or any Restricted Subsidiary approved by a
majority of the disinterested members of the board of directors and consistent
with industry practice;
3. transactions between or among McLeodUSA and its Restricted
Subsidiaries;
4. transactions permitted by the covenant described under
"-Covenants-Limitation on Restricted Payments;"
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5. transactions pursuant to any agreement or arrangement existing
on the Issue Date; and
6. transactions with respect to wireline or wireless transmission
capacity, the lease or sharing or other use of cable or fiber optic lines,
equipment, rights-of-way or other access rights, between McLeodUSA or any
Restricted Subsidiary and any other Person; provided, in any case, that such
transaction is on terms that are no less favorable, taken as a whole, to
McLeodUSA or the relevant Restricted Subsidiary than those that could have been
obtained in a comparable transaction by McLeodUSA or such Restricted Subsidiary
with Persons who are not Affiliates of McLeodUSA or the relevant Restricted
Subsidiary, or, in the event that there are no comparable transactions involving
Persons who are not Affiliates of McLeodUSA or the relevant Restricted
Subsidiary to apply for comparative purposes, is otherwise on terms that, taken
as a whole, McLeodUSA has determined to be fair to McLeodUSA or the relevant
Restricted Subsidiary.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
(a) McLeodUSA may designate a Subsidiary (including a newly formed or
newly acquired Subsidiary) of McLeodUSA or any of its Restricted Subsidiaries as
an Unrestricted Subsidiary if such Subsidiary does not have any obligations
which, if in Default, would result in a cross default on Indebtedness of
McLeodUSA or a Restricted Subsidiary (other than Indebtedness to McLeodUSA or a
Wholly-Owned Restricted Subsidiary), and (i) such Subsidiary has total assets of
$1,000 or less, (ii) such Subsidiary has assets of more than $1,000 and an
Investment in such Subsidiary in an amount equal to the Fair Market Value of
such Subsidiary would then be permitted under the first paragraph of
"-Covenants-Limitation on Restricted Payments" or (iii) such designation is
effective immediately upon such Person becoming a Subsidiary. Unless so
designated as an Unrestricted Subsidiary, any Person that becomes a Subsidiary
of McLeodUSA or any of its Restricted Subsidiaries shall be classified as a
Restricted Subsidiary thereof.
(b) McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person (other than a newly formed Subsidiary
having no outstanding Indebtedness (other than Indebtedness to McLeodUSA or a
Restricted Subsidiary) at the date of determination) becoming a Restricted
Subsidiary (whether through an acquisition, the redesignation of an Unrestricted
Subsidiary or otherwise) unless, after giving effect to such action, transaction
or series of transactions, on a pro forma basis, (i) McLeodUSA could incur at
least $1.00 of additional Indebtedness pursuant to the first paragraph of
"-Covenants-Limitation on Consolidated Indebtedness" and (ii) no Default or
Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be
redesignated as a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary as a
Restricted Subsidiary in compliance with clause (b) shall be made by the board
of directors pursuant to a Board Resolution delivered to the trustee and shall
be effective as of the date specified in such Board Resolution, which shall not
be prior to the date such Board Resolution is delivered to the trustee.
REPORTS
McLeodUSA will file with the trustee within 15 days after it files them
with the SEC copies of the annual and quarterly reports and the information,
documents, and other reports that McLeodUSA is required to file with the SEC
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act ("SEC
Reports"). In the event McLeodUSA shall cease to be required to file SEC Reports
pursuant to the Securities Exchange Act, McLeodUSA will nevertheless continue to
file such reports with the SEC, unless the SEC will not accept such a filing,
and the trustee. McLeodUSA will furnish copies of the SEC Reports to the holders
of McLeodUSA notes at the time McLeodUSA is required to file the same with the
trustee and will make such information available to investors who request it in
writing.
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CONSOLIDATION, MERGER, CONVEYANCE, LEASE OR TRANSFER
McLeodUSA will not, in any transaction or series of transactions,
consolidate with, or merge with or into, any other Person or permit any other
Person to merge with or into McLeodUSA, other than a merger of a Restricted
Subsidiary into McLeodUSA in which McLeodUSA is the continuing corporation, or
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the Property and assets of McLeodUSA and the Restricted
Subsidiaries taken as a whole to any other Person, unless:
(i) either (a) McLeodUSA shall be the continuing corporation or (b) the
corporation, if other than McLeodUSA, formed by such consolidation or into which
McLeodUSA is merged, or the Person which acquires, by sale, assignment,
conveyance, transfer, lease or disposition, all or substantially all of the
Property and assets of McLeodUSA and the Restricted Subsidiaries taken as a
whole (such corporation or Person, the "Surviving Entity"), shall be a
corporation organized and validly existing under the laws of the United States
of America, any political subdivision thereof, any state thereof or the District
of Columbia, and shall expressly assume, by a supplemental indenture, the due
and punctual payment of the principal of (and premium, if any) and interest on
all the McLeodUSA notes and the performance of McLeodUSA's covenants and
obligations under the McLeodUSA indenture;
(ii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions, no Event of Default or
Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions, McLeodUSA (or the
Surviving Entity, if McLeodUSA is not continuing) would (A) be permitted to
Incur at least $1.00 of additional Indebtedness pursuant to the first paragraph
of "-Covenants-Limitation on Consolidated Indebtedness" and (B) have a
Consolidated Net Worth that is not less than the Consolidated Net Worth of
McLeodUSA immediately before such transaction or series of transactions; and
(iv) if, as a result of any such transaction, Property of McLeodUSA
would become subject to a Lien prohibited by the provisions of the McLeodUSA
indenture described under "-Covenants-Limitation on Liens" above, McLeodUSA
or the successor entity to McLeodUSA shall have secured the McLeodUSA notes
as required thereby.
EVENTS OF DEFAULT
Each of the following is an "Event of Default" under the McLeodUSA
indenture:
(a) default in the payment of interest on any McLeodUSA note when the
same becomes due and payable, and the continuance of such default for a period
of 30 days;
(b) default in the payment of the principal of (or premium, if any, on)
any McLeodUSA note at its maturity, upon optional redemption, required
repurchase (including pursuant to a Change of Control Offer or an Asset Sale
Offer) or otherwise or the failure to make an offer to purchase any McLeodUSA
note as required;
(c) failure by McLeodUSA to comply with any of its covenants or
agreements described under "-Repurchase at the Option of the Holders upon a
Change of Control," "-Asset Sales" or "-Consolidation, Merger, Conveyance, Lease
or Transfer;"
(d) default in the performance, or breach, of any covenant or warranty
of McLeodUSA in the McLeodUSA indenture (other than a covenant or warranty
addressed in (a), (b) or (c) above) and continuance of such Default or breach
for a period of 60 days after written notice thereof has been given to McLeodUSA
by the trustee or to
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McLeodUSA and the trustee by holders of at least 25% of the aggregate
principal amount of the outstanding McLeodUSA notes;
(e) Indebtedness of McLeodUSA or any Restricted Subsidiary is not paid
when due within the applicable grace period, if any, or is accelerated by the
holders thereof and, in either case, the principal amount of such unpaid or
accelerated Indebtedness exceeds $10 million;
(f) the entry by a court of competent jurisdiction of one or more final
judgments against McLeodUSA or any Restricted Subsidiary in an uninsured or
unindemnified aggregate amount in excess of $10 million which is not discharged,
waived, appealed, stayed, bonded or satisfied for a period of 45 consecutive
days;
(g) the entry by a court having jurisdiction in the premises of (i) a
decree or order for relief in respect of McLeodUSA or any Restricted Subsidiary
in an involuntary case or proceeding under U.S. bankruptcy laws, as now or
hereafter constituted, or any other applicable Federal, state, or foreign
bankruptcy, insolvency, or other similar law or (ii) a decree or order adjudging
McLeodUSA or any Restricted Subsidiary bankrupt or insolvent, or approving as
properly filed a petition seeking reorganization, arrangement, adjustment or
composition of or in respect of McLeodUSA or any Restricted Subsidiary under
U.S. bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal, state or foreign bankruptcy, insolvency or similar law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of McLeodUSA or any Restricted Subsidiary or of any substantial
part of the Property or assets of McLeodUSA or any Restricted Subsidiary, or
ordering the winding up or liquidation of the affairs of McLeodUSA or any
Restricted Subsidiary, and the continuance of any such decree or order for
relief or any such other decree or order unstayed and in effect for a period of
60 consecutive days; or
(h) (i) the commencement by McLeodUSA or any Restricted Subsidiary of a
voluntary case or proceeding under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent; or (ii) the consent by McLeodUSA or any
Restricted Subsidiary to the entry of a decree or order for relief in respect of
McLeodUSA or any Restricted Subsidiary in an involuntary case or proceeding
under U.S. bankruptcy laws, as now or hereafter constituted, or any other
applicable Federal, state or foreign bankruptcy, insolvency or other similar law
or to the commencement of any bankruptcy or insolvency case or proceeding
against McLeodUSA or any Restricted Subsidiary; or (iii) the filing by McLeodUSA
or any Restricted Subsidiary of a petition or answer or consent seeking
reorganization or relief under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law; or (iv) the consent by McLeodUSA or any
Restricted Subsidiary to the filing of such petition or to the appointment of or
taking possession by a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of McLeodUSA or any Restricted Subsidiary or of
any substantial part of the Property or assets of McLeodUSA or any Restricted
Subsidiary, or the making by McLeodUSA or any Restricted Subsidiary of an
assignment for the benefit of creditors; or (v) the admission by McLeodUSA or
any Restricted Subsidiary in writing of its inability to pay its debts generally
as they become due; or (vi) the taking of corporate action by McLeodUSA or any
Restricted Subsidiary in furtherance of any such action.
If any Event of Default (other than an Event of Default specified in
clause (g) or (h) above) occurs and is continuing, then and in every such case
the trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of McLeodUSA notes may declare the Default Amount (as defined
herein) and any accrued and unpaid interest on all McLeodUSA notes then
outstanding to be immediately due and payable by a notice in writing to
McLeodUSA (and to the trustee if given by holders of the McLeodUSA notes), and
upon any such declaration, such Default Amount and any accrued interest will
become and be immediately due and payable. If any Event of Default specified in
clause (g) or (h) above occurs, the Default Amount and any accrued and unpaid
interest on the McLeodUSA notes then outstanding shall become immediately due
and payable without any declaration or other act on the part of the trustee or
any holder of McLeodUSA notes. In the event of a declaration of acceleration
because an Event of Default set forth in clause (e) above has occurred and is
continuing, such declaration of acceleration shall be automatically rescinded
and annulled if the event of default triggering such Event of Default pursuant
to clause (e) shall be remedied, or cured or waived by the holders of the
relevant Indebtedness, within 60 days after
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such event of default, provided that no judgment or decree for the payment of
money due on the McLeodUSA notes has been obtained by the trustee. The
Default Amount shall equal 100% of the principal amount of the McLeodUSA
notes. Under specified circumstances, the holders of a majority in principal
amount of the outstanding McLeodUSA notes by notice to McLeodUSA and the
trustee may rescind an acceleration and its consequences.
McLeodUSA will be required to deliver to the trustee annually a
statement regarding compliance with the McLeodUSA indenture, and McLeodUSA is
required within 30 days after becoming aware of any Default or Event of Default,
to deliver to the trustee a statement describing such Default or Event of
Default, its status and what action McLeodUSA is taking or proposes to take with
respect thereto. The trustee may withhold from holders of the McLeodUSA notes
notice of any continuing Default or Event of Default, other than relating to the
payment of principal or interest, if the trustee determines that withholding
such notice is in the holders' interest.
AMENDMENT, SUPPLEMENT AND WAIVER
McLeodUSA and the trustee may, at any time and from time to time,
without notice to or consent of any holder of McLeodUSA notes, enter into one or
more indentures supplemental to the McLeodUSA indenture:
(1) to evidence the succession of another Person to McLeodUSA and the
assumption by such successor of the covenants of McLeodUSA in the McLeodUSA
indenture and the McLeodUSA notes;
(2) to add to the covenants of McLeodUSA, for the benefit of the
holders, or to surrender any right or power conferred upon McLeodUSA by the
McLeodUSA indenture;
(3) to add any additional Events of Default;
(4) to provide for uncertificated McLeodUSA notes in addition to or in
place of certificated McLeodUSA notes;
(5) to evidence and provide for the acceptance of appointment under the
McLeodUSA indenture of a successor trustee;
(6) to secure the McLeodUSA notes;
(7) to cure any ambiguity in the McLeodUSA indenture, to correct or
supplement any provision in the McLeodUSA indenture which may be inconsistent
with any other provision therein or to add any other provisions with respect to
matters or questions arising under the McLeodUSA indenture; provided such
actions shall not adversely affect the interests of the holders in any material
respect; or
(8) to comply with the requirements of the SEC in order to effect or
maintain the qualification of the McLeodUSA indenture under the Trust Indenture
Act.
With the consent of the holders of not less than a majority in
principal amount of the outstanding McLeodUSA notes, McLeodUSA and the trustee
may enter into one or more indentures supplemental to the McLeodUSA indenture
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the McLeodUSA indenture or modifying in any
manner the rights of the holders; provided that no such supplemental indenture
shall, without the consent of the holder of each outstanding McLeodUSA note:
(1) change the Stated Maturity of the principal of, or any installment
of interest on, any McLeodUSA note, or alter the redemption provisions thereof,
or reduce the principal amount thereof (or premium, if any), or the interest
thereon that would be due and payable upon Maturity thereof, or change the place
of payment where, or the coin or currency in which, any McLeodUSA note or any
premium or interest thereon is payable, or impair the right to institute suit
for the enforcement of any such payment on or after the maturity thereof;
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(2) reduce the percentage in principal amount of the outstanding
McLeodUSA notes, the consent of whose holders is necessary for any such
supplemental indenture or required for any waiver of compliance with several
provisions of the McLeodUSA indenture or several Defaults thereunder;
(3) subordinate in right of payment, or otherwise subordinate, the
McLeodUSA notes to any other Indebtedness; or
(4) modify any provision of this paragraph, except to increase any
percentage set forth herein.
The holders of not less than a majority in principal amount of the
outstanding McLeodUSA notes may, on behalf of the holders of all the McLeodUSA
notes, waive any past Default under the McLeodUSA indenture and its
consequences, except a Default (1) in the payment of the principal of (or
premium, if any) or interest on any McLeodUSA note, or (2) in respect of a
covenant or provision hereof which under the proviso to the prior paragraph
cannot be modified or amended without the consent of the holder of each
outstanding McLeodUSA note affected.
SATISFACTION AND DISCHARGE OF THE MCLEODUSA INDENTURE; DEFEASANCE
McLeodUSA may terminate its obligations under the McLeodUSA indenture
when:
(i) either (A) all outstanding McLeodUSA notes have been delivered to
the trustee for cancellation or (B) all such McLeodUSA notes not theretofore
delivered to the trustee for cancellation have become due and payable, will
become due and payable within one year or are to be called for redemption within
one year under irrevocable arrangements satisfactory to the trustee for the
giving of notice of redemption by the trustee in the name and at the expense of
McLeodUSA, and McLeodUSA has irrevocably deposited or caused to be deposited
with the trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on the McLeodUSA notes not theretofore delivered to the trustee for
cancellation, for principal of (or premium, if any, on) and interest to the date
of deposit or maturity or date of redemption;
(ii) McLeodUSA has paid or caused to be paid all sums payable by
McLeodUSA under the McLeodUSA indenture; and
(iii) McLeodUSA has delivered to the trustee an Officers' Certificate
and an Opinion of Counsel relating to compliance with the conditions set forth
in the McLeodUSA indenture.
McLeodUSA, at its election, shall:
(a) be deemed to have paid and discharged its debt on the McLeodUSA
notes and the McLeodUSA indenture shall cease to be of further effect as to all
outstanding McLeodUSA notes, except as to (i) rights of registration of
transfer, substitution and exchange of McLeodUSA notes and McLeodUSA's right of
optional redemption, (ii) rights of holders to receive payments of principal of,
premium, if any, and interest on the McLeodUSA notes (but not the Change of
Control Purchase Price or the Offer Purchase Price) and any rights the holders
with respect to such amounts, (iii) the rights, obligations and immunities of
the trustee under the McLeodUSA indenture and (iv) several other specified
provisions in the McLeodUSA indenture, or
(b) cease to be under any obligation to comply with specified
restrictive covenants, including those described under "-Covenants," after the
irrevocable deposit by McLeodUSA with the trustee, in trust for the benefit of
the holders, at any time prior to the maturity of the McLeodUSA notes, of (A)
money in an amount, (B) U.S. Government Obligations which through the payment of
interest and principal will provide, not later than one day before the due date
of payment in respect of the McLeodUSA notes, money in an amount, or (C) a
combination thereof, sufficient to pay and discharge the principal of, and
interest on, the McLeodUSA notes then outstanding on the dates on which any such
payments are due in accordance with the terms of the McLeodUSA indenture and of
the McLeodUSA notes.
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Such defeasance or covenant defeasance shall be deemed to occur only if
specified conditions are satisfied, including, among other things, delivery by
McLeodUSA to the trustee of an opinion of counsel reasonably acceptable to the
trustee to the effect that (i) such deposit, defeasance and discharge will not
be deemed, or result in, a taxable event for federal income tax purposes with
respect to the holders; and (ii) McLeodUSA's deposit will not result in the
Trust or the trustee being subject to regulation under the Investment Company
Act of 1940.
THE TRUSTEE
United States Trust Company of New York is the trustee under the
McLeodUSA indenture and its current address is 114 West 47th Street, New York,
New York 10036.
The holders of not less than a majority in principal amount of the
outstanding McLeodUSA notes will have the right to direct the time, method and
place of conducting any proceeding for exercising any remedy available to the
trustee, subject to several exceptions. Except during the continuance of an
Event of Default, the trustee will perform only such duties as are specifically
set forth in the McLeodUSA indenture. The McLeodUSA indenture provides that in
case an Event of Default shall occur (which shall not be cured or waived), the
trustee will be required, in the exercise of its rights and powers under the
McLeodUSA indenture, to use the degree of care of a prudent person in the
conduct of such person's own affairs. Subject to such provisions, the trustee
will be under no obligation to exercise any of its rights or powers under the
McLeodUSA indenture at the request of any of the holders of the McLeodUSA notes,
unless such holders shall have offered to the trustee indemnity satisfactory to
it against any loss, liability or expense.
NO PERSONAL LIABILITY OF CONTROLLING PERSONS, DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No controlling Person, director, officer, employee, incorporator or
stockholder of McLeodUSA, as such, shall have any liability for any covenant,
agreement or other obligations of McLeodUSA under the McLeodUSA notes or the
McLeodUSA indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation, solely by reason of its past, present or
future status as a controlling Person, director, officer, employee, incorporator
or stockholder of McLeodUSA. By accepting a McLeodUSA note each holder waives
and releases all such liability (but only such liability). The waiver and
release are part of the consideration for issuance of the McLeodUSA notes.
Nonetheless, such waiver may not be effective to waive liabilities under the
federal securities laws and it has been the view of the SEC that such a waiver
is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange McLeodUSA notes in accordance with
the McLeodUSA indenture. McLeodUSA, the Registrar and the trustee may require a
holder, among other things, to furnish appropriate endorsements and transfer
documents and McLeodUSA may require a holder to pay any taxes and fees required
by law or permitted by the McLeodUSA indenture.
DEFINITIONS
Set forth below is a summary of several of the defined terms used in
the McLeodUSA indenture. Reference is made to the McLeodUSA indenture for the
full definition of all such terms, as well as any capitalized terms used herein
for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that such
Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such
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other Person merging with or into or becoming a Subsidiary of such specified
Person, but excluding Indebtedness which is extinguished, retired or repaid
in connection with such other Person merging with or into or becoming a
Subsidiary of such specified Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of McLeodUSA and of each other Subsidiary of McLeodUSA; provided,
further, that neither McLeodUSA nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling," "under
common control with" and "controlled by"), as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of Voting Stock, by agreement or otherwise.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease
or other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person to
such Person or a Wholly-Owned Restricted Subsidiary of such Person or by such
Person to a Wholly-Owned Restricted Subsidiary of such Person) of (i) shares of
Capital Stock or other ownership interests of a Restricted Subsidiary of such
Person (other than as permitted by the provisions of the McLeodUSA indenture
described above under "-Covenants-Limitation on Indebtedness and Preferred Stock
of Restricted Subsidiaries"), (ii) substantially all of the assets of such
Person or any of its Restricted Subsidiaries representing a division or line of
business (other than as part of a Permitted Investment) or (iii) other assets or
rights of such Person or any of its Restricted Subsidiaries outside of the
ordinary course of business and, in each case, that is not governed by the
provisions of the McLeodUSA indenture applicable to consolidations, mergers, and
transfers of all or substantially all of the assets of the McLeodUSA; provided
that "Asset Sale" shall not include (i) sales or other dispositions of
inventory, receivables and other current assets in the ordinary course of
business, (ii) simultaneous exchanges by McLeodUSA or any Restricted Subsidiary
of Telecommunications Assets for other Telecommunications Assets in the ordinary
course of business; provided that the applicable Telecommunications Assets
received by McLeodUSA or such Restricted Subsidiary have at least substantially
equal Fair Market Value to McLeodUSA or such Restricted Subsidiary (as
determined by the board of directors whose good faith determination shall be
conclusive and evidenced by a Board Resolution), and (iii) sales or other
dispositions of assets with a Fair Market Value (as certified in an Officers'
Certificate) not in excess of $1 million.
"Attributable Indebtedness" means, with respect to any Sale and
Leaseback Transaction of any Person, as at the time of determination, the
greater of (i) the capitalized amount in respect of such transaction that would
appear on the balance sheet of such Person in accordance with GAAP and (ii) the
present value (discounted at a rate consistent with accounting guidelines, as
determined in good faith by the responsible accounting officer of such Person)
of the payments during the remaining term of the lease (including any period for
which such lease has been extended or may, at the option of the lessor, be
extended) or until the earliest date on which the lessee may terminate such
lease without penalty or upon payment of a penalty (in which case the rental
payments shall include such penalty).
"Average Life" means, as of any date, with respect to any debt security
or Disqualified Stock, the quotient obtained by dividing (i) the sum of the
products of (x) the number of years from such date to the dates of each
scheduled principal payment or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt security or Disqualified
Stock multiplied in each case by (y) the amount of such principal or redemption
payment, by (ii) the sum of all such principal or redemption payments.
"board of directors" means the board of directors of McLeodUSA or any
committee thereof duly authorized to act on behalf of the board of directors,
unless the context suggests otherwise.
"Board Resolution" means a duly adopted resolution of the board of
directors in full force and effect at the time of determination.
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"Capital Lease Obligation" of any Person means the obligation to pay
rent or other payment amounts under a lease of (or other Indebtedness
arrangement conveying the right to use) real or personal property of such Person
which is required to be classified and accounted for as a capital lease or a
liability on the face of a balance sheet of such Person prepared in accordance
with GAAP, and the stated maturity thereof shall be the date of the last payment
of rent or any amount due under such lease prior to the first date upon which
such lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Change of Control" shall be deemed to occur if (i) the sale,
conveyance, transfer or lease of all or substantially all of the assets of
McLeodUSA to any "Person" or "group" (within the meaning of Sections 13(d)(3)
and 14(d)(2) of the Securities Exchange Act or any successor provision to either
of the foregoing, including any group acting for the purpose of acquiring,
holding or disposing of securities within the meaning of Rule 13d-5(b)(i) under
the Securities Exchange Act), other than any Permitted Holder (as defined below)
or any Restricted Subsidiary of McLeodUSA, shall have occurred; (ii) any
"Person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the
Securities Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(i) under the Securities Exchange
Act), other than any Permitted Holder, becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Securities Exchange Act) of more than 35% of the
total voting power of all classes of the Voting Stock of McLeodUSA (including
any warrants, options or rights to acquire such Voting Stock), calculated on a
fully diluted basis, and such voting power percentage is greater than or equal
to the total voting power percentage then beneficially owned by the Permitted
Holders in the aggregate; or (iii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the board of
directors (together with any directors whose election or appointment by the
board of directors or whose nomination for election by the stockholders of
McLeodUSA was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the board of directors then in office.
"Common Stock" means Capital Stock other than Preferred Stock.
"Consolidated Capital Ratio" of any Person as of any date means the
ratio of (i) the aggregate consolidated principal amount of Indebtedness of such
Person then outstanding to (ii) the aggregate consolidated paid-in capital of
such Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period
means the Consolidated Net Income of McLeodUSA and its Restricted Subsidiaries
for such period increased by the sum of (i) Consolidated Interest Expense of
McLeodUSA and its Restricted Subsidiaries for such period, plus (ii)
Consolidated Income Tax Expense of McLeodUSA and its Restricted Subsidiaries for
such period, plus (iii) the consolidated depreciation and amortization expense
included in the income statement of McLeodUSA and its Restricted Subsidiaries
for such period, plus (iv) any non-cash expense related to the issuance to
employees of McLeodUSA or any Restricted Subsidiary of McLeodUSA of options to
purchase Capital Stock of McLeodUSA or such Restricted Subsidiary, plus (v) any
charge related to any premium or penalty paid in connection with redeeming or
retiring any Indebtedness prior to its stated maturity; and plus (vi) any
non-cash expense related to a purchase accounting adjustment not requiring an
accrual or reserve and separately disclosed in McLeodUSA's Consolidated Income
Statement, and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in accordance
with GAAP; provided that there shall be excluded therefrom the Consolidated Cash
Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary of
McLeodUSA (calculated separately for such Restricted Subsidiary in the same
manner as provided above for McLeodUSA) that is subject to a restriction which
prevents the payment of dividends or the making of distributions to McLeodUSA or
another Restricted Subsidiary of McLeodUSA to the extent of such restriction.
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"Consolidated Income Tax Expense" for any period means the aggregate
amounts of the provisions for income taxes of McLeodUSA and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"Consolidated Interest Expense" means for any period the interest
expense included in a consolidated income statement (excluding interest income)
of McLeodUSA and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of), (i) the amortization of Indebtedness discount;
(ii) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities; (iii) fees with respect to interest rate swap
or similar agreements or foreign currency hedge, exchange or similar agreements;
(iv) Preferred Stock dividends of McLeodUSA and its Restricted Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not Disqualified
Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of
McLeodUSA and its Restricted Subsidiaries, whether or not declared or paid; (vi)
interest on Indebtedness guaranteed by McLeodUSA and its Restricted
Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during
such period that is allocable to interest expense in accordance with GAAP.
"Consolidated Net Income" of any Person means, for any period, the
aggregate net income (or net loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis determined in accordance
with GAAP; provided that there shall be excluded therefrom, without duplication
(i) all items classified as extraordinary, (ii) any net income (or net loss) of
any Person other than such Person and its Restricted Subsidiaries, except to the
extent of the amount of dividends or other distributions actually paid to such
Person or its Restricted Subsidiaries by such other Person during such period,
(iii) the net income of any Person acquired by such Person or any of its
Restricted Subsidiaries in a pooling-of-interests transaction for any period
prior to the date of the related acquisition, (iv) any gain or loss, net of
taxes, realized on the termination of any employee pension benefit plan, (v) net
gains (or net losses) in respect of Asset Sales by such Person or its Restricted
Subsidiaries, (vi) the net income (or net loss) of any Restricted Subsidiary of
such Person to the extent that the payment of dividends or other distributions
to such Person is restricted by the terms of its charter or any agreement,
instrument, contract, judgment, order, decree, statute, rule, governmental
regulation or otherwise, except for any dividends or distributions actually paid
by such Restricted Subsidiary to such Person, (vii) with regard to a
non-wholly-owned Restricted Subsidiary, any aggregate net income (or loss) in
excess of such Person's or such Restricted Subsidiary's pro rata share of such
non-wholly-owned Restricted Subsidiary's net income (or loss) and (viii) the
cumulative effect of changes in accounting principles.
"Consolidated Net Worth" of any Person means, at any date of
determination, the consolidated stockholders' equity or partners' capital
(excluding Disqualified Stock) of such Person and its subsidiaries, as
determined in accordance with GAAP.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under GAAP would be included on a consolidated balance sheet of such Person and
its Subsidiaries after deducting therefrom all goodwill, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangibles, which in each case under GAAP would be included on such
consolidated balance sheet.
"Default" means any event, act or condition, the occurrence of which
is, or after notice or the passage of time or both would be, an Event of
Default.
"Depository" means, with respect to the McLeodUSA notes issuable or
issued in whole or in part in the form of one or more Global Notes, The
Depository Trust Company for so long as it shall be a clearing agency registered
under the Securities Exchange Act, or such successor as McLeodUSA shall
designate from time to time in an Officers' Certificate delivered to the
trustee.
"Disqualified Stock" means any Capital Stock which, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the
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holder thereof, or is exchangeable for Indebtedness at any time, in whole or
in part, prior to the Stated Maturity of the McLeodUSA notes.
"Eligible Cash Equivalents" means (i) securities issued or directly and
fully guaranteed or insured by the United States of America or any agency or
instrumentality thereof, provided that the full faith and credit of the United
States of America is pledged in support thereof; (ii) time deposits and
certificates of deposit of any commercial bank organized in the United States
having capital and surplus in excess of $500 million with a maturity date not
more than one year from the date of acquisition, (iii) repurchase obligations
with a term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (ii) above; (iv) direct obligations issued by
any state of the United States of America or any political subdivision of any
such state or any public instrumentality thereof maturing, or subject to tender
at the option of the holder thereof within 270 calendar days after the date of
acquisition thereof and, at the time of acquisition, having a rating of A or
better from Standard & Poor's Corporation or A-2 or better from Moody's
Investors Service, Inc., (v) commercial paper issued by the parent corporation
of any commercial bank organized in the United States having capital and surplus
in excess of $500 million and commercial paper issued by others having one of
the two highest ratings obtainable from either Standard & Poor's Corporation or
Moody's Investors Service, Inc. and in each case maturing within 270 calendar
days after the date of acquisition, (vi) overnight bank deposits and bankers'
acceptances at any commercial bank organized in the United States having capital
and surplus in excess of $500 million; (vii) deposits available for withdrawal
on demand with a commercial bank organized in the United States having capital
and surplus in excess of $500 million; and (viii) investments in money market
funds substantially all of whose assets comprise securities of the types
described in clauses (i) through (vi).
"Existing Indebtedness" means Indebtedness outstanding on the date of
the McLeodUSA indenture (other than under any Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the
sale value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy, as determined in good faith by the
board of directors.
"GAAP" means United States generally accepted accounting principles,
consistently applied, as set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board, or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States, that are applicable to the circumstances as of the date of
determination; provided that, except as otherwise specifically provided, all
calculations made for purposes of determining compliance with the terms of the
provisions of the McLeodUSA indenture shall utilize GAAP as in effect on the
Issue Date.
"Guarantee" means any direct or indirect obligation, contingent or
otherwise, of a Person guaranteeing or having the economic effect of
guaranteeing any Indebtedness of any other Person in any manner (and
"Guaranteed," "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing).
"Holder" means (i) in the case of any certificated McLeodUSA note, the
Person in whose name such certificated McLeodUSA note is registered in the Note
Register and (ii) in the case of any Global McLeodUSA note, the Depositary.
"Incur" means, with respect to any Indebtedness or other obligation of
any Person, to create, issue, incur (by conversion, exchange or otherwise),
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness or other
obligation on the balance sheet of such Person (and "Incurrence," "Incurred,"
"Incurrable" and "Incurring" shall have meanings correlative to the foregoing);
provided that a change in GAAP that results in an obligation of such Person that
exists at such time becoming Indebtedness shall not be deemed an Incurrence of
such Indebtedness and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Indebtedness.
Indebtedness otherwise incurred by a Person
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before it becomes a Subsidiary of McLeodUSA (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to have been
incurred at the time at which such Person becomes a Subsidiary of McLeodUSA.
"Indebtedness" means, at any time (without duplication), with respect
to any Person, whether recourse as to all or a portion of the assets of such
Person, and whether or not contingent, (i) any obligation of such Person for
money borrowed, (ii) any obligation of such Person evidenced by bonds,
debentures, notes, Guarantees or other similar instruments, including, without
limitation, any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in the
ordinary course of business, (iii) any reimbursement obligation of such Person
with respect to letters of credit, bankers' acceptances or similar facilities
issued for the account of such Person, (iv) any obligation of such Person issued
or assumed as the deferred purchase price of Property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business, which in either case are not more than 60 days overdue or which are
being contested in good faith), (v) any Capital Lease Obligation of such Person,
(vi) the maximum fixed redemption or repurchase price of Disqualified Stock of
such Person and, to the extent held by Persons other than such Person or its
Restricted Subsidiaries, the maximum fixed redemption or repurchase price of
Disqualified Stock of such Person's Restricted Subsidiaries, at the time of
determination, (vii) every obligation under Interest Rate and Currency
Protection Agreements of such Person, (viii) any Attributable Indebtedness with
respect to any Sale and Leaseback Transaction to which such Person is a party
and (ix) any obligation of the type referred to in clauses (i) through (viii) of
this definition of another Person and all dividends and distributions of another
Person the payment of which, in either case, such Person has Guaranteed or is
responsible or liable, directly or indirectly, as obligor, Guarantor or
otherwise. For purposes of the preceding sentence, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the McLeodUSA indenture; provided
that, if such Disqualified Stock is not then permitted to be repurchased, the
repurchase price shall be the book value of such Disqualified Stock. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with respect
to contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided that the amount outstanding
at any time of any Indebtedness issued with original issue discount (including,
without limitation, our 10 1/2% senior discount notes) is the face amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with
GAAP.
"Interest Rate or Currency Protection Agreement" of any Person means
any forward contract, futures contract, swap, option, future option or other
financial agreement or arrangement (including, without limitation, caps, floors,
collars and similar agreements) relating to, or the value of which is dependent
upon, interest rates or currency exchange rates or indices.
"Investment" in any Person means any direct, indirect or contingent (i)
advance or loan to, Guarantee of any Indebtedness of, extension of credit or
capital contribution to such Person, (ii) the acquisition of any shares of
Capital Stock, bonds, notes, debentures or other securities of such Person, or
(iii) the acquisition, by purchase or otherwise, of all or substantially all of
the business, assets or stock or other evidence of beneficial ownership of such
Person; provided that Investments shall exclude commercially reasonable
extensions of trade credit. The amount of any Investment shall be the original
cost of such Investment, plus the cost of all additions thereto and minus the
amount of any portion of such Investment repaid to such Person in cash as a
repayment of principal or a return of capital, as the case may be, but without
any other adjustments for increases or decreases in value, or write-ups,
write-downs or write-offs with respect to such Investment. In determining the
amount of any Investment involving a transfer of any Property other than cash,
such Property shall be valued at its Fair Market Value at the time of such
transfer.
"Issue Date" means the date on which the McLeodUSA notes were first
authenticated and delivered under the McLeodUSA indenture.
"Lien" means, with respect to any Property or other asset, any mortgage
or deed of trust, pledge, hypothecation, assignment, deposit arrangement,
security interest, lien (statutory or other), charge, easement,
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encumbrance, preference, priority or other security or similar agreement or
preferential arrangement of any kind or nature whatsoever on or with respect
to such Property or other asset (including, without limitation, any
conditional sale or title retention agreement having substantially the same
economic effect as any of the foregoing).
"Maturity" means, when used with respect to a McLeodUSA note, the date
on which the principal of such McLeodUSA note becomes due and payable as
provided therein or in the McLeodUSA indenture, whether on the date specified in
such McLeodUSA note as the fixed date on which the principal of such McLeodUSA
note is due and payable, a Change of Control Payment Date or an Asset Sale
Payment Date, or by declaration of acceleration, call for redemption or
otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or
assets by any Person or any of its Restricted Subsidiaries, cash or readily
marketable cash equivalents received net of (i) all reasonable out-of-pocket
expenses of such Person or such Restricted Subsidiary incurred in connection
with such sale, including, without limitation, all legal, title and recording
tax expenses, commissions and other fees and expenses incurred (but excluding
any finder's fee or broker's fee payable to any Affiliate of such Person) and
all federal, state, foreign and local taxes arising in connection with such sale
that are paid or required to be accrued as a liability under GAAP by such Person
or its Restricted Subsidiaries, (ii) all payments made or required to be made by
such Person or its Restricted Subsidiaries on any Indebtedness which is secured
by such Properties or other assets in accordance with the terms of any Lien upon
or with respect to such Properties or other assets or which must, by the terms
of such Lien, or in order to obtain a necessary consent to such transaction or
by applicable law, be repaid in connection with such sale, (iii) all
contractually required distributions and other payments made to minority
interest holders (but excluding distributions and payments to Affiliates of such
Person) in Restricted Subsidiaries of such Person as a result of such
transaction and (iv) appropriate amounts to be provided by such Person or any
Restricted Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with such assets and retained by
such Person or any Restricted Subsidiary thereof, as the case may be, after such
transaction, including, without limitation, liabilities under any
indemnification obligations and severance and other employee termination costs
associated with such transaction, in each case as determined by the board of
directors of such Person, in its reasonable good faith judgment evidenced by a
resolution of the board of directors filed with the trustee; provided that, in
the event that any consideration for a transaction (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; and provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the McLeodUSA indenture.
"Officers' Certificate" means a certificate signed by (i) the Chairman
of the Board, a Vice Chairman of the Board, the President, the Chief Executive
Officer or a Vice President, and (ii) the Chief Financial Officer, the Chief
Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an
Assistant Secretary of McLeodUSA and delivered to the trustee, which shall
comply with the McLeodUSA indenture.
"Paying Agent" means any Person authorized by McLeodUSA to make
payments of principal, premium or interest with respect to the McLeodUSA notes
on behalf of McLeodUSA.
"Permitted Holders" means Alliant Energy Corp., Media/Communications
Partners III Limited Partnership and Forstmann Little & Co. and their
respective successors and assigns, and Clark E. and Mary E. McLeod, Richard
A. Lumpkin and Kwok Li and foundations and trusts controlled by them or any
of them, and Affiliates (other than McLeodUSA and the Restricted
Subsidiaries) of each of the foregoing.
"Permitted Interest Rate or Currency Protection Agreement" of any
Person means any Interest Rate or Currency Protection Agreement entered into
with one or more financial institutions in the ordinary course of business that
is designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Indebtedness Incurred and which shall
have a notional amount no greater than the payments due with respect to the
Indebtedness being hedged thereby and not for purposes of speculation.
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"Permitted Investments" means (i) Eligible Cash Equivalents; (ii)
Investments in Property used in the ordinary course of business; (iii)
Investments in any Person as a result of which such Person becomes a Restricted
Subsidiary in compliance with the McLeodUSA indenture; (iv) Investments pursuant
to agreements or obligations of McLeodUSA or a Restricted Subsidiary, in effect
on the Issue Date, to make such Investments; (v) Investments in prepaid
expenses, negotiable instruments held for collection and lease, utility and
workers' compensation, performance and other similar deposits; (vi) Permitted
Interest Rate or Currency Protection Agreements with respect to any floating
rate Indebtedness that is permitted by the terms of the McLeodUSA indenture to
be outstanding; (vii) bonds, notes, debentures or other debt securities received
as a result of Asset Sales permitted under the covenant described under "-Asset
Sales"; (viii) Investments in existence at the Issue Date; (ix) commission,
payroll, travel and similar advances to employees in the ordinary course of
business to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (x) stock,
obligations or securities received in satisfaction of judgments; and (xi)
Investments made pursuant to any deferred-compensation plan, including
Investments made through a trust (including a grantor trust) established in
connection with any such plan, for the benefit of employees of McLeodUSA or of
any Restricted Subsidiary.
"Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims which are not yet delinquent or which are being contested in
good faith by appropriate proceedings, if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have been
made therefor; (ii) other Liens incidental to the conduct of McLeodUSA's and its
Restricted Subsidiaries' business or the ownership of its property and assets
not securing any Indebtedness, and which do not in the aggregate materially
detract from the value of McLeodUSA's and its Restricted Subsidiaries' property
or assets when taken as a whole, or materially impair the use thereof in the
operation of its business; (iii) Liens with respect to assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to McLeodUSA to secure
Indebtedness owing to McLeodUSA; (iv) pledges and deposits made in the ordinary
course of business in connection with workers' compensation and unemployment
insurance, statutory Liens of landlords, carriers, warehousemen, mechanics,
materialmen, repairmen and other types of statutory obligations; (v) deposits
made to secure the performance of tenders, bids, leases, and other obligations
of like nature incurred in the ordinary course of business (exclusive of
obligations for the payment of borrowed money); (vi) zoning restrictions,
servitudes, easements, rights-of-way, restrictions and other similar charges or
encumbrances incurred in the ordinary course of business which, in the
aggregate, do not materially detract from the value of the property subject
thereto or interfere with the ordinary conduct of the business of McLeodUSA or
its Restricted Subsidiaries; (vii) Liens arising out of judgments or awards
against McLeodUSA or any Restricted Subsidiary with respect to which McLeodUSA
or such Restricted Subsidiary is prosecuting an appeal or proceeding for review
and McLeodUSA or such Restricted Subsidiary is maintaining adequate reserves in
accordance with GAAP; (viii) any interest or title of a lessor in the property
subject to any lease other than a Capital Lease; (ix) Liens (including
extensions and renewals thereof) upon real or personal property acquired after
the Issue Date; provided that (a) such Lien is created solely for the purpose of
securing Indebtedness Incurred, in accordance with "-Covenants-Limitation on
Consolidated Indebtedness," (1) to finance the cost (including the cost of
improvement or construction) of the item of property or assets subject thereto
and such Lien is created prior to, at the time of or within six months after the
later of the acquisition, the completion of construction or the commencement of
full operation of such property or (2) to refinance any Indebtedness previously
so secured, (b) the principal amount of the Indebtedness secured by such Lien
does not exceed 100% of such cost and (c) any such Lien shall not extend to or
cover any property or assets other than such item of property or assets and any
improvements on such item; (x) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of McLeodUSA and its
Restricted Subsidiaries; (xi) Liens encumbering property or assets under
construction arising from progress or partial payments by a customer of
McLeodUSA or its Restricted Subsidiaries relating to such property or assets;
(xii) Liens arising from filing precautionary Uniform Commercial Code financing
statements regarding leases; (xiii) Liens on property of, or on shares of stock
or Indebtedness of, any corporation existing at the time such corporation
becomes, or becomes a part of, any Restricted Subsidiary; provided that such
Liens do not extend to or cover any property or assets of McLeodUSA or any
Restricted Subsidiary other than the property or assets acquired; (xiv) Liens in
favor of McLeodUSA or any Restricted Subsidiary; (xv) Liens securing
reimbursement obligations with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof; (xvi) Liens in favor of customs and revenue authorities
arising as a matter of law to secure payment of customs duties in connection
with the importation of goods; (xvii) Liens encumbering customary initial
deposits and margin deposits, and other Liens that are either within the general
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parameters customary in the industry and incurred in the ordinary course of
business, in each case, securing Indebtedness under Permitted Interest Rate
Agreements and Currency Agreements; and (xviii) Liens arising out of conditional
sale, title retention, consignment or similar arrangements for the sale of goods
entered into by McLeodUSA or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of McLeodUSA and its
Restricted Subsidiaries prior to the Issue Date.
"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of
any class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, excluding Capital Stock in any other Person.
"Purchase Money Indebtedness" means Indebtedness of McLeodUSA
(including Acquired Indebtedness and Capital Lease Obligations, mortgage
financings and purchase money obligations) incurred for the purpose of financing
all or any part of the cost of construction, acquisition, development or
improvement by McLeodUSA or any Restricted Subsidiary of any Telecommunications
Assets of McLeodUSA or any Restricted Subsidiary and including any related
notes, Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Qualified Receivable Facility" means Indebtedness of McLeodUSA or any
Subsidiary Incurred from time to time pursuant to either (x) credit facilities
secured by Receivables or (y) receivable purchase facilities, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed
solely for the purpose of obtaining a Qualified Receivable Facility and
substantially all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other
than Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents
or intangibles evidencing or relating to the right to payment of money and
proceeds and products thereof in each case generated in the ordinary course of
business.
"Restricted Payment" means (i) a dividend or other distribution
declared or paid on the Capital Stock of McLeodUSA or to McLeodUSA's
stockholders (in their capacity as such), or declared or paid to any Person
other than McLeodUSA or a Restricted Subsidiary of McLeodUSA on the Capital
Stock of any Restricted Subsidiary of McLeodUSA, in each case, other than
dividends, distributions or payments made solely in Qualified Stock of McLeodUSA
or such Restricted Subsidiary, (ii) a payment made by McLeodUSA or any of its
Restricted Subsidiaries (other than to McLeodUSA or any Restricted Subsidiary)
to purchase, redeem, acquire or retire any Capital Stock of McLeodUSA or of a
Restricted Subsidiary, (iii) a payment made by McLeodUSA or any of its
Restricted Subsidiaries (other than a payment made solely in Qualified Stock of
McLeodUSA) to redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including pursuant to
mandatory repurchase covenants), prior to any scheduled maturity, scheduled
sinking fund or mandatory redemption payment, Indebtedness of McLeodUSA or such
Restricted Subsidiary which is subordinate (whether pursuant to its terms or by
operation of law) in right of payment to the McLeodUSA notes and which was
scheduled to mature on or after the maturity of the McLeodUSA notes or (iv) an
Investment in any Person, including an Unrestricted Subsidiary or the
designation of a Subsidiary as an Unrestricted Subsidiary, other than (a) a
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Permitted Investment, (b) an Investment by McLeodUSA in a Wholly-Owned
Restricted Subsidiary or (c) an Investment by a Restricted Subsidiary in
McLeodUSA or a Wholly-Owned Restricted Subsidiary of McLeodUSA.
"Restricted Subsidiary" means any Subsidiary of McLeodUSA that has not
been designated as an "Unrestricted Subsidiary" pursuant to the terms of the
McLeodUSA indenture.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Senior Credit Facility" means Indebtedness of McLeodUSA and its
Subsidiaries Incurred from time to time pursuant to one or more credit
agreements or similar facilities made available from time to time to McLeodUSA
and its Subsidiaries, whether or not secured, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the payment of principal
of such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred), and, when used with respect
to any installment of interest on such security, the fixed date on which such
installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of McLeodUSA as to which
the payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the McLeodUSA notes to at least the following extent: (i) no
payments of principal of (or premium, if any) or interest on or otherwise due in
respect of such Indebtedness may be permitted for so long as any default in the
payment of principal (or premium, if any) or interest on the McLeodUSA notes
exists; (ii) in the event that any other default that with the passing of time
or the giving of notice, or both, would constitute an event of default exists
with respect to the McLeodUSA notes, upon notice by 25% or more in principal
amount of the McLeodUSA notes to the trustee, the trustee shall give notice to
McLeodUSA and the holders of such Indebtedness (or trustees or agents therefor)
of a payment blockage, and thereafter no payments of principal of (or premium,
if any) or interest on or otherwise due in respect of such Indebtedness may be
made for a period of 179 days from the date of such notice; and (iii) such
Indebtedness may not (x) provide for payments of principal of such Indebtedness
at the stated maturity thereof or by way of a sinking fund applicable thereto or
by way of any mandatory redemption, defeasance, retirement or repurchase thereof
by McLeodUSA (including any redemption, retirement or repurchase which is
contingent upon events or circumstances, but excluding any retirement required
by virtue of acceleration of such Indebtedness upon an event of default
thereunder), in each case prior to the final Stated Maturity of the McLeodUSA
notes or (y) permit redemption or other retirement (including pursuant to an
offer to purchase made by McLeodUSA) of such other Indebtedness at the option of
the holder thereof prior to the final Stated Maturity of the McLeodUSA notes,
other than a redemption or other retirement at the option of the holder of such
Indebtedness (including pursuant to an offer to purchase made by McLeodUSA)
which is conditioned upon a change of control of McLeodUSA pursuant to
provisions substantially similar to those described under "-Repurchase at the
Option of Holders upon a Change of Control" (and which shall provide that such
Indebtedness will not be repurchased pursuant to such provisions prior to
McLeodUSA's repurchase of the McLeodUSA notes required to be repurchased by
McLeodUSA pursuant to the provisions described under "-Repurchase at the Option
of Holders upon a Change of Control").
"Subsidiary" means, with respect to any Person, (i) any corporation
more than 50% of the outstanding shares of Voting Stock of which is owned,
directly or indirectly, by such Person, or by one or more other Subsidiaries of
such Person, or by such Person and one or more other Subsidiaries of such
Person, (ii) any general partnership, limited liability company, joint venture
or similar entity, more than 50% of the outstanding partnership, membership or
similar interests of which are owned, directly or indirectly, by such Person, or
by one or more other
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Subsidiaries of such Person, or by such Person and one or more other
Subsidiaries of such Person and (iii) any limited partnership of which such
Person or any Subsidiary of such Person is a general partner.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting,
or providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (ii)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, (iii) creating, developing, producing or marketing
audiotext or videotext, (iv) publishing or distributing telephone (including
Internet) directories, whether in paper, electronic, audio or video format, (v)
marketing (including direct marketing and telemarketing), or (vi) evaluating,
participating in or pursuing any other business that is primarily related to
those identified in the foregoing clauses (i), (ii), (iii), (iv) or (v) above
(in the case of clauses (iii), (iv) and (v), however, in a manner consistent
with McLeodUSA's manner of business on the Issue Date), and shall, in any event,
include all businesses in which McLeodUSA or any of its Subsidiaries are engaged
on the Issue Date; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the board of
directors.
"Trading Day" means, with respect to a security traded on a securities
exchange, automated quotation system or market, a day on which such exchange,
system or market is open for a full day of trading.
"Unrestricted Subsidiary" means any Subsidiary of McLeodUSA that
McLeodUSA has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the McLeodUSA
indenture.
"Voting Stock" means, with respect to any Person, securities of any
class or classes of Capital Stock in such Person entitling the holders thereof
(whether at all times or at the times that such class of Capital Stock has
voting power by reason of the happening of any contingency) to vote in the
election of members of the board of directors or comparable body of such Person.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary
of such Person all of the outstanding Capital Stock or other ownership interests
(other than any director's qualifying shares) of which shall at the time be
owned by such Person or by one or more other Wholly-Owned Restricted
Subsidiaries of such Person or by such Person and one or more other Wholly-Owned
Restricted Subsidiaries of such Person.
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OTHER McLEODUSA INDEBTEDNESS
On March 4, 1997, we completed an offering of $500 million aggregate
principal amount at maturity of our 10 1/2% senior discount notes. Our 10
1/2% senior discount notes were priced at a discount and we received net
proceeds of approximately $288.9 million from the offering of our 10 1/2%
senior discount notes. Our 10 1/2% senior discount notes will accrete to an
aggregate principal amount of $500 million by March 1, 2002. Interest will
not accrue on our 10 1/2% senior discount notes prior to March 1, 2002.
Thereafter, interest will accrue at a rate of 10 1/2%% per annum which will
be payable in cash semi-annually in arrears on March 1 and September 1 of
each year, commencing September 1, 2002. Our 10 1/2% senior discount notes
rank PARI PASSU in right of payment with our 9 1/4% senior notes, 8 3/8%
senior notes, 9 1/2% senior notes, 8 1/8% senior notes and the McLeodUSA
notes. Our 10 1/2% senior discount notes will mature on March 1, 2007 and
will be payable prior to the maturity of our 9 1/4% senior notes, 8 3/8%
senior notes, 9 1/2% senior notes, 8 1/8% senior notes and the McLeodUSA
notes.
On July 21, 1997, we completed an offering of $225 million principal
amount of our 9 1/4% senior notes. We received net proceeds of approximately
$217.6 million from the offering of our 9 1/4% senior notes. Our 9 1/4%
senior notes accrue interest at a rate of 9 1/4% per annum which is payable
in cash semi-annually in arrears on July 15 and January 15 of each year,
commencing January 15, 1998. Our 9 1/4% senior notes rank PARI PASSU in right
of payment with our 10 1/2% senior discount notes, 8 3/8% senior notes,
9 1/2% senior notes, 8 3/8% senior notes and the McLeodUSA notes. Our 9 1/4%
senior notes will mature on July 15, 2007 and will be payable prior to the
maturity of our 8 3/8% senior notes, 9 1/2% senior notes, 8 3/8% senior notes
and the McLeodUSA notes.
On March 16, 1998, we completed an offering of $300 million
principal amount of our 8 3/8% senior notes. We received net proceeds of
approximately $291.9 million from the offering of our 8 3/8% senior notes.
Our 8 3/8% senior notes accrue interest at a rate of 8 3/8% per annum which
is payable in cash semi-annually in arrears on March 15 and September 15 of
each year, commencing September 15, 1998. Our 8 3/8% senior notes rank PARI
PASSU in right of payment with our 10 1/2% senior discount notes, 9 1/4%
senior notes, 9 1/2% senior notes, 8 1/8% senior notes and the McLeodUSA
notes. Our 8 3/8% senior notes will mature on March 15, 2008 and will be
payable prior to the maturity of our 9 1/2% senior notes, 8 1/8% senior notes
and the McLeodUSA notes.
On October 30, 1998, we completed an offering of $300 million
principal amount of our 9 1/2% senior notes. We received net proceeds of
approximately $291.9 million from the offering of our 9 1/2% senior notes.
Our 9 1/2% senior notes accrue interest at a rate of 9 1/2% per annum which
is payable in cash semi-annually in arrears on May 1 and November 1 of each
year, commencing May 1, 1999. Our 9 1/2% senior notes rank PARI PASSU in
right of payment with our 10 1/2% senior discount notes, 9 1/4% senior notes,
8 3/8% senior notes, 8 1/8% senior notes and the McLeodUSA notes. Our 9 1/2%
senior notes will mature on November 1, 2008 and will be payable prior to the
maturity of our 8 1/8% senior notes and the McLeodUSA notes.
On February 22, 1999, we completed an offering of $500 million
principal amount of our 8 1/8% senior notes. We received net proceeds of
approximately $487.8 million from the offering of our 8 1/8% senior notes.
Our 8 1/8% senior notes accrue interest at a rate of 8 1/8% per annum, which
is payable in cash semi-annually in arrears on February 15 and August 15 of
each year, commencing August 15, 1999. Our 8 1/8% senior notes rank PARI
PASSU in right of payment with our 10 1/2% senior discount notes, 9 1/4%
senior notes, 8 3/8% senior notes, 9 1/2% senior notes, 8 1/8% senior notes
and the McLeodUSA notes.
The indentures governing our 10 1/2% senior discount notes, 9 1/4%
senior notes, 8 3/8% senior notes, 9 1/2% senior notes and 8 1/8% senior
notes impose operating and financial restrictions on us and our subsidiaries
that are substantially the same as the restrictions governing the McLeodUSA
notes. These restrictions affect, and in some cases significantly limit or
prohibit, among other things, our ability and the ability of our subsidiaries
to incur additional indebtedness, pay dividends or make distributions in
respect of our or such subsidiaries' capital stock, make other restricted
payments, enter into sale and leaseback transactions, create liens upon
assets, enter into transactions with affiliates, sell assets, or consolidate,
merge or sell all or substantially all of our, or our subsidiaries' assets.
There can be no assurance that such covenants will not adversely affect our
ability to finance our future operations or capital needs or to engage in
other business activities that may be in our interest.
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<PAGE>
If the Concurrent Exchange Offer is consummated, we will issue up to
$210 million of additional senior notes. These notes will be due May 1, 2009 and
will rank PARI PASSU in right of payment with the McLeodUSA notes and the other
senior notes referred to above. In addition, the McLeodUSA notes will be
effectively subordinated in certain respects to any CapRock notes and any
CapRock 11 1/2 senior notes due 2009 that remain outstanding after this exchange
offer and the Concurrent Exchange Offer for which CapRock will remain the
obligor.
On May 31, 2000 we put in place $1.3 billion of senior secured credit
facilities with a syndicate of financial institutions (the "Senior Secured
Credit Facilities"). The Senior Secured Credit Facilities consist of (1) a seven
year senior secured revolving facility with an aggregate principal amount of
$450 million (the "Revolving Facility"), (2) a seven year senior secured
multi-draw term loan facility with an aggregate principal amount of $275 million
("Tranche A Term Facility"), and (3) an eight year single draw senior secured
term loan with an aggregate principal amount of $575 million ("Tranche B Term
Facility"). The Tranche A Term Facility provides for multiple ($50 million
minimum) draws for the first 24 months of the agreement at which time any
undrawn commitments expire. At June 30, 2000 the Tranche B Term Facility was
drawn in full and the balance of the other facilities remained undrawn.
The Senior Secured Credit Facilities are secured by (1) a first
priority pledge of all the capital stock owned by us and by each subsidiary, and
(2) a perfected first priority security interest in substantially all our
tangible and intangible assets and, to the extent of $100 million, by each
subsidiary. In addition, telecommunications assets acquired with proceeds or
refinanced from the Senior Secured Credit Facilities serve as collateral.
Interest on the Senior Secured Credit Facilities is payable quarterly
and variable at LIBOR plus 1% to LIBOR plus 3.25% based our debt rating. At our
current debt rating, interest rates are LIBOR plus 2.25% on the Revolving
Facility and Tranche A Term Facility, and LIBOR plus 3.00% on the Tranche B Term
Facility. We must maintain certain financial covenants requiring minimum
revenue, minimum access lines and debt to capital and debt to EBITDA ratios.
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<PAGE>
INFORMATION ABOUT CAPROCK
GENERAL
CAPROCK. CapRock is a facilities-based integrated communications
service provider primarily to small and medium-sized business and communications
carrier customers in the Southwestern United States. CapRock offers business
customers an integrated bundle of communications products and services including
local exchange, domestic and international long distance, enhanced voice, data,
Internet, DSL and dedicated private line services. Additionally, CapRock offers
its communications-intensive business and carrier customers dark fiber, high
bandwidth dedicated fiber infrastructure, terminating access for domestic and
international long distance and ATM, frame relay and IP data transport services.
CapRock's communications services are provided through resale and over
its fiber, voice and data networks. As of June 30, 2000, CapRock's network
covered approximately 4,500 route miles (including 22 metro fiber loops in key
markets). Additionally, as of June 30, 2000, CapRock provided switch-based
competitive local exchange services in 13 markets. As of June 30, 2000, CapRock
had 12 voice and 17 data switches installed and operational on its network.
CapRock had 61 central office collocations at June 30, 2000.
Additionally, CapRock is implementing its DSL footprint through its recent
agreement with a third party supplier of DSL services. These collocations enable
CapRock to provide local and other services over its own network infrastructure,
thereby lowering its cost of providing these services.
CAPROCK'S NETWORK. CapRock's fiber network is comprised primarily of 96
fiber strands pulled through one of four conduits buried below ground. A key
element of CapRock's strategy is to reduce the cost basis of fiber it retains
for its own use by sharing construction costs with other carriers and to quickly
recover its investment by selling excess dark fiber. CapRock plans to retain at
least 24 fiber strands throughout its entire network. CapRock is also building a
competitive local exchange service in 48 markets where it will provide Class 5
switching functionality and DSL services to its local customers. CapRock's data
network will consist of data switches and fiber capacity that will connect all
of these markets supporting ATM, frame relay and IP traffic. In many of these
local markets CapRock will install equipment to backhaul its voice and data
traffic to one of its switches in order to significantly lower its capital
requirements.
INFORMATION TECHNOLOGY SYSTEMS AND ELECTRONIC BONDING. CapRock is
automating most of the processes involved with switching a customer to its
network in order to decrease the time between receipt of a customer order and
completion of service installation. To achieve this goal, CapRock is acquiring,
integrating and developing information technology systems and platforms to
support its operations. CapRock has established and will continue to implement
"electronic bonding," which is the on-line and real-time connections of its
operating systems with those of ILECs. Additionally, CapRock has developed and
intends to roll out web-enabled ordering, billing and customer service features
to its customers.
CapRock has completed testing and began utilizing electronic bonding
with Southwestern Bell Telephone. Electronic bonding with Southwestern Bell has
enabled CapRock to reduce its provisioning times from approximately 25 business
days to as few as five business days. Orders submitted with electronic bonding
are also less likely to be rejected by Southwestern Bell, resulting in a greater
percentage of customers being transitioned to CapRock's facilities in a shorter
amount of time.
JOINT BUILD PROJECTS. CapRock has entered into joint fiber construction
agreements with AT&T, Enron Broadband Services, Inc., Pathnet, Inc. and
360networks, Inc. The joint construction arrangements provide several benefits,
including reduction of construction costs, accelerated construction, and the
freeing up of resources to focus attention on the construction of additional
portions of CapRock's network. To further recover the cost of building its fiber
network, CapRock has sold and intends to continue to sell excess dark fiber.
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<PAGE>
SALES ORGANIZATION. CapRock uses a direct sales force to sell its
communications products and services to business customers. CapRock believes
that its face-to-face sales efforts coupled with its personalized customer care
are highly effective in capturing and retaining market share among small and
medium-sized businesses. CapRock had 251 sales force employees as of June 30,
2000. CapRock provides its sales force with financial incentives that promote a
high level of ongoing customer care and loyalty.
Additionally, as of June 30, 2000, CapRock had 267 independent sales
agents who contributed to its sales efforts throughout the region, primarily in
smaller markets. CapRock's agent program was established in 1996, and consists
primarily of independent telephone equipment vendors authorized by CapRock to
market its products and services. Authorized agents receive recurring
commissions based on product, pricing, volume of usage and customer loyalty.
CapRock has six agent managers who actively recruit new independent sales
agents.
LITIGATION. On July 26, 2000, a stockholder class action complaint was
filed in the United States District Court for the Northern District of Texas on
behalf of all purchasers of CapRock common stock during the period between April
28, 2000 and July 6, 2000. Additional stockholder suits have been filed
subsequently, also in the United States District Court for Northern District of
Texas. The named defendants in these lawsuits, which allege that CapRock made
material misstatements or omissions of fact in violation of Section 10(b) of the
Securities Exchange Act, include CapRock and certain of its officers and
directors. The plaintiffs in the lawsuits seek monetary damages. CapRock intends
to vigorously defend the pending suits and any other similar suits subsequently
filed.
CapRock is a Texas corporation that was formed on February 3, 1998 to
be a holding company for its predecessor companies. The principal executive
offices of CapRock are located at 15601 Dallas Parkway, Suite 700, Dallas, Texas
75001, and its phone number is 972-982-9500.
ADDITIONAL INFORMATION
A detailed description of the CapRock business, executive compensation,
various benefit plans, including stock option plans, voting securities and the
principal holders of these securities, relationships and transactions between
CapRock and its executive officers, directors and principal stockholders,
financial statements and other matters related to CapRock is incorporated by
reference or set forth in the CapRock registration statement on Form S-3
(333-32910), the CapRock Annual Report on Form 10-K for the year ended December
31, 1999, and the CapRock Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2000 and June 30, 2000, incorporated into this prospectus by
reference. Holders of CapRock notes desiring copies of such documents may
contact McLeodUSA at its address or telephone number indicated under "Where You
Can Find More Information."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
The following table sets forth financial data as of and for the years
ended December 31, 1995, 1996, 1997, 1998 and 1999 and as of and for the six
months ended June 30, 1999 and 2000. The business combination among CapRock's
predecessor companies was completed on August 26, 1998 and was accounted for as
a pooling of interests. Accordingly, these Consolidated Financial Statements
include CapRock's three predecessor companies (CapRock Telecommunications Corp.,
CapRock Fiber Network, LTD. and IWL Communications, Incorporated) as though
these entities were always a part of CapRock.
In May 1998, IWL Communications changed its fiscal year end to coincide
with the fiscal years of CapRock, CapRock Telecommunications and CapRock Fiber.
The Consolidated Statement of Operations for the year ended December 31, 1996
combines the operating activity of IWL Communications for the year ended June
30, 1996 with the operating activity of CapRock Telecommunications and CapRock
Fiber for the year ended December 31, 1996. The net income of IWL Communications
in the amount of approximately $260,000 for the six month period ended December
31, 1996 was excluded from the Consolidated Statement of Operations for the year
ended December 31, 1996 as a result of the non-conforming year ends for such
period. This amount was included as an adjustment to retained earnings in the
Consolidated Statement of Stockholders' Equity and Comprehensive Income in 1997.
IWL Communications' cash flow for this period was added to the 1997 beginning
balance in the Consolidated Statement of Cash Flows.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ............................................... $ 29,407 $ 50,970 $ 75,349 $ 121,774 $ 192,623
Costs of Services ...................................... 21,185 39,357 52,471 83,221 115,676
--------- --------- --------- --------- ---------
Gross profit ..................................... 8,222 11,613 22,878 38,553 76,947
Operating expenses:
Selling, general and administrative ................ 7,326 8,983 14,074 23,528 56,535
Merger related expenses ............................ -- -- -- 2,313 --
Depreciation and amortization ...................... 1,186 1,536 3,346 4,887 9,698
--------- --------- --------- --------- ---------
Total operating expenses ........................ 8,512 10,519 17,420 30,728 66,233
--------- --------- --------- --------- ---------
Operating income (loss) ................................ (290) 1,094 5,458 7,825 10,714
Interest expense, net .................................. (484) (585) (1,603) (6,441) (17,861)
Other income (expense) ................................. 151 42 220 106 1,526
--------- --------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary item ................................. (623) 551 4,075 1,490 (5,621)
Income tax expense (benefit) ........................... 48 227 1,513 1,267 (2,080)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ................ (671) 324 2,562 223 (3,541)
Extraordinary item - extinguishment of debt ............ 645 -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ................................ $ (26) $ 324 $ 2,562 $ 223 $ (3,541)
========= ========= ========= ========= =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item ................................. $ (623) $ 551 $ 4,075 $ 1,490 $ (5,621)
Pro forma income taxes, as if CapRock
Fiber were a C corporation ......................... (211) 143 1,475 1,267 (2,080)
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item ............ (412) 408 2,600 223 (3,541)
Extraordinary item, net of taxes ................... 397 -- -- -- --
--------- --------- --------- --------- ---------
Pro forma net income (loss) ...................... $ (15) $ 408 $ 2,600 $ 223 $ (3,541)
========= ========= ========= ========= =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item ............ $ (0.02) $ 0.01 $ 0.09 $ 0.01 $ (0.11)
Extraordinary item, net of tax ..................... $ 0.02 -- -- -- --
--------- --------- --------- --------- ---------
Basic and diluted .................................. $ -- $ 0.01 $ 0.09 $ 0.01 $ (0.11)
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic .............................................. 25,926 27,146 27,984 28,899 31,727
Diluted ............................................ 25,936 27,156 28,481 30,028 31,727
</TABLE>
86
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------
1999 2000
-------- ------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ............................................... $ 74,596 $ 113,936
Costs of Services ...................................... 44,919 79,220
--------- ---------
Gross profit ..................................... 29,677 34,716
Operating expenses:
Selling, general and administrative ................ 25,012 43,398
Merger related expenses ............................ -- --
Depreciation and amortization ...................... 3,337 9,077
--------- ---------
Total operating expenses ........................ 28,349 52,475
--------- ---------
Operating income (loss) ................................ 1,328 (17,759)
Interest expense, net .................................. (7,134) (7,021)
Other income (expense) ................................. (135) 25
--------- ---------
Income (loss) before income taxes and
extraordinary item ................................. (5,941) (24,755)
Income tax expense (benefit) ........................... (2,335) (9,118)
--------- ---------
Income (loss) before extraordinary item ................ (3,606) (15,637)
Extraordinary item - extinguishment of debt ............ -- --
--------- ---------
Net income (loss) ................................ $ 3,606 $ (15,637)
========= =========
Pro forma net income (loss):
Income (loss) before income taxes and
extraordinary item ................................. $ (5,941) $ (24,755)
Pro forma income taxes, as if CapRock
Fiber were a C corporation ......................... (2,335) (9,118)
--------- ---------
Income (loss) before extraordinary item ............ (3,606) (15,637)
Extraordinary item, net of taxes ................... -- --
--------- ---------
Pro forma net income (loss) ...................... $ (3,606) $ (15,637)
========= =========
Historical and pro forma income (loss) per common share:
Income (loss) before extraordinary item ............ $ (0.12) $ (0.47)
Extraordinary item, net of tax ..................... -- --
--------- ---------
Basic and diluted .................................. $ (0.12) $ (0.47)
========= =========
Weighted average shares outstanding:
Basic .............................................. 30,321 33,406
Diluted ............................................ 30,321 33,406
</TABLE>
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA OF CAPROCK
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .................. $ (797) $ (2,153) $ (305) $ 102,489 $ 216,145
Property, plant and equipment, net ......... 6,705 15,901 27,341 59,607 228,601
Total assets ............................... 13,198 28,522 49,389 191,966 548,835
Long-term debt and capital lease obligations 2,443 13,254 21,062 145,187 347,502
Stockholders' equity ....................... 3,552 3,886 14,086 16,062 96,030
OPERATING DATA:
EBITDA(1) .................................. $ 896 $ 2,630 $ 8,804 $ 15,025 $ 20,412
Cash flows provided by (used in) operations 827 781 4,112 7,125 (13,302)
Cash flows used in investing activities .... (1,919) (9,350) (12,987) (134,350) (264,623)
Cash flows provided by financing activities 903 8,605 12,114 123,990 283,338
Capital expenditures ....................... (2,282) (10,212) (13,631) (36,855) (201,289)
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------
1999 2000
-------- ------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) .................. $ 337,555 $ 104,312
Property, plant and equipment, net ......... 97,360 423,039
Total assets ............................... 479,533 676,174
Long-term debt and capital lease obligations 347,012 348,218
Stockholders' equity ....................... 94,939 177,738
OPERATING DATA:
EBITDA(1) .................................. $ (4,665) $ (8,682)
Cash flows provided by (used in) operations (14,897) 50,799
Cash flows used in investing activities .... (258,169) (159,910)
Cash flows provided by financing activities 283,872 107,113
Capital expenditures ....................... (45,717) (216,263)
</TABLE>
(1) EBITDA consists of operating income or loss before interest, income
taxes, depreciation and amortization and other nonrecurring operating expenses.
EBITDA is a measure commonly used in the communications industry. EBITDA is not
a measure of financial performance under generally accepted accounting
principles and should not be considered as an alternative to net income as a
measure of performance nor as an alternative to cash flow as a measure of
liquidity.
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<PAGE>
DESCRIPTION OF THE CAPROCK NOTES
The CapRock notes were issued under the indenture, dated as of July 16,
1998, among CapRock, CapRock Telecommunications Corp., CapRock Fiber Network,
LTD., IWL Communications, Incorporated and Chase Manhattan Trust Company,
National Association, as successor trustee under the indenture.
We refer to this indenture as the CapRock indenture. The terms of the
CapRock notes include those stated in the CapRock indenture and those made a
part of the CapRock indenture by reference to the Trust Indenture Act of 1939 as
in effect on the date of the CapRock indenture. The CapRock notes are subject to
all of those terms, and holders of the CapRock notes should refer to the CapRock
indenture and the Trust Indenture Act for a complete statement of the applicable
terms. The CapRock indenture has been filed as an exhibit to the registration
statement, of which this prospectus is a part, and copies of the CapRock
indenture are available upon request from McLeodUSA.
The following summary contains a description of certain provisions of
the CapRock indenture and the CapRock notes but does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
provisions of the CapRock notes and the CapRock indenture, including the
definitions of certain terms contained therein and those terms made part of the
CapRock indenture through the incorporation by reference of the Trust Indenture
Act. Capitalized terms used in the following summary but not otherwise defined
have the meanings attributed to them in the CapRock indenture and the CapRock
notes. For definitions of certain capitalized terms used in the following
summary, see "-Certain Definitions."
CONSENT SOLICITATION
On October 11, 2000, CapRock commenced a solicitation of consents from
the holders of the CapRock notes to amend the CapRock indenture to (a) modify
certain restrictive covenants contained in the CapRock indenture in order to
permit the merger of CapRock with a wholly-owned subsidiary of McLeodUSA, (b)
allow the merger of CapRock and the McLeodUSA subsidiary to be consummated
without triggering the change of control provisions of the CapRock indenture and
(c) eliminate most of the restrictive covenants and reporting requirements
contained in the CapRock indenture. See "-The Proposed Amendments."
Any CapRock notes that are not tendered to us or are not accepted for
exchange will remain outstanding and will continue to accrue interest in
accordance with and otherwise be entitled to all of the rights and privileges
under the indenture governing the CapRock notes. If CapRock obtains the
requisite number of consents from the CapRock noteholders, however, the
indenture will be amended as summarized in the preceding paragraph and the
holders of any CapRock notes that remain outstanding after the exchange offer
will be without the protection that the deleted restrictive covenants and
reporting requirements gave them. The elimination of these restrictive covenants
and other provisions will permit CapRock to, among other things, incur
indebtedness, pay dividends and make other restricted payments, incur liens and
make investments which would otherwise not have been permitted under the CapRock
indenture. It is possible that any such actions that CapRock will be permitted
to take as a result of the changes to the CapRock indenture will increase the
risk with respect to CapRock. The receipt by CapRock of the requisite consents
to approve the amendments to the CapRock indenture is a condition to the
consummation of the exchange offer.
Notwithstanding the merger, CapRock will remain the obligor under the
CapRock indenture and any CapRock notes that remain outstanding after
consummation of the exchange offer.
Unless otherwise indicated, the summary of the terms of the CapRock
notes set forth below does not give effect to the amendments referred to in this
section.
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<PAGE>
GENERAL DESCRIPTION OF THE CAPROCK NOTES
The CapRock notes are general unsecured unsubordinated obligations of
CapRock, limited to $150,000,000 aggregate principal amount, and mature on July
15, 2008. Each CapRock note bears interest at the rate of 12% from the most
recent Interest Payment Date to which interest has been paid or provided for,
payable semiannually (to Holders of record at the close of business on the
January 1 or July 1 immediately preceding the Interest Payment Date) on January
15 and July 15 of each year. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the CapRock notes are
payable, and the CapRock notes may be exchanged or transferred, at the office or
agency of CapRock in the Borough of Manhattan, The City of New York; PROVIDED
THAT, at the option of CapRock, payments of interest may be made by check mailed
to the Holders at their addresses as they appear in the Security Register.
The CapRock notes were issued only in fully registered form, without
coupons, in denominations of $1,000 principal amount and integral multiple
thereof. See "Book-Entry; Delivery and Form." No service charge will be made for
any registration of transfer or exchange of the CapRock notes, but CapRock may
require payment of a sum sufficient to cover any transfer tax or other similar
governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The CapRock notes will be redeemable, at CapRock's option, in whole or
in part, at any time or from time to time, on or after July 15, 2003 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed by
first class mail to each Holder's last address, as it appears in the Security
Register, at the following Redemption Prices (expressed in percentages of
principal amount), plus accrued and unpaid interest to the Redemption Date
(subject to the right of Holders of record on the relevant record date that is
prior to the Redemption Date to receive interest due on an Interest Payment
Date), if redeemed during the 12-month period beginning on July 15 of the years
set forth below:
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2003............................................... 106.000%
2004............................................... 104.000%
2005............................................... 102.000%
2006 and thereafter................................ 100.000%
</TABLE>
If less than all of the CapRock notes are to be redeemed at any time,
the trustee will select the CapRock notes, or portions thereof, for redemption
in compliance with the requirements of the principal national securities
exchange, if any, on which the CapRock notes are listed or, if the CapRock notes
are not listed on a national securities exchange, on a pro rata basis, by lot or
by such other method as the trustee in its sole discretion shall deem to be fair
and appropriate; PROVIDED THAT no CapRock note of $1,000 in principal amount or
less shall be redeemed in part. If any CapRock note is to be redeemed in part
only, the notice of redemption relating to such CapRock note shall state the
portion of the principal amount thereof to be redeemed. A new CapRock note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original CapRock note.
CAPROCK NOTES CALLED FOR REDEMPTION CEASE TO BE OUTSTANDING
CapRock notes called for redemption in accordance with the terms of the
CapRock indenture will be deemed to be paid and discharged and cease to be
outstanding, and interest on such CapRock notes will cease to accrue, from and
after the date set for redemption if CapRock has deposited with the trustee, in
trust, money and/or Temporary Cash Investments that, through the payment of
interest and principal in respect thereof in accordance with their terms, will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the CapRock notes on the Redemption Date in accordance
with the terms of the CapRock indenture and the CapRock notes.
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<PAGE>
RANKING
The Indebtedness evidenced by the CapRock notes ranks PARI PASSU in
right of payment with all existing and future unsecured senior indebtedness of
CapRock and senior in right of payment to all existing and future indebtedness
of CapRock expressly subordinated in right of payment to the CapRock notes. As
of June 30, 2000, CapRock had outstanding debt and other liabilities of
approximately $263 million (in addition to the $150 million evidenced by the
CapRock notes). None of such debt or liabilities ranked senior in right of
payment to the CapRock notes. As of the same date, CapRock's subsidiaries had no
outstanding debt (other than trade payables).
CapRock is a holding company with no direct operations and no
significant assets other than the stock and other equity interests of its
subsidiaries. CapRock's subsidiaries have no direct obligation to pay amounts
due on the CapRock notes and have not guaranteed the CapRock notes. As a result,
the CapRock notes are effectively subordinated to all existing and future
indebtedness and other liabilities (including trade payables) of CapRock's
subsidiaries. As of June 30, 2000, CapRock's subsidiaries had approximately $97
million of liabilities (excluding intercompany payables), all of which are
structurally senior to the CapRock notes. CapRock is dependent upon access to
the cash flow or assets of its subsidiaries to make payments on the CapRock
notes, and CapRock's ability to obtain such access may be limited by law.
CapRock, CapRock Telecommunications Corp. and CapRock Fiber Network,
LTD. have entered into a $100 million secured Credit Facility. This Credit
Facility is secured by substantially all of the assets of each of CapRock's
subsidiaries. The CapRock notes are unsecured. This means that in the event of a
default on the secured debt, the secured creditors could foreclose on their
collateral and receive payment out of the proceeds of that collateral prior to
the CapRock noteholders. CapRock and its subsidiaries are permitted to incur
certain additional indebtedness and, in limited situations, to secure such
indebtedness. The CapRock notes are effectively subordinated to such security
interests to the extent of such security interests.
CERTAIN COVENANTS
The CapRock indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS.
The CapRock indenture provides that CapRock will not, and will not
permit any of its Restricted Subsidiaries to, Incur any Indebtedness (including
Acquired Indebtedness) other than Permitted Indebtedness; PROVIDED THAT CapRock
may Incur Indebtedness, in addition to Permitted Indebtedness, if, after giving
effect to the Incurrence of such Indebtedness and the receipt and application of
the proceeds thereof, (i) the Consolidated Leverage Ratio would be less than or
equal to 7.0 to 1, for Indebtedness Incurred on or prior to June 30, 2000, or
less than or equal to 5.0 to 1, for Indebtedness Incurred thereafter and (ii) no
Default or Event of Default shall have occurred and be continuing or occur as a
consequence of the actions set forth in this covenant.
Notwithstanding any other provision of the foregoing "Limitation on
Indebtedness" covenant, the maximum amount of Indebtedness that CapRock or a
Restricted Subsidiary may Incur pursuant to this "Limitation on Indebtedness"
covenant shall not be deemed to be exceeded due solely to the result of
fluctuations in the exchange rates of currencies.
For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or obligations
with respect to letters of credit supporting Indebtedness otherwise included in
the determination of such particular amount shall not be included and (2) any
Liens granted pursuant to the equal and ratable provisions referred to in the
"Limitation on Liens" covenant described below shall not be treated as
Indebtedness. For purposes of determining compliance with the foregoing
"Limitation on Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the definition of "Indebtedness", CapRock, in its sole discretion, shall
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classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
LIMITATION ON RESTRICTED PAYMENTS.
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, make any Restricted
Payment if, at the time of, and after giving effect to, the proposed Restricted
Payment: (A) a Default or Event of Default shall have occurred and be
continuing, (B) CapRock could not Incur at least $1.00 of Indebtedness under
clause (i) of the first paragraph of the "Limitation on Indebtedness" covenant
or (C) the aggregate amount of all Restricted Payments (the amount, if other
than in cash, to be determined in good faith by the Board of Directors of
CapRock, whose determination shall be conclusive and evidenced by a Board
Resolution) made after the Closing Date shall exceed the sum of:
(1) 50% of the aggregate amount of the Adjusted Consolidated Net Income
(or, if the Adjusted Consolidated Net Income is a loss, minus 100% of the amount
of such loss) accrued on a cumulative basis during the period (taken as one
accounting period) beginning on the first day of the fiscal quarter commencing
immediately following the Closing Date and ending on the last day of the last
fiscal quarter preceding the Calculation Date for which reports have been filed
with the SEC or provided to the trustee pursuant to the "SEC Reports and Reports
to Holders" covenant, plus
(2) the aggregate Net Cash Proceeds received by CapRock after the
Closing Date (and, in the event the Transaction is consummated, the aggregate
Net Cash Proceeds received by CapRock Telecommunications Corp., CapRock Fiber
Network, LTD. or IWL Communications, Incorporated during the Transition Period),
from a capital contribution from, or the issuance and sale permitted by the
CapRock indenture to, a Person who is not a Subsidiary of CapRock (or CapRock
Telecommunications Corp., CapRock Fiber Network, LTD. or IWL Communications,
Incorporated, if applicable) of (a) its Capital Stock (other than Redeemable
Stock), (b) any options, warrants or other rights to acquire its Capital Stock
(in each case, exclusive of any Redeemable Stock or any options, warrants or
other rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the CapRock notes) and (c)
Indebtedness of CapRock (and CapRock Telecommunications Corp., CapRock Fiber
Network, LTD. or IWL Communications, Incorporated during the Transition Period)
or a Restricted Subsidiary that has been exchanged for or converted into Capital
Stock of CapRock (or CapRock Telecommunications Corp., CapRock Fiber Network,
LTD. or IWL Communications, Incorporated, if applicable) (other than Redeemable
Stock) or such options, warrants or other rights, in each case except to the
extent such Net Cash Proceeds are used to Incur Indebtedness permitted under
clause (viii) of the definition of "Permitted Indebtedness", plus
(3) an amount equal to the net reduction in Investments (other than
reductions in Permitted Investments and reductions in Investments made pursuant
to clause (vi) of the second paragraph of this "Limitation on Restricted
Payments" covenant) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers of
assets, in each case to CapRock (or CapRock Telecommunications Corp., CapRock
Fiber Network, LTD. or IWL Communications, Incorporated during the Transition
Period) or any Restricted Subsidiary or from the Net Cash Proceeds from the sale
of any such Investment (except, in each case, to the extent any such payment or
proceeds is included in the calculation of Adjusted Consolidated Net Income), or
from redesignations of Unrestricted Subsidiaries as Restricted Subsidiaries
(valued in each case as provided in the definition of "Investments"), not to
exceed, in each case, the amount of Investments previously made by CapRock (or
CapRock Telecommunications Corp., CapRock Fiber Network, LTD. or IWL
Communications, Incorporated, if applicable) or any Restricted Subsidiary in
such Person or Unrestricted Subsidiary.
The foregoing provision shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date of
declaration thereof if, at such date of declaration, such payment would comply
with the foregoing paragraph;
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(ii) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment to
the CapRock notes, including premium, if any, and accrued and unpaid interest
thereon to the date of payment, with the proceeds of, or in exchange for,
Indebtedness Incurred under clause (iii) of the definition of "Permitted
Indebtedness";
(iii) the purchase, redemption or other acquisition or retirement for
value of Capital Stock of CapRock (or options, warrants or other rights to
acquire such Capital Stock) in exchange for, or out of the proceeds of a
substantially concurrent offering to a Person who is not a Subsidiary of CapRock
of, shares of Capital Stock (other than Redeemable Stock) of CapRock (or
options, warrants or other rights to acquire such Capital Stock (exclusive of
any options, warrants or other rights that are redeemable at the option of the
holder, or are required to be redeemed, prior to the Stated Maturity of the
CapRock notes)) including in connection with a "cashless" exercise of an option,
warrant or right;
(iv) the making of any principal payment or the purchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of CapRock
which is subordinated in right of payment to the CapRock notes, including
premium, if any, and accrued and unpaid interest thereon to the date of payment,
in exchange for, or out of the proceeds of, a substantially concurrent offering
to a Person who is not a Subsidiary of CapRock of, shares of the Capital Stock
(other than Redeemable Stock) of CapRock (or options, warrants or other rights
to acquire such Capital Stock (exclusive of any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the CapRock notes));
(v) payments or distributions to dissenting stockholders pursuant to
applicable law in connection with the Transaction or the Special Partnership
Transaction or any consolidation, merger or transfer of assets that complies
with the provisions of the CapRock indenture applicable to mergers,
consolidations and transfers of all or substantially all of the property and
assets of CapRock;
(vi) Investments in any Person that is in the Telecommunications
Business on the date of such Investments; PROVIDED THAT the aggregate amount of
Investments made pursuant to this clause (vi) does not exceed the sum of (x) $50
million plus (y) the amount of Net Cash Proceeds received by CapRock after the
Closing Date (and, in the event the Transaction is consummated, the aggregate
Net Cash Proceeds received by CapRock Telecommunications Corp., CapRock Fiber
Network, LTD. or IWL Communications, Incorporated during the Transition Period)
as a capital contribution or from the sale of Capital Stock (other than
Redeemable Stock) of CapRock (or options, warrants or other rights to acquire
such Capital Stock (exclusive of any options, warrants or other rights that are
redeemable at the option of the holder, or are required to be redeemed, prior to
the Stated Maturity of the CapRock notes)) to a Person who is not a Subsidiary
of CapRock (or CapRock Telecommunications Corp., CapRock Fiber Network, LTD. or
IWL Communications, Incorporated, if applicable), except to the extent such Net
Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) under the
definition of "Permitted Indebtedness" or to make Restricted Payments pursuant
to clause (C)(2) of the first paragraph, or clauses (iii) or (iv) of this
paragraph, of this "Limitation on Restricted Payments" covenant, plus (z) the
net reduction in Investments made pursuant to this clause (vi) resulting from
distributions on or repayments of such Investments or from the Net Cash Proceeds
from the sale of any such Investment (except in each case to the extent any such
payment or proceeds is included in the calculation of Adjusted Consolidated Net
Income) or from such Person becoming a Restricted Subsidiary (valued in each
case as provided in the definition of "Investments"); PROVIDED THAT the net
reduction in any Investment shall not exceed the amount of such Investment;
(vii) the purchase, redemption or other retirement or acquisition for
value of shares of Capital Stock of CapRock to the extent necessary, in the
judgment of the Board of Directors of CapRock, to prevent the loss or secure the
renewal or reinstatement of any license or franchise held by CapRock or any
Restricted Subsidiary from any governmental agency;
(viii) the purchase, redemption or other retirement or acquisition for
value of shares of Capital Stock of CapRock, or options, warrants or other
rights to purchase such shares, held by directors, employees, or former
directors or employees of CapRock or any Restricted Subsidiary (or their estates
or beneficiaries under their estates) upon their death, disability, retirement
or termination of employment or pursuant to the terms of any agreement
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under which such shares of Capital Stock or options were issued; PROVIDED
THAT the aggregate consideration paid for such purchase, redemption or other
retirement or acquisition for value of such shares of Capital Stock or
options, warrants or rights after the Closing Date does not exceed $2 million
in any calendar year, or $5 million in the aggregate;
(ix) Investments acquired (x) as a capital contribution to CapRock or a
Restricted Subsidiary or (y) in exchange for Capital Stock (other than
Redeemable Stock) of CapRock (or options, warrants or other rights to acquire
such Capital Stock (exclusive of any options, warrants or other rights that are
redeemable at the option of the holder, or are required to be redeemed, prior to
the Stated Maturity of the CapRock notes)) so long as immediately after giving
effect to such transaction described in clause (y) above no Default or Event of
Default shall have occurred and be continuing;
(x) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness of CapRock which is subordinated in right
of payment to the CapRock notes, including premium, if any, and accrued and
unpaid interest thereon to the date of payment, at a price not greater than 101%
of the principal amount thereof plus any accrued and unpaid interest thereon to
the date of repayment in the event of a Change of Control in accordance with
provisions similar to the "Change of Control" covenant; PROVIDED THAT prior to
such purchase, redemption, defeasance or other acquisition or retirement,
CapRock has made the Change of Control Offer as provided in such covenant with
respect to the CapRock notes and has purchased all CapRock notes validly
tendered for payment in connection with such Change of Control Offer; or
(xi) any payment, distribution, repurchase or other transaction that,
but for this provision, would constitute a Restricted Payment but only to the
extent that the aggregate amount of such payments, distributions, repurchases
and other transactions do not exceed $10 million.
The actions described in clauses (i), (v), (vi), (vii), (viii), (x) and
(xi) of the immediately preceding paragraph will be Restricted Payments that
will be permitted in accordance with the immediately preceding paragraph but
will reduce the amount that would otherwise be available for Restricted Payments
under clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant. The actions described in clauses (ii), (iii), (iv) and (ix)
of the immediately preceding paragraph will be Restricted Payments that will be
permitted in accordance with the immediately preceding paragraph and will not
reduce the amount that would otherwise be available for Restricted Payments
under clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES.
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any consensual encumbrance or
restriction of any kind on the ability of any Restricted Subsidiary to (i) pay
dividends, in cash or otherwise, or make any other distributions permitted by
applicable law on any Capital Stock or any other interest or participation in,
or measured by, its profits of such Restricted Subsidiary owned by CapRock or
any other Restricted Subsidiary, (ii) pay any Indebtedness owed to CapRock or
any other Restricted Subsidiary, (iii) make loans or advances to CapRock or any
other Restricted Subsidiary or (iv) transfer any of its property or assets to
CapRock or any other Restricted Subsidiary.
The foregoing provisions shall not restrict any encumbrances or
restrictions:
(i) existing on the Closing Date in the CapRock indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; PROVIDED THAT the encumbrances and
restrictions in any such extensions, refinancings, renewals or replacements are
no less favorable in any material respect to the Holders than those encumbrances
or restrictions that are then in effect and that are being extended, refinanced,
renewed or replaced;
(ii) existing under or by reason of applicable law;
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(iii) existing with respect to any Person or the property or assets of
such Person acquired by CapRock or any Restricted Subsidiary and existing at the
time of such acquisition and not incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the property or
assets of any Person other than such Person or the property or assets of such
Person so acquired;
(iv) in the case of clause (iv) of the first paragraph of this
"Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenants, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of CapRock or any Restricted Subsidiary not otherwise
prohibited by the CapRock indenture or (C) arising or agreed to in the ordinary
course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of CapRock or any Restricted Subsidiary in any manner material to CapRock or any
Restricted Subsidiary;
(v) with respect to a Restricted Subsidiary and imposed pursuant to an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock of, or property and assets of, such
Restricted Subsidiary; or
(vi) pursuant to (x) a Credit Facility, (y) a Vendor Credit Facility or
(z) any agreement which amends, extends, renews, refinances, replaces or refunds
a Credit Facility or Vendor Credit Facility; PROVIDED, however, that in the case
of subclauses (x), (y) and (z), the provisions of the Credit Facility or Vendor
Credit Facility (A) permit (whether explicitly or as a result of the relative
maturities of the Credit Facility, the Vendor Credit Facility and the CapRock
notes) distributions to CapRock for the purposes of, and in an amount sufficient
to fund, the payment of principal due at stated maturity and interest in respect
of the CapRock notes (PROVIDED, in either case, that such payment is due or to
become due within 30 days from the date of such distribution) at a time when
there does not exist an event which after notice or passage of time or both
would permit the lenders under the Credit Facility or Vendor Credit Facility to
declare all amounts thereunder due and payable, and (B) provide that in no event
shall any encumbrance or restriction pursuant to the Credit Facility or Vendor
Credit Facility prohibit distributions to CapRock for such purposes for more
than 180 days in any consecutive 360 day period, unless (1) there exists a
default under the Credit Facility or Vendor Credit Facility resulting from any
payment default under the Credit Facility or Vendor Credit Facility or (2) the
maturity of the Credit Facility or Vendor Credit Facility has been accelerated.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent CapRock
or any Restricted Subsidiary from (1) creating, incurring, assuming or suffering
to exist any Liens otherwise permitted by the "Limitation on Liens" covenant
described below or (2) restricting the sale or other disposition of property or
assets of CapRock or any of its Restricted Subsidiaries subject to such Liens.
LIMITATION ON THE ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES.
The CapRock indenture provides that CapRock will not sell, pledge,
hypothecate or otherwise convey or dispose of any Capital Stock of a Restricted
Subsidiary or permit any Restricted Subsidiary, directly or indirectly, to
issue, sell pledge, hypothecate or otherwise convey or dispose of, any shares of
Capital Stock of a Restricted Subsidiary (including options, warrants or other
rights to purchase shares of such Capital Stock) except:
(i) to CapRock or a Wholly-Owned Restricted Subsidiary,
(ii) issuances of director's qualifying shares or other issuances or
sales to the extent required by applicable law or regulation,
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(iii) issuances or sales of 100% of the Capital Stock of a Restricted
Subsidiary, PROVIDED THAT CapRock or such Restricted Subsidiary applies the Net
Cash Proceeds, if any, of any such sale pursuant to this clause (iii) in
accordance with clause (A) or (B) of the "Limitation on Asset Sales" covenant
described below,
(iv) issuances or sales in a transaction if, immediately after giving
effect thereto, such Restricted Subsidiary would no longer be a Restricted
Subsidiary if (A) such transaction does not violate the "Limitation on Asset
Sales" covenant and (B) any Investment in such Person remaining after giving
effect to such transaction would not violate the "Limitation on Restricted
Payments" covenant if made at the date of such issuance or sale,
(v) pursuant to a Credit Facility or a Vendor Credit Facility,
(vi) issuances or sales of Redeemable Stock in exchange for, or upon
conversion of, or the proceeds from the issuance or sale of which are used to
refinance, shares of Redeemable Stock of such Restricted Subsidiary if the
amounts payable with respect to the redemption of such newly issued or sold
Redeemable Stock do not exceed the amount payable with respect to the redemption
of the Redeemable Stock being exchanged, converted or refinanced and such newly
issued or sold Redeemable Stock does not require any redemption earlier than the
date on which the Redeemable Stock being exchanged, converted or refinanced
required a redemption,
(vii) issuances or sales of Redeemable Stock (other than Redeemable
Stock convertible into or exchangeable for Common Stock of any Restricted
Subsidiary) that does not otherwise violate the provisions of the CapRock
indenture, or
(viii) in the Transaction or the Special Partnership Transaction.
LIMITATION ON ISSUANCES OF GUARANTEES BY RESTRICTED SUBSIDIARIES.
The CapRock indenture provides that CapRock will not permit any
Restricted Subsidiary, directly or indirectly, to Guarantee any Indebtedness of
CapRock which is PARI PASSU in right of payment with, or subordinate in right of
payment to, the CapRock notes ("Guaranteed Indebtedness"), unless:
(i) such Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture to the CapRock indenture providing for a Guarantee (a
"Subsidiary Guarantee") of payment of the CapRock notes by such Restricted
Subsidiary and
(ii) such Restricted Subsidiary waives, and will not in any manner whatsoever
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against CapRock or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee;
PROVIDED THAT this paragraph shall not be applicable to (x) any Guarantee of any
Restricted Subsidiary that existed at the time such Person became a Restricted
Subsidiary and was not Incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary or (y) any Guarantee of any Restricted
Subsidiary of Indebtedness Incurred under Credit Facilities or Vendor Credit
Facilities pursuant to clause (ix) of the definition of "Permitted
Indebtedness". If the Guaranteed Indebtedness is (A) PARI PASSU in right of
payment with the CapRock notes, then the Guarantee of such Guaranteed
Indebtedness shall be PARI PASSU in right of payment with, or subordinated in
right of payment to, the Subsidiary Guarantee or (B) subordinated in right of
payment to the CapRock notes, then the Guarantee of such Guaranteed Indebtedness
shall be subordinated in right of payment to the Subsidiary Guarantee at least
to the extent that the Guaranteed Indebtedness is subordinated in right of
payment to the CapRock notes.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or transfer,
to any Person not an Affiliate of CapRock, of all of CapRock's and each
Restricted Subsidiary's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the CapRock indenture) or (ii) the release or discharge of the
Guarantee which resulted in the creation of such Subsidiary Guarantee, except a
discharge or release by or as a result of payment under such Guarantee.
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LIMITATION ON TRANSACTIONS WITH STOCKHOLDERS AND AFFILIATES.
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, enter into, renew
or extend any transaction (including, without limitation, the purchase, sale,
lease or exchange of property or assets, or the rendering of any service) with
any holder (or any Affiliate of such holder) of 5% or more of any class of
Capital Stock of CapRock or with any Affiliate of CapRock or any Restricted
Subsidiary, except (a) in writing (other than the payment of salaries or bonuses
to officers of CapRock or any Restricted Subsidiary in the ordinary course of
business which need not be in writing) upon fair and reasonable terms no less
favorable in any material respect to CapRock or such Restricted Subsidiary than
could be obtained, at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate, (b) with respect to any transaction or series of
related transactions involving an aggregate value in excess of $5 million, if
CapRock delivers an Officers' Certificate to the trustee certifying that such
transaction or series of related transactions complies with clause (a) above,
and (c) with respect to any transaction or series of related transactions
involving an aggregate value in excess of $10 million, if either (1) such
transaction or series of related transactions has been approved by a majority of
the Disinterested Directors of CapRock, or in the event there is only one
Disinterested Director, by such Disinterested Director, or (2) CapRock delivers
to the trustee a written opinion of an investment banking firm of national
standing or other recognized independent expert with experience appraising the
terms and conditions of the type of transaction or series of related
transactions for which an opinion is required stating that the transaction or
series of related transactions is fair to CapRock or such Subsidiary from a
financial point of view.
The foregoing limitation does not limit, and shall not apply to:
(i) any transaction solely between CapRock and any of its Wholly-Owned
Restricted Subsidiaries or solely between Wholly-Owned Restricted
Subsidiaries;
(ii) the payment of reasonable and customary regular fees to directors
of CapRock who are not employees of CapRock;
(iii)any payments or other transactions pursuant to any tax-sharing
agreement between CapRock and any other Person with which CapRock
files a consolidated tax return or with which CapRock is part of a
consolidated group for tax purposes;
(iv) any Restricted Payments not prohibited by the "Limitation on
Restricted Payments" covenant;
(v) the Transaction or the Special Partnership Transaction; or
(vi) any transaction or agreement as described in the offering
memorandum pursuant to which the CapRock notes were initially
offered and as in effect as of July 10, 1998.
LIMITATION ON LIENS.
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume or suffer to exist any Lien on any of its assets or properties of any
character, or any shares of Capital Stock or Indebtedness of any Restricted
Subsidiary, without making effective provision for all of the CapRock notes and
all other amounts due under the CapRock indenture to be directly secured equally
and ratably with (or, if the obligation or liability to be secured by such Lien
is subordinated in right of payment to the CapRock notes, prior to) the
obligation or liability secured by such Lien. The foregoing limitation does not
apply to Permitted Liens.
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LIMITATION ON SALE-LEASEBACK TRANSACTIONS.
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, enter into any sale-leaseback transaction
involving any of its assets or properties, whether now owned or hereafter
acquired, whereby CapRock or a Restricted Subsidiary sells or transfers such
assets or properties and then or thereafter leases such assets or properties or
any part thereof or any other assets or properties which CapRock or such
Restricted Subsidiary, as the case may be, intends to use for substantially the
same purpose or purposes as the assets or properties sold or transferred.
The foregoing restriction does not apply to any sale-leaseback
transaction if
(i) the lease is for a period, including renewal rights, of not in
excess of three years;
(ii) the lease secures or relates to industrial revenue or pollution
control bonds;
(iii) the transaction is solely between CapRock and any Wholly-Owned
Restricted Subsidiary or solely between Wholly-Owned Restricted Subsidiaries; or
(iv) CapRock or such Restricted Subsidiary, within 12 months after the
sale or transfer of any assets or properties is completed, applies an amount not
less than the net proceeds received from such sale in accordance with clause (A)
or (B) of the first paragraph of the "Limitation on Asset Sales" covenant
described below.
LIMITATION ON ASSET SALES.
The CapRock indenture provides that CapRock will not, and will not
permit any Restricted Subsidiary to, consummate any Asset Sale, unless (i) the
consideration received by CapRock or such Restricted Subsidiary is at least
equal to the fair market value of the assets sold or disposed of and (ii) at
least 75% of the consideration received consists of cash or Temporary Cash
Investments (with the amount of Indebtedness and liabilities of CapRock or a
Restricted Subsidiary that are unconditionally assumed by the transferee being
deemed to be cash for purposes of this covenant). In the event and to the extent
that the Net Cash Proceeds received by CapRock or any of its Restricted
Subsidiaries from one or more Asset Sales occurring on or after the Closing Date
in any period of 12 consecutive months exceed the greater of $10 million and 10%
of Adjusted Consolidated Net Tangible Assets (determined as of the date closest
to the commencement of such 12-month period for which a consolidated balance
sheet of CapRock and its Subsidiaries has been filed with the SEC or provided to
the trustee pursuant to the "SEC Reports and Reports to Holders" covenant (or,
if such determination date is prior to the date of the consummation of the
Transaction or Special Partnership Transaction, then the balance sheet of
CapRock as of such date shall be adjusted to give pro forma effect to the
Transaction or Special Partnership Transaction, as the case may be, as if such
transaction had occurred on such determination date, together with an Officers'
Certificate certifying that such balance sheet has been prepared in accordance
with GAAP and is true and correct in all material respects)), then CapRock shall
or shall cause the relevant Restricted Subsidiary to (i) within 12 months after
the date Net Cash Proceeds so received exceed the greater of $10 million and 10%
of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal to such
excess Net Cash Proceeds to permanently repay unsubordinated Indebtedness of
CapRock or any Restricted Subsidiary providing a Subsidiary Guarantee pursuant
to the "Limitation on Issuances of Guarantees by Restricted Subsidiaries"
covenant described above or Indebtedness of any other Restricted Subsidiary, in
each case owing to a Person other than CapRock or any of its Subsidiaries, or
(B) invest an amount equal to such excess Net Cash Proceeds, or the amount of
such Net Cash Proceeds not so applied pursuant to clause (A) (or enter into a
definitive agreement committing to so invest within 12 months after the date of
such agreement), in Telecommunications Assets and (ii) apply (no later than the
end of the 12-month period referred to in clause (i)) such excess Net Cash
Proceeds (to the extent not applied pursuant to clause (i)) as provided in the
following paragraph of this "Limitation on Asset Sales" covenant. The amount of
such excess Net Cash Proceeds required to be applied (or to be committed to be
applied) during such 12-month period as set forth in clause (i) of the preceding
sentence and not applied as so required by the end of such period shall
constitute "Excess Proceeds." Pending the final application of any such Net Cash
Proceeds, CapRock or such Restricted Subsidiary may invest such funds in
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Temporary Cash Investments or temporarily reduce revolving Indebtedness under
any Credit Facility or any Vendor Credit Facility.
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $10 million, CapRock must
commence, not later than the fifteenth Business Day of such month, and
consummate an Offer to Purchase from the Holders on a pro rata basis an
aggregate principal amount of CapRock notes equal to the Excess Proceeds on such
date, at a purchase price equal to 100% of the principal amount of the CapRock
notes plus, in each case, accrued interest to the Payment Date. To the extent
that the aggregate purchase price for the CapRock notes tendered pursuant to an
Offer to Purchase is less than the Excess Proceeds, CapRock or any Restricted
Subsidiary may use such deficiency for general corporate purposes. Upon
completion of such Offer to Purchase, the amount of Excess Proceeds shall be
reset to zero.
SEC REPORTS AND REPORTS TO HOLDERS.
Whether or not CapRock is then required to file reports with the SEC,
CapRock shall file with the SEC all such reports and other information as it
would be required to file with the SEC by Section 13(a) or 15(d) under the
Securities Exchange Act if it were subject thereto. CapRock shall supply the
trustee and each Holder or shall supply to the trustee for forwarding to each
such Holder, without cost to such Holder, copies of such reports and other
information; PROVIDED, however, that the copies of such reports and information
mailed to Holders need not contain the exhibits thereto, but CapRock agrees to
furnish any such exhibits to any Holder upon written request therefor.
REPURCHASE OF CAPROCK NOTES UPON A CHANGE OF CONTROL
If a Change of Control shall occur at any time, each Holder shall have
the right to require that CapRock purchase all such Holder's CapRock notes in
whole or in part in integral multiples of $1,000, at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest to the
Payment Date. CapRock shall commence such Offer to Purchase within 30 days
following the occurrence of such Change of Control.
There can be no assurance that CapRock will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of CapRock notes) required by the foregoing covenant (as
well as may be contained in other securities of CapRock which might be
outstanding at the time). The foregoing covenant requiring CapRock to repurchase
the CapRock notes will, unless consents are obtained, require CapRock to repay
all indebtedness then outstanding which by its terms would prohibit such CapRock
note repurchase, either prior to or concurrently with such CapRock note
repurchase.
EVENTS OF DEFAULT
The following events are defined as "Events of Default" in the CapRock
indenture:
(a) defaults in the payment of principal of (or premium, if any, on)
any CapRock note when the same becomes due and payable at maturity, upon
acceleration, redemption or otherwise;
(b) defaults in the payment of interest on any CapRock note when the
same becomes due and payable, which defaults continue for a period of 30 days;
(c) defaults in the performance or breach of the provisions of the
CapRock indenture applicable to mergers, consolidations and transfers of all or
substantially all of the assets of CapRock or mandatory redemption, or the
failure to make or consummate an Offer to Purchase in accordance with the
"Limitation on Asset Sales" or the "Repurchase of CapRock Notes Upon a Change of
Control" covenants described above;
(d) defaults in the performance or breach of any covenant or agreement
of CapRock in the CapRock indenture or under the CapRock notes (other than a
default specified in clause (a), (b) or (c) above), which default or breach
continues (i) for a period of 30 consecutive days or (ii) in the event such
default or breach cannot be cured in
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such 30-day period and CapRock is diligently and in good faith attempting to
cure such default or breach, for a period of 60 consecutive days in the case
of both clauses (i) and (ii), after written notice by the trustee or the
Holders of at least 25% in aggregate principal amount of the CapRock notes
then outstanding;
(e) there occurs with respect to any issue or issues of Indebtedness of
CapRock or any Restricted Subsidiary having an outstanding principal amount of
$7.5 million or more in the aggregate for all such issues of all such Persons,
whether such Indebtedness now exists or shall hereafter be created, (I) an event
of default that has caused the holder thereof to declare such Indebtedness to be
due and payable prior to its Stated Maturity and such Indebtedness has not been
discharged in full or such acceleration has not been rescinded or annulled
within 30 days of such acceleration and/or (II) the failure to make a principal
payment at the final (but not any interim) fixed maturity and such defaulted
payment shall not have been made, waived or extended within 30 days of such
payment default;
(f) any final judgment or order (not covered by insurance) for the
payment of money in excess of $7.5 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against CapRock
or any Restricted Subsidiary and shall not be paid or discharged, and there
shall be any period of 30 consecutive days following entry of the final judgment
or order that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to exceed $7.5
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect;
(g) a court having jurisdiction in the premises enters a decree or
order for (A) relief in respect of CapRock or any Restricted Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, (B) appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of CapRock or any
Restricted Subsidiary or for all or substantially all of the property and assets
of CapRock or any Restricted Subsidiary or (C) the winding up or liquidation of
the affairs of CapRock or any Restricted Subsidiary and, in each case, such
decree or order shall remain unstayed and in effect for a period of 60
consecutive days;
(h) CapRock or any Restricted Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of CapRock or any Restricted Subsidiary or for
all or substantially all of the property and assets of CapRock or any Restricted
Subsidiary or (C) effects any general assignment for the benefit of creditors;
or
(i) there occurs a default by CapRock or IWL Communications,
Incorporated under the Escrow Agreement or the Escrow Agreement shall cease to
be in full force and effect or enforceable in accordance with its terms, other
than in accordance with its terms or prior to the termination of such agreement,
the lien of the trustee under such agreement ceases to be a first priority
perfected security interest in any portion of the collateral purported to be
pledged thereunder.
If an Event of Default (other than an Event of Default specified in
clause (g) or (h) above that occurs with respect to CapRock) occurs and is
continuing under the CapRock indenture, the trustee or the Holders of at least
25% in aggregate principal amount of the CapRock notes then outstanding, by
written notice to CapRock (and to the trustee if such notice is given by the
Holders), may, and the trustee at the request of such Holders shall, declare the
principal of, premium, if any, and accrued interest on the CapRock notes to be
immediately due and payable. Upon a declaration of acceleration, such principal,
premium, if any, and accrued interest shall be immediately due and payable. In
the event of a declaration of acceleration because an Event of Default set forth
in clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by CapRock or the relevant Restricted Subsidiary or waived by
the holders of the relevant Indebtedness within 60 days after the declaration of
acceleration with respect thereto. If an Event of Default specified in clause
(g) or (h) above occurs with respect to CapRock, the principal of, premium, if
any, and accrued interest on the CapRock notes then
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outstanding shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the trustee or any
Holder. The Holders of at least a majority in principal amount of the
outstanding CapRock notes, by written notice to CapRock and to the trustee,
may waive all past defaults and their consequences including the acceleration
of the CapRock notes if (i) all existing Events of Default, other than the
nonpayment of the principal of, premium, if any, and interest on the CapRock
notes that have become due solely by such acceleration, have been cured or
waived and (ii) the rescission would not conflict with any judgment or decree
of a court of competent jurisdiction. For information as to the waiver of
defaults, see "-Modification and Waiver."
The Holders of at least a majority in aggregate principal amount of the
outstanding CapRock notes may direct the time, method and place of conducting
any proceeding for any remedy available to the trustee or exercising any trust
or power conferred on the trustee. however, the trustee may refuse to follow any
direction that conflicts with law or the CapRock indenture that may involve the
trustee in personal liability, or that the trustee determines in good faith may
be unduly prejudicial to the rights of Holders of CapRock notes not joining in
the giving of such direction, and may take any other action it deems proper that
is not inconsistent with any such direction received from Holders of CapRock
notes. A Holder may not pursue any remedy with respect to the CapRock indenture
or the CapRock notes unless:
(i) the Holder gives the trustee written notice of a continuing Event
of Default;
(ii) the Holders of at least 25% in aggregate principal amount of
outstanding CapRock notes make a written request to the trustee to pursue the
remedy;
(iii) such Holders offer the trustee indemnity satisfactory to the
trustee against any costs, liability or expense;
(iv) the trustee does not comply with the request within 60 days after
receipt of the request and the offer of indemnity; and
(v) during such 60-day period, the Holders of a majority in aggregate
principal amount of the outstanding CapRock notes do not give the trustee a
direction that is inconsistent with the request. However, such limitations do
not apply to the right of any Holder of a CapRock note to receive payment of the
principal of, premium, if any, or (subject to certain provisions of the CapRock
indenture) interest on, such CapRock note or to bring suit for the enforcement
of any such payment, on or after the due date expressed in the CapRock notes,
which right shall not be impaired without the consent of the Holder.
The CapRock indenture requires certain officers of CapRock to certify,
on or before a date not more than 90 days after the end of each fiscal year,
that a review has been conducted of the activities of CapRock and its Restricted
Subsidiaries and the performance of CapRock and its Restricted Subsidiaries
under the CapRock indenture and that CapRock has fulfilled all obligations
thereunder, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default and the nature and status thereof.
CapRock also is obligated to notify the trustee of any default or defaults in
the performance of any covenants or agreements under the CapRock indenture.
CONSOLIDATION, MERGER AND SALE OF ASSETS
The CapRock indenture provides that CapRock shall not consolidate with,
merge with or into, or sell, convey, transfer, lease or otherwise dispose of all
or substantially all of its property and assets (as an entirety or substantially
an entirety in one transaction or a series of related transactions) to, any
Person or permit any Person to merge with or into CapRock, other than in
connection with the Transaction or the Special Partnership Transaction, unless:
(i) CapRock shall be the continuing Person, or the Person (if other
than CapRock) formed by such consolidation or into which CapRock is merged or
that acquired or leased such property and assets of CapRock shall be a
corporation organized and validly existing under the laws of the United States
of America or any jurisdiction
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thereof, and shall expressly assume, by a supplemental indenture, executed
and delivered to the trustee, all of the obligations of CapRock on all of the
CapRock notes and under the CapRock indenture;
(ii) immediately after giving effect to such transaction, no Default or
Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction on a pro
forma basis, CapRock, or any Person becoming the successor obligor of the
CapRock notes, as the case may be, could Incur at least $1.00 of Indebtedness
under clause (i) of the first paragraph of the "Limitation on Indebtedness"
covenant described above; PROVIDED, however, that this clause (iii) shall not
apply to a consolidation or merger with or into a Wholly-Owned Restricted
Subsidiary with a positive net worth, PROVIDED THAT in connection with any such
merger or consolidation, no consideration (except Capital Stock (other than
Redeemable Stock) in the surviving Person or CapRock (or a Person that owns
directly or indirectly all of the Capital Stock of the surviving Person or
CapRock immediately following such transaction) or cash paid to satisfy
dissenter or appraisal rights; PROVIDED THAT such rights are exercised with
respect to no more than 5% of the outstanding Capital Stock of CapRock or other
Person) shall be issued or distributed to the stockholders of CapRock; and
(iv) CapRock delivers to the trustee an Officers' Certificate
(attaching the arithmetic computations to demonstrate compliance with clause
(iii) above) and an Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture comply with
this provision and that all conditions precedent provided for herein relating to
such transaction have been complied with; PROVIDED, however, that clauses (ii)
and (iii) above do not apply if, in the good faith determination of the Board of
Directors of CapRock, whose determination shall be evidenced by a Board
Resolution, the principal purpose of such transaction is to change the state of
incorporation of CapRock; and PROVIDED FURTHER that any such transaction shall
not have as one of its purposes the evasion of the foregoing limitations.
DEFEASANCE
DEFEASANCE AND DISCHARGE.
The CapRock indenture provides that CapRock will be deemed to have paid
and will be discharged from any and all obligations in respect of the CapRock
notes on the 123rd day after the deposit referred to below, and the provisions
of the CapRock indenture will no longer be in effect with respect to the CapRock
notes (except for, among other matters, certain obligations to register the
transfer or exchange of the CapRock notes, to replace stolen, lost or mutilated
CapRock notes, to maintain paying agencies and to hold monies for payment in
trust) if, among other things, (A) CapRock has deposited with the trustee, in
trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if any,
and accrued interest on the CapRock notes on the Stated Maturity of such
payments in accordance with the terms of the CapRock indenture and the CapRock
notes, (B) CapRock has delivered to the trustee (i) either (x) an Opinion of
Counsel to the effect that Holders will not recognize income, gain or loss for
federal income tax purposes as a result of CapRock's exercise of its option
under this "Defeasance" provision and will be subject to federal income tax on
the same amount and in the same manner and at the same times as would have been
the case if such deposit, defeasance and discharge had not occurred, which
Opinion of Counsel must be based upon (and accompanied by a copy of) a ruling of
the Internal Revenue Service to the same effect unless there has been a change
in applicable federal income tax law after the Closing Date such that a ruling
is no longer required or (y) a ruling directed to the trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days (or, under certain circumstances, one year) following
the deposit, the trust fund will not be subject to the effect of Section 547 of
the United States Bankruptcy Code or Section 15 of the New York Debtor and
Creditor Law, (C) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or lapse of
time or both would become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 123rd
day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
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instrument to which CapRock or any of its Subsidiaries is a party or by which
CapRock or any of its Subsidiaries is bound, and (D) if at such time the CapRock
notes are listed on a national securities exchange, CapRock has delivered to the
trustee an Opinion of Counsel to the effect that the CapRock notes will not be
delisted as a result of such deposit, defeasance and discharge.
DEFEASANCE OF CERTAIN COVENANTS AND CERTAIN EVENTS OF DEFAULT.
The CapRock indenture further provides that the provisions of the
CapRock indenture will no longer be in effect with respect to clauses (iii) and
(iv) under "Consolidation, Merger and Sale of Assets" and all the covenants
described herein under "Certain Covenants," clause (d) under "Events of Default"
with respect to such covenants and clauses (iii) and (iv) under "Consolidation,
Merger and Sale of Assets," and that clauses (e) and (f) under "Events of
Default" shall be deemed not to be Events of Default, upon, among other things,
the deposit with the trustee, in trust, of money and/or U.S. Government
Obligations that through the payment of interest and principal in respect
thereof in accordance with their terms will provide money in an amount
sufficient to pay the principal of, premium, if any, and accrued interest on the
CapRock notes on the Stated Maturity of such payments in accordance with the
terms of the CapRock indenture and the CapRock notes, the satisfaction of the
provisions described in clauses (B)(ii), (C) and (D) of the preceding paragraph
and the delivery by CapRock to the trustee of an Opinion of Counsel to the
effect that, among other things, the Holders will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit and defeasance
of certain covenants and Events of Default and will be subject to federal income
tax on the same amount and in the same manner and at the same times as would
have been the case if such deposit and defeasance had not occurred.
DEFEASANCE AND CERTAIN OTHER EVENTS OF DEFAULT.
In the event CapRock exercises its option to omit compliance with
certain covenants and provisions of the CapRock indenture with respect to the
CapRock notes as described in the immediately preceding paragraph and the
CapRock notes are declared due and payable because of the occurrence of an Event
of Default that remains applicable, the amount of money and/or U.S. Government
Obligations on deposit with the trustee will be sufficient to pay amounts due on
the CapRock notes at the time of their Stated Maturity but may not be sufficient
to pay amounts due on the CapRock notes at the time of the acceleration
resulting from such Event of Default. However, CapRock will remain liable for
such payments.
MODIFICATION AND WAIVER
From time to time, CapRock and the trustee, without the consent of the
Holders, may amend, waive or supplement the CapRock indenture, the CapRock
notes, the Merger Agreement and the Escrow Agreement for certain specified
purposes, including, among other things, curing ambiguities, defects or
inconsistencies, to provide for the assumption of CapRock's obligations to
Holders in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders, to add guarantors with
respect to the CapRock notes, to secure the CapRock notes, to maintain the
qualification of the CapRock indenture under the Trust Indenture Act or to make
any change that does not adversely affect the rights of any Holder. Other
amendments and modifications of the CapRock indenture or the CapRock notes
issued thereunder, the Merger Agreement or the Escrow Agreement may be made by
CapRock and the trustee with the consent of the Holders of not less than a
majority in aggregate principal amount of the outstanding CapRock notes;
PROVIDED, however, that no such modification or amendment may, without the
consent of each Holder affected thereby:
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any CapRock note,
(ii) reduce the principal of, or premium, if any, or interest on, any
CapRock note,
(iii) change the place or currency of payment of principal of, or
premium, if any, or interest on, any CapRock note,
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(iv) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption, on or
after the Redemption Date) of any CapRock note,
(v) reduce the above-stated percentage of outstanding CapRock notes the
consent of whose Holders is necessary to modify or amend the CapRock indenture,
(vi) waive a default in the payment of principal of, premium, if any,
or interest on the CapRock notes,
(vii) reduce the percentage or aggregate principal amount of
outstanding CapRock notes the consent of whose Holders is necessary for waiver
of compliance with certain provisions of the CapRock indenture or for waiver of
certain defaults,
(viii) release any lien created by the Escrow Agreement, except in
accordance with the terms thereof, or
(ix) amend, change or otherwise modify the obligation of CapRock to
make and consummate the Special Offer to Purchase contemplated by the covenant
entitled "Special Offer to Purchase."
GOVERNING LAW
The CapRock indenture and the CapRock notes are governed by and will be
construed in accordance with the laws of the State of New York without giving
effect to principles of conflicts of law.
CONCERNING THE TRUSTEE
The CapRock indenture provides that, except during the continuance of a
Default, the trustee will not be liable, except for the performance of such
duties as are specifically set forth in such CapRock indenture. If an Event of
Default has occurred and is continuing, the trustee will use the same degree of
care and skill in its exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
The CapRock indenture and provisions of the Trust Indenture Act
incorporated by reference therein contain limitations on the rights of the
trustee, should it become a creditor of CapRock, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The trustee is permitted to engage in
other transactions; PROVIDED, however, that if it acquires any conflicting
interest, it must eliminate such conflict or resign.
The Trustee shall act as registrar and paying agent for the CapRock
notes.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in
the covenants and other provisions of the CapRock indenture. Reference is made
to the CapRock indenture for the definition of any other capitalized term used
herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person existing at the
time such Person becomes a Restricted Subsidiary or assumed in connection with
an Asset Acquisition by CapRock or a Restricted Subsidiary; PROVIDED THAT
Indebtedness of such Person which is redeemed, defeased, retired or otherwise
repaid at the time of or immediately upon consummation of the transaction by
which such Person becomes a Restricted Subsidiary or such Asset Acquisition
shall not be Acquired Indebtedness.
"Adjusted Consolidated Net Income" means, for any period, the aggregate
net income (or loss) of CapRock and its Restricted Subsidiaries for such period
(which calculation shall include the combined aggregate consolidated net income
(or loss) of CapRock Telecommunications Corp., CapRock Fiber Network, LTD. and
IWL Communications, Incorporated and their respective Restricted Subsidiaries
during the Transition Period in the event
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the Transaction is consummated) determined in conformity with GAAP; PROVIDED
THAT the following items shall be excluded in computing Adjusted Consolidated
Net Income (without duplication):
(i) the net income (or loss) of any Person (other than a Restricted
Subsidiary) in which any Person (other than CapRock or any of its Restricted
Subsidiaries) has a joint interest and the net income (or loss) of any
Unrestricted Subsidiary, except
(x) with respect to net income, to the extent of the amount of
dividends or other distributions actually paid in cash to CapRock or any of its
Restricted Subsidiaries by such other Person or such Unrestricted Subsidiary
during such period and
(y) with respect to net losses, to the extent of the amount of cash
contributed by CapRock or any Restricted Subsidiary to such Person during such
period;
(ii) the net income (or loss) of any Person acquired by CapRock or any
of its Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of the related acquisition;
(iii) the net income of any Restricted Subsidiary to the extent that
the declaration or payment of dividends or similar distributions by such
Restricted Subsidiary of such net income is not at the time permitted by the
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to such
Restricted Subsidiary;
(iv) any gains or losses (on an after-tax basis) attributable to Asset
Sales;
(v) any net after-tax extraordinary or non-recurring gains or losses;
(vi) any gain or loss, net of taxes, realized upon the termination of
any employee benefit plan; and
(vii) any compensation or other expense paid or payable solely with
Capital Stock (other than Redeemable Stock) of CapRock or any options, warrants
or other rights to acquire such Capital Stock.
"Adjusted Consolidated Net Tangible Assets" means the total amount of
assets of CapRock and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), minus (i) all current liabilities of
CapRock and its Restricted Subsidiaries (excluding intercompany items) and (ii)
all goodwill, trade names, trademarks, patents, unamortized debt discount and
expense and other like intangibles, all as set forth on the most recent
quarterly or annual consolidated balance sheet of CapRock and its Restricted
Subsidiaries, prepared in conformity with GAAP and filed with the SEC or
provided to the trustee pursuant to the "SEC Reports and Reports to Holders"
covenant described above.
"Affiliate" means, with respect to any specified Person, any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person. For the purposes of this
definition, "control," when used with respect to any specified Person, means the
power to direct the management and policies of such Person, directly or
indirectly, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Acquisition" means (i) an investment by CapRock or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or shall be merged into or consolidated with
CapRock or any of its Restricted Subsidiaries; PROVIDED THAT such Person's
primary business is related, ancillary or complementary to the businesses of
CapRock and its Restricted Subsidiaries on the date of such investment or (ii)
an acquisition by CapRock or any of its Restricted Subsidiaries of the property
and assets of any Person other than CapRock or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person; PROVIDED THAT the property and assets acquired are related,
ancillary or complementary to
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the businesses of CapRock and its Restricted Subsidiaries on the date of such
acquisition. The term does not include the Transaction or the Special
Partnership Transaction.
"Asset Disposition" means the sale or other disposition by CapRock or
any of its Restricted Subsidiaries (other than to CapRock or another Restricted
Subsidiary) of (i) all or substantially all of the Capital Stock of any
Restricted Subsidiary or (ii) all or substantially all of the assets of a
division or line of business of CapRock or any of its Restricted Subsidiaries.
The term does not include the Transaction or the Special Partnership
Transaction.
"Asset Sale" means any direct or indirect sale, transfer or lease or
other disposition (including by way of merger, consolidation or sale-leaseback
transaction) in one transaction or a series of related transactions by CapRock
or any of its Restricted Subsidiaries to any Person other than CapRock or any of
its Restricted Subsidiaries of:
(i) all or any of the Capital Stock of any Restricted Subsidiary,
(ii) all or substantially all of the property and assets of an
operating unit or business of CapRock or any of its Restricted Subsidiaries or
(iii) any other property and assets of CapRock or any of its Restricted
Subsidiaries outside the ordinary course of business of CapRock or such
Restricted Subsidiary other than the Capital Stock of or Investment in an
Unrestricted Subsidiary
that, with respect to each of (i), (ii) and (iii), is not governed by the
provisions of the CapRock indenture applicable to mergers, consolidations and
sales of all or substantially all of the assets of CapRock; PROVIDED THAT "Asset
Sale" shall not include:
(a) sales, transfers or other dispositions of assets, whether in one
transaction or a series of related transactions occurring within one year,
involving assets with a fair market value not in excess of $1.0 million in any
transaction or series of related transactions,
(b) contemporaneous exchanges by CapRock or any Restricted Subsidiary
of Telecommunications Assets for other Telecommunications Assets in the ordinary
course of business, including fiber swaps and partitioning of switches; PROVIDED
THAT the applicable Telecommunications Assets received by CapRock or such
Restricted Subsidiary have at least substantially equal fair market value to the
Telecommunications Assets disposed of,
(c) sales, transfers or other dispositions of assets that have become
uneconomic, obsolete or worn-out, or
(d) the Transaction or the Special Partnership Transaction.
"Average Life" means, at any date of determination with respect to any
debt security, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
"Board of Directors" means, with respect to any Person, its Board of
Directors, general partner(s), manager(s), or similar governing body.
"Calculation Date" means, with respect to the Incurrence of any
Indebtedness by CapRock or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment, the
date such Restricted Payment is to be made.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
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"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means the discounted present value of
the rental obligations under a Capitalized Lease.
"Change of Control" shall be deemed to occur if, after the
Transaction occurs:
(i) the sale, conveyance, transfer or lease of all or substantially all
of the assets of CapRock to any Person or "group" (as such term is used in
Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act, including any
group acting for the purpose of acquiring, holding or disposing of securities
within the meaning of Rule 13d-5(b)(1) under the Securities Exchange Act), other
than to one or more Permitted Holders and/or one or more Restricted
Subsidiaries, shall have occurred,
(ii) any Person or "group" (as such term is used in Sections 13(d)(3)
and 14(d)(2) of the Securities Exchange Act including any group acting for the
purpose of acquiring, holding or disposing of securities within the meaning of
Rule 13d-5(b)(1) under the Securities Exchange Act), other than any Permitted
Holder (or group that includes a Permitted Holder), becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Securities Exchange Act) of more than
50% of the total voting power of all classes of the Voting Stock of CapRock
(including any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis,
(iii) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of CapRock
(together with any directors whose election or appointment by the Board of
Directors of CapRock or whose nomination for election by the stockholders of
CapRock was approved by a vote of a majority of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors of CapRock then in
office or
(iv) the merger, amalgamation or consolidation of CapRock with or into
another Person or the merger of another Person with or into CapRock shall have
occurred, and the securities of CapRock that are outstanding immediately prior
to such transaction and which represent 100% of the aggregate voting power of
the Voting Stock of CapRock are changed into or exchanged for cash, securities
or property, unless pursuant to such transaction such securities are changed
into or exchanged for, in addition to any other consideration, securities of the
surviving Person that represent, immediately after giving effect to such
transaction, at least a majority of the aggregate voting power of the Voting
Stock of the surviving Person.
"Closing Date" means the date on which the CapRock notes were
originally issued under the CapRock indenture.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
"Consolidated EBITDA" means, for any period, Adjusted Consolidated Net
Income for such period plus, to the extent such amount was deducted in
calculating such Adjusted Consolidated Net Income,
(i) Consolidated Interest Expense,
(ii) income taxes (other than income taxes (either positive or
negative) attributable to extraordinary and non-recurring gains or losses or
sales of assets),
(iii) depreciation expense,
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(iv) amortization expense,
(v) all other non-cash items reducing Adjusted Consolidated Net Income
(other than items that will require cash payments and for which an accrual or
reserve is, or is required by GAAP to be, made), and
(vi) costs directly related to the Transaction, the Special Partnership
Transaction or the offering of the CapRock notes and expensed by CapRock in
accordance with GAAP on or prior to December 31, 1998,
less all non-cash items increasing Adjusted Consolidated Net Income, all as
determined on a consolidated basis for CapRock and its Restricted Subsidiaries
in conformity with GAAP; PROVIDED THAT, if any Restricted Subsidiary is not a
Wholly-Owned Restricted Subsidiary, Consolidated EBITDA shall be reduced (to the
extent not otherwise reduced in accordance with GAAP) by an amount equal to (A)
the amount of the Adjusted Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by (B) the quotient of (1) the number of shares
of outstanding Common Stock of such Restricted Subsidiary not owned on the last
day of such period by CapRock or any of its Restricted Subsidiaries divided by
(2) the total number of shares of outstanding Common Stock of such Restricted
Subsidiary on the last day of such period.
"Consolidated Interest Expense" means, for any period, without
duplication, the aggregate amount of interest in respect of Indebtedness,
including, without limitation:
(i) amortization of original issue discount on any Indebtedness and the
interest portion of any deferred payment obligation, calculated in accordance
with the effective interest method of accounting;
(ii) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing;
(iii) the net costs associated with Interest Rate Agreements;
(iv) Preferred Stock dividends of CapRock's Restricted Subsidiaries
(other than dividends paid in shares of Preferred Stock that are not Redeemable
Stock) declared and paid or payable;
(v) accrued Redeemable Stock dividends of CapRock and its Restricted
Subsidiaries, whether or not declared or paid; and
(vi) the interest component of rentals in respect of Capitalized Lease
Obligations paid, accrued or scheduled to be paid or to be accrued by CapRock
and its Restricted Subsidiaries during such period;
excluding, however, (a) any amount of such interest of any Restricted Subsidiary
if the net income of such Restricted Subsidiary is excluded in the calculation
of Adjusted Consolidated Net Income pursuant to clause (iii) of the definition
thereof (but only in the same proportion as the net income of such Restricted
Subsidiary is excluded from the calculation of Adjusted Consolidated Net Income
pursuant to clause (iii) of the definition thereof) and (b) any premiums, fees
and expenses (and any amortization thereof) payable in connection with the
offering of the CapRock notes and the Transaction and the Special Partnership
Transaction, all as determined on a consolidated basis (without taking into
account Unrestricted Subsidiaries) in conformity with GAAP.
"Consolidated Leverage Ratio" means, on any Calculation Date, the ratio
of (i) the aggregate amount of Indebtedness of CapRock and its Restricted
Subsidiaries on a consolidated basis outstanding on such Calculation Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of CapRock have been filed with
the SEC or provided to the trustee pursuant to the "SEC Reports and Reports to
Holders" covenant described above or, if such financial statements do not cover
the most recent four fiscal quarters, then the most recent four fiscal quarters
for (x) CapRock (if the Transaction has occurred) giving pro forma effect to the
Transaction as if it occurred at the beginning of such four fiscal quarter
period or (y) CapRock Telecommunications Corp. and CapRock Fiber Network LTD.,
on a combined basis (if the Special Offer
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to Purchase has occurred), prepared in accordance with GAAP (such four fiscal
quarter period being the "Four Quarter Period"); PROVIDED THAT, in making the
foregoing calculation, (A) pro forma effect shall be given to any
Indebtedness to be Incurred or repaid on the Calculation Date; (B) pro forma
effect shall be given to Asset Dispositions and Asset Acquisitions (including
giving pro forma effect to the application of proceeds of any Asset
Disposition) that occur from the beginning of the Four Quarter Period through
the Calculation Date (the "Reference Period"), as if they had occurred and
such proceeds had been applied on the first day of such Reference Period; and
(C) pro forma effect shall be given to asset dispositions and asset
acquisitions (including giving pro forma effect to the application of
proceeds of any asset disposition) that have been made by any Person that has
become a Restricted Subsidiary or has been merged with or into CapRock or any
Restricted Subsidiary during such Reference Period and that would have
constituted Asset Dispositions or Asset Acquisitions had such transactions
occurred when such Person was a Restricted Subsidiary, as if such asset
dispositions or asset acquisitions had occurred on the first day of such
Reference Period; PROVIDED THAT to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four
full fiscal quarters immediately preceding the Calculation Date of the
Person, or division or line of business of the Person, that is acquired or
disposed of for which financial information is available.
"Consolidated Net Worth" means, at any date of determination,
stockholders' equity as set forth on the most recently available quarterly or
annual consolidated balance sheet of CapRock and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the outstanding principal amount of any promissory notes receivable from the
sale of the Capital Stock of CapRock or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of foreign
currency exchange adjustments under Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 52).
"Credit Facilities" means any senior commercial term loan and/or
revolving credit or working capital facility or any letter of credit facility
entered into principally with commercial banks and/or other financial
institutions typically party to commercial loan agreements.
"Currency Agreement" means any spot or forward foreign exchange
contract, currency swap agreement, currency option or other similar financial
agreement or arrangement entered into by CapRock or any of its Subsidiaries
designed solely to protect against or manage exposure to fluctuations in
currency exchange rates.
"Default" means any event that is, or after notice or passage of time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any matter, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such matter.
"Escrow Account" shall have the meaning set forth in the Escrow
Agreement.
"Escrow Agreement" means the Escrow and Security Agreement among
CapRock, CapRock Telecommunications Corp., CapRock Fiber Network, LTD., IWL
Communications, Incorporated and the trustee, substantially in the form
delivered to the trustee on the Closing Date.
"fair market value" means the price that would be paid in an
arm's-length transaction between a willing seller under no compulsion to sell
and a willing buyer under no compulsion to buy, as determined in good faith by
the Board of Directors, whose determination shall be conclusive if evidenced by
a Board Resolution; PROVIDED THAT for purposes of clause (viii) of the
definition of "Permitted Indebtedness", (x) the fair market value of any
security registered under the Securities Exchange Act shall be the average of
the closing prices, regular way, of such security for the 20 consecutive trading
days immediately preceding the capital contribution or sale of Capital Stock and
(y) in the event the aggregate fair market value of any other property (other
than cash or cash equivalents) received by CapRock exceeds $10 million, the fair
market value of such property shall be determined by a nationally recognized
investment banking firm (selected by the Board of Directors of CapRock) and set
forth in their written opinion which shall be delivered to the trustee.
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"GAAP" means generally accepted accounting principles in the United
States of America in effect on the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any other Person
and, without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length and are entered into in
the ordinary course of business), to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED THAT the term "Guarantee" shall not include endorsements for collection
or deposit in the ordinary course of business. The term "Guarantee" used as a
verb has a corresponding meaning.
"Guaranteed Indebtedness" has the meaning given it under the caption
"Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"Holder" means the registered holder of any CapRock note.
"Incur" means, with respect to any Indebtedness, to incur, create,
issue, assume, Guarantee or otherwise become liable for or with respect to, or
become responsible for, the payment of, contingently or otherwise, such
Indebtedness, including an Incurrence of Acquired Indebtedness; PROVIDED THAT
neither the accrual of interest nor the accretion of original issue discount
shall be considered an Incurrence of Indebtedness. The terms "Incurrence" and
"Incurred" shall have corresponding meanings.
"Indebtedness" means, with respect to any Person at any date of
determination (without duplication):
(i) all indebtedness of such Person for borrowed money,
(ii) all obligations of such Person evidenced by bonds, debentures,
notes or other similar instruments,
(iii) all obligations of such Person in respect of letters of credit,
acceptance facilities or other similar instruments (including reimbursement
obligations with respect thereto),
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services, which purchase price is due more than
six months after the date of placing such property in service or taking delivery
and title thereto or the completion of such services,
(v) all Capitalized Lease Obligations of such Person,
(vi) all Indebtedness of other Persons secured by a Lien on any asset
of such Person, whether or not such Indebtedness is assumed by such Person;
PROVIDED THAT the amount of such Indebtedness shall be the lesser of (A) the
fair market value of such asset at such date of determination and (B) the amount
of such Indebtedness,
(vii) all Indebtedness of other Persons and all dividends and
distributions of another Person the payment of which, in either case, such
Person has Guaranteed or is responsible or liable for, directly or indirectly,
as obligor, guarantor or otherwise,
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(viii) all Redeemable Stock of such Person valued at its maximum fixed
repurchase price plus (to the extent not otherwise included in such repurchase
price) accrued and unpaid dividends payable prior to the Stated Maturity of the
CapRock notes in connection with a mandatory redemption or in connection with a
redemption at the option of the holder thereof unless such Redeemable Stock has
actually been called for redemption but not yet redeemed, in which case it shall
be valued at the redemption price therefor plus such accrued and unpaid
dividends unless the holder thereof can require redemption or repurchase at any
higher price, and
(ix) to the extent not otherwise included in this definition,
obligations under Currency Agreements and Interest Rate Agreements.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation.
Notwithstanding anything herein to the contrary:
(A) the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance, as determined in conformity with GAAP,
(B) money borrowed and set aside at the time of the Incurrence of any
Indebtedness or thereafter in order to refund the payment of the interest on
such Indebtedness shall not be deemed to be "Indebtedness,"
(C) Indebtedness shall not include any liability for federal, state,
local or other taxes,
(D) Indebtedness shall not include any Trade Payable or amounts due
under leases that are not Capitalized Lease Obligations,
(E) Indebtedness shall not include amounts due with respect to any
customer advance payments and customer deposits in the ordinary course of
business with CapRock or any Restricted Subsidiary, and
(F) Indebtedness shall not include overdrafts.
For purposes hereof, the "maximum fixed repurchase price" of any
Redeemable Stock which does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Redeemable Stock as if such
Redeemable Stock were purchased on any date on which Indebtedness shall be
required to be determined pursuant to the CapRock indenture, and if such price
is based upon, or measured by, the fair market value of such Redeemable Stock,
such fair market value shall be determined in good faith by the Board of
Directors of the issuer of such Redeemable Stock.
"Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
"Investment" in any Person means any direct or indirect advance, loan,
account receivable (other than an account receivable arising in the ordinary
course of business) or other extension of credit (including, without limitation,
by way of Guarantee or similar arrangement) or any capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase or
acquisition of Capital Stock, bonds, notes, debentures or other similar
instruments issued by, such Person and shall include (i) the designation of a
Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair market
value of the Capital Stock (or any other Investment), held by CapRock or any of
its Restricted Subsidiaries, of (or in) any Person that has ceased to be a
Restricted Subsidiary at the time it so ceases to be a Restricted Subsidiary,
including, without limitation, by reason of any transaction permitted by clause
(iii) of the "Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant described above. For purposes of the
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definition of "Unrestricted Subsidiary" and the "Limitation on Restricted
Payments" covenant described above, (i) "Investment" shall include the fair
market value of the assets (net of liabilities (other than liabilities to
CapRock or any of its Subsidiaries)) of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary,
(ii) the fair market value of the assets (net of liabilities (other than
liabilities to CapRock or any of its Subsidiaries)) of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding
Investments and (iii) any property transferred to or from any Person shall be
valued at its fair market value at the time of such transfer.
"Issuer" shall initially mean, collectively, CapRock, CapRock
Telecommunications Corp. and CapRock Fiber Network, LTD. and shall mean (i)
CapRock after the Transaction is consummated, or (ii) CapRock Telecommunications
Corp. and CapRock Fiber Network, LTD. after the payment of all CapRock notes
tendered in the Special Offer to Purchase, if any CapRock notes remain
outstanding. To the extent financial calculations are made with respect to
CapRock following the closing of the Transaction for any period or as of any
date prior to the closing of the Transaction, those calculations should include
the transactions, financial results or financial status of CapRock
Telecommunications Corp., CapRock Fiber Network, LTD. and IWL Communications,
Incorporated for such period or as of such date.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
(statutory or other) or charge of any kind (including, without limitation, any
conditional sale or other title retention agreement or lease in the nature
thereof or any agreement to give any security interest). The term "Lien" does
not include any lease or grant of rights to use any fiber or other asset under
an arrangement that does not qualify as a conditional sale or other title
retention agreement or lease in the nature thereof or a switch partition.
"Merger Agreement" means that certain Agreement and Plan of Merger and
Plan of Exchange dated as of February 16, 1998 among CapRock, CapRock
Telecommunications Corp., CapRock Fiber Network, LTD., IWL Communications,
Incorporated and certain other parties thereto, as amended through the Closing
Date and thereafter in accordance with the terms of the CapRock indenture.
"Net Cash Proceeds" means, (a) with respect to any Asset Sale, the
proceeds of such Asset Sale in the form of cash or cash equivalents, including
payments in respect of deferred payment obligations (to the extent corresponding
to the principal, but not interest, component thereof) when received in the form
of cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to CapRock or any Restricted Subsidiary) and proceeds from
the conversion of other property received when converted to cash or cash
equivalents, net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes (whether or not such taxes will
actually be paid or are payable) as a result of such Asset Sale without regard
to the consolidated results of operations of CapRock and its Restricted
Subsidiaries, taken as a whole, (iii) payments made to repay Indebtedness or any
other obligation outstanding at the time of such Asset Sale that either (A) is
secured by a Lien on the property or assets sold or (B) is required to be paid
as a result of such sale and (iv) appropriate amounts to be provided by CapRock
or any Restricted Subsidiary as a reserve against any liabilities associated
with such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale, all as determined in conformity with GAAP, and (b) with respect
to any capital contribution or issuance or sale of Capital Stock, options,
warrants or other rights to acquire Capital Stock or Indebtedness, the proceeds
of such capital contribution or issuance or sale in the form of cash or cash
equivalents, including payments in respect of deferred payment obligations (to
the extent corresponding to the principal, but not interest, component thereof)
when received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to CapRock or any Restricted
Subsidiary) and proceeds from the conversion of other property received when
converted to cash or cash equivalents, net of attorney's fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees incurred in connection with such issuance
or sale and net of taxes payable as a result thereof.
"Offer to Purchase" means an offer by CapRock to purchase CapRock notes
from the Holders commenced by mailing a notice to the trustee and each Holder
stating:
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(i) the covenant pursuant to which the offer is being made and that all
CapRock notes validly tendered will be accepted for payment on a pro rata basis;
(ii) the purchase price and the date of purchase (which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date such
notice is mailed);
(iii) that any CapRock note not tendered will continue to accrue
interest pursuant to its terms;
(iv) that, unless CapRock defaults in the payment of the purchase
price, any CapRock note accepted for payment pursuant to the Offer to Purchase
shall cease to accrue interest on and after the Payment Date;
(v) that Holders electing to have a CapRock note purchased pursuant to
the Offer to Purchase will be required to surrender the CapRock note, together
with the form entitled "Option of the Holder to Elect Purchase" on the reverse
side of the CapRock note completed, to the Paying Agent at the address specified
in the notice prior to the close of business on the Business Day immediately
preceding the Payment Date;
(vi) that Holders will be entitled to withdraw their election if the
Paying Agent receives, not later than the close of business on the third
Business Day immediately preceding the Payment Date, a facsimile transmission or
letter setting forth the name of such Holder, the principal amount of CapRock
notes delivered for purchase and a statement that such Holder is withdrawing his
election to have such CapRock notes purchased; and
(vii) that Holders whose CapRock notes are being purchased only in part
will be issued new CapRock notes equal in principal amount to the unpurchased
portion of the CapRock notes surrendered; PROVIDED THAT each CapRock note
purchased and each new CapRock note issued shall be in a principal amount of
$1,000 or integral multiples thereof.
On the Payment Date, CapRock shall (i) accept for payment on a pro rata
basis CapRock notes or portions thereof tendered pursuant to an Offer to
Purchase; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all CapRock notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the trustee all CapRock notes or portions
thereof so accepted together with an Officers' Certificate specifying the
CapRock notes or portions thereof accepted for payment by CapRock. The Paying
Agent shall promptly mail to the Holders of CapRock notes so accepted payment in
an amount equal to the purchase price, and the trustee shall promptly
authenticate and mail to such Holders a new CapRock note equal in principal
amount to any unpurchased portion of the CapRock note surrendered; PROVIDED THAT
each CapRock note purchased and each new CapRock note issued shall be in a
principal amount of $1,000 or integral multiples thereof. CapRock will publicly
announce the results of an Offer to Purchase as soon as practicable after the
Payment Date. The trustee shall act as the Paying Agent for an Offer to
Purchase. CapRock will comply with Rule 14e-1 under the Securities Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable, in the event that CapRock is required to
repurchase CapRock notes pursuant to an Offer to Purchase.
"Payment Date" means the date on which any CapRock note is purchased
pursuant to an Offer to Purchase or the Special Offer to Purchase.
"Permitted Holders" means Jere W. Thompson, Sr., Jere W. Thompson, Jr.,
Mark Langdale, Timothy W. Rogers, Scott L. Roberts, Timothy M. Terrell and
Ignatius W. Leonards and any corporation, limited liability company,
partnership, joint venture or other entity controlled by any one or more of
them.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of CapRock pursuant to the CapRock notes;
(ii) Indebtedness owed (A) to CapRock and evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiaries; PROVIDED
THAT such Indebtedness to any Restricted Subsidiary is subordinated in right of
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payment from and after such time as the CapRock notes shall become due and
payable (whether at Stated Maturity, by acceleration or otherwise); PROVIDED
further any event which results in any such Restricted Subsidiary ceasing to be
a Restricted Subsidiary or any subsequent transfer of such Indebtedness (other
than to CapRock or another Restricted Subsidiary) shall be deemed, in each case,
to constitute an Incurrence of such Indebtedness not permitted by this clause
(ii);
(iii) Indebtedness issued in exchange for, or the net proceeds of which
are used to refinance or refund, then outstanding Indebtedness (other than
Indebtedness Incurred under clause (ii), (iv), (vi) or (xii) of the definition
of Permitted Indebtedness) and any refinancings of such new Indebtedness in an
amount not to exceed the amount so refinanced or refunded (plus premiums,
accrued interest, fees and expenses); PROVIDED THAT Indebtedness the proceeds of
which are used to refinance or refund the CapRock notes or Indebtedness that is
PARI PASSU in right of payment with, or subordinated in right of payment to, the
CapRock notes shall only be permitted under this clause (iii) if (A) in case the
CapRock notes are refinanced in part or the Indebtedness to be refinanced is
PARI PASSU in right of payment with the CapRock notes, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which such
new Indebtedness is outstanding, is expressly made PARI PASSU in right of
payment with, or subordinate in right of payment to, the remaining CapRock
notes, (B) in case the Indebtedness to be refinanced is subordinated in right of
payment to the CapRock notes, such new Indebtedness, by its terms or by the
terms of any agreement or instrument pursuant to which such new Indebtedness is
issued or remains outstanding, is expressly made subordinate in right of payment
to the CapRock notes at least to the extent that the Indebtedness to be
refinanced is subordinated to the CapRock notes and (C) such new Indebtedness,
determined as of the date of Incurrence of such new Indebtedness, does not
mature prior to the Stated Maturity of the Indebtedness to be refinanced or
refunded, and the Average Life of such new Indebtedness is at least equal to the
remaining Average Life of the Indebtedness to be refinanced or refunded; and
PROVIDED FURTHER that in no event may Indebtedness of CapRock be refinanced by
means of any Indebtedness of any Restricted Subsidiary pursuant to this clause
(iii);
(iv) Indebtedness (A) to reimburse workers' compensation insurance
companies for claims paid by such companies on behalf of CapRock or any
Restricted Subsidiary in accordance with the policies issued to CapRock and the
Restricted Subsidiaries, (B) in respect of performance, surety or appeal bonds
or similar obligations provided in the ordinary course of business, or (C) under
Currency Agreements and Interest Rate Agreements; PROVIDED THAT such agreements
(I) are designed solely to protect CapRock or its Subsidiaries against
fluctuations in foreign currency exchange rates or interest rates and (II) do
not increase the Indebtedness of the obligor outstanding at any time other than
as a result of fluctuations in foreign currency exchange rates or interest rates
or by reason of fees, indemnities and compensation payable thereunder or (D)
arising from agreements providing for indemnification, adjustment of purchase
price or similar obligations, or from Guarantees or letters of credit, surety
bonds or performance bonds securing any obligations of CapRock or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted Subsidiary
(other than Guarantees of Indebtedness Incurred by any Person acquiring all or
any portion of such business, assets or Restricted Subsidiary for the purpose of
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by CapRock or any Restricted Subsidiary in connection
with such disposition;
(v) Indebtedness of CapRock, to the extent the net proceeds thereof are
promptly used to purchase CapRock notes tendered in the Special Offer to
Purchase or in an Offer to Purchase made as a result of a Change of Control or
Indebtedness of CapRock or any Restricted Subsidiary to the extent the net
proceeds thereof are promptly deposited to defease all of the CapRock notes as
described above under "- Defeasance";
(vi) Guarantees of the CapRock notes and Guarantees of Indebtedness of
CapRock by any Restricted Subsidiary; PROVIDED THAT the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described above;
(vii) Acquired Indebtedness and any Indebtedness issued in exchange
for, or the net proceeds of which are used to refinance or refund, such Acquired
Indebtedness in an amount not to exceed the amount so refinanced or refunded
(plus premium, accrued interest, and reasonable fees and expenses) in an
aggregate amount not to exceed at any one time outstanding $25 million;
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(viii) (A) Indebtedness of CapRock not to exceed, at any one time
outstanding, two times the Net Cash Proceeds received by CapRock after the
Closing Date (and, in the event the Transaction is consummated, the aggregate
Net Cash Proceeds received by CapRock Telecommunications Corp., CapRock Fiber
Network, LTD. or IWL Communications, Incorporated during the Transition Period)
as a capital contribution or from the issuance and sale of its Capital Stock
(other than Redeemable Stock) or options, warrants or other rights to acquire
Capital Stock (other than Redeemable Stock) to a Person that is not a Subsidiary
of CapRock (or CapRock Telecommunications Corp., CapRock Fiber Network, LTD. or
IWL Communications, Incorporated, if applicable) to the extent such Net Cash
Proceeds have not been used pursuant to clause (C)(2) of the first paragraph or
clause (iii), (iv) or (vi) of the second paragraph of the "Limitation on
Restricted Payments" covenant described above to make a Restricted Payment less
any Indebtedness Incurred pursuant to clause (B), (B) Indebtedness Incurred by
(x) CapRock and/or (y) any of the Restricted Subsidiaries in an aggregate amount
not to exceed, at any one time outstanding, the Net Cash Proceeds received by
CapRock after the Closing Date (and, in the event the Transaction is
consummated, the aggregate Net Cash Proceeds received by CapRock
Telecommunications Corp., CapRock Fiber Network, LTD. or IWL Communications,
Incorporated during the Transition Period) as a capital contribution or from the
issuance and sale of its Capital Stock (other than Redeemable Stock) or options,
warrants or other rights to acquire Capital Stock (other than Redeemable Stock)
to a Person that is not a Subsidiary of CapRock (or CapRock Telecommunications
Corp., CapRock Fiber Network, LTD. or IWL Communications, Incorporated, if
applicable) to the extent such Net Cash Proceeds have not been used pursuant to
clause (C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the second
paragraph of the "Limitation on Restricted Payments" covenant described above to
make a Restricted Payment; PROVIDED THAT the Incurrence of Indebtedness pursuant
to this clause (B) will only be permitted to the extent that such Incurrence
does not cause the amount of Indebtedness Incurred pursuant to clause (A) to
exceed the amount permitted thereunder, and (C) Indebtedness of CapRock not to
exceed, at any one time outstanding, 100% of the fair market value of property
(other than cash and cash equivalents) received by CapRock after the Closing
Date (and, in the event the Transaction is consummated, by CapRock
Telecommunications Corp., CapRock Fiber Network, LTD. or IWL Communications,
Incorporated during the Transition Period) from a contribution of capital or the
proceeds from the sale of its Capital Stock (other than Redeemable Stock) or
options, warrants or other rights to acquire Capital Stock (other than
Redeemable Stock) to a Person that is not CapRock (or CapRock Telecommunications
Corp., CapRock Fiber Network, LTD. or IWL Communications, Incorporated, if
applicable) or a Restricted Subsidiary, to the extent such capital contribution
or sale of Capital Stock or options, warrants or rights have not been used
pursuant to clause (iii), (iv) or (ix) of the second paragraph of the
"Limitation on Restricted Payments" covenant described above to make a
Restricted Payment; PROVIDED THAT such Indebtedness does not mature prior to the
Stated Maturity of the CapRock notes and has an Average Life longer than the
CapRock notes;
(ix) Indebtedness under one or more Credit Facilities or Vendor Credit
Facilities; PROVIDED THAT the aggregate principal amount of any Indebtedness
incurred pursuant to this clause (ix) (including any amounts refinanced or
refunded under this clause (ix)) does not exceed at any time outstanding the
greater of (x) 85% of eligible accounts receivable and 65% of eligible inventory
of CapRock and its Restricted Subsidiaries as of the last fiscal quarter for
which financial statements are prepared or (y) $100 million less any amount of
such Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described above;
(x) Indebtedness existing as of the Closing Date and Indebtedness
existing as of the date of consummation of the Transaction or the Special
Partnership Transaction (to the extent such Indebtedness is incurred without
violation of the CapRock indenture);
(xi) Capitalized Lease Obligations in an aggregate principal amount
outstanding at any time not to exceed $10 million; and
(xii) Indebtedness of CapRock (in addition to Indebtedness permitted
under clauses (i) through (xi) above) in the aggregate principal amount
outstanding at any time not to exceed $50 million, less any amount of such
Indebtedness permanently repaid as provided under the "Limitation on Asset
Sales" covenant described above.
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"Permitted Investment" means any of the following:
(i) an Investment in CapRock or a Restricted Subsidiary or a Person
which will, upon the making of such Investment, become a Restricted Subsidiary
or be merged or consolidated with or into or transfer or convey all or
substantially all its assets to, CapRock or a Restricted Subsidiary; PROVIDED
THAT such Person's primary business is related, ancillary or complementary to
the businesses of CapRock and its Restricted Subsidiaries on the date of such
Investment;
(ii) a Temporary Cash Investment;
(iii) commission, payroll, travel, relocation and similar advances to
cover matters that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP;
(iv) stock, obligations or securities received in satisfaction of
judgments or settlement of disputed accounts receivable that arose in the
ordinary course of business;
(v) Investments in prepaid expenses, negotiable instruments held for
collection, and lease, utility and workers' compensation, performance and other
similar deposits;
(vi) Interest Rate Agreements and Currency Agreements to the extent
permitted under clause (iv) of the definition of "Permitted Indebtedness;" and
(vii) loans and advances to employees of CapRock or any Subsidiary in
an aggregate amount not to exceed $1 million at any time outstanding.
"Permitted Liens" means any of the following:
(i) Liens for taxes, fees, assessments, governmental charges or claims
that are not yet due and payable, or, if delinquent, are payable without penalty
or are being contested in good faith by appropriate legal proceedings promptly
instituted and diligently conducted and for which a reserve or other appropriate
provisions, if any, as shall be required in conformity with GAAP shall have been
made;
(ii) statutory and common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, material men, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts not
yet delinquent, or, if delinquent, are payable without penalty or are or being
contested in good faith by appropriate legal proceedings promptly instituted and
diligently conducted and for which a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security;
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of money bonds and other obligations of a similar nature incurred in the
ordinary course of business (exclusive of obligations for the payment of
borrowed money);
(v) easements, rights-of-way, restrictions, municipal and zoning
ordinances, reservations, permits and similar charges, encumbrances, title
defects or other irregularities that do not materially interfere with the
ordinary course of business of CapRock or any of its Restricted Subsidiaries;
(vi) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the Incurrence of such Indebtedness by
CapRock or any Restricted Subsidiary; PROVIDED THAT such Lien does not extend to
any property or assets of CapRock or any Restricted Subsidiary other than the
asset acquired in connection with the Incurrence of such Acquired Indebtedness;
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(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of CapRock and its Restricted
Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of CapRock or its Restricted
Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or becomes
a part of, any Restricted Subsidiary; PROVIDED THAT such Liens do not extend to
or cover any property or assets of CapRock or any Restricted Subsidiary other
than the property or assets acquired and any proceeds thereof;
(xii) Liens in favor of CapRock or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order
against CapRock or any Restricted Subsidiary that does not give rise to an Event
of Default;
(xiv) Liens securing reimbursement obligations with respect to letters
of credit that encumber documents and other property relating to such letters of
credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvi) Liens encumbering customary initial deposits and margin deposits,
and other Liens that are either within the general parameters customary in the
industry or incurred in the ordinary course of business, in each case securing
Indebtedness under Interest Rate Agreements and Currency Agreements and forward
contracts, options, future contracts, futures options or similar agreements or
arrangements designed solely to protect CapRock or any of its Restricted
Subsidiaries from fluctuations in interest rates, currencies or the price of
commodities;
(xvii) Liens arising out of conditional sale, title retention,
consignment or similar arrangements for the sale of goods entered into by
CapRock or any of its Restricted Subsidiaries in the ordinary course of business
in accordance with the past practices of CapRock and its Restricted Subsidiaries
prior to the Closing Date;
(xviii) Liens on or sales of receivables, including related intangible
assets and proceeds thereof;
(xix) Liens securing Indebtedness incurred under clauses (iv)(A),
(iv)(B), (vii), (viii)(B), (ix), (x) or (xii) of the definition of "Permitted
Indebtedness";
(xx) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off, or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution;
(xxi) Liens securing Capitalized Lease Obligations on assets subject to
such Capitalized Leases;
(xxii) Liens of CapRock (which term shall include CapRock
Telecommunications Corp., CapRock Fiber Network, LTD. and IWL Communications,
Incorporated if the Transaction is consummated) or any Restricted Subsidiary
securing Indebtedness in effect at the Closing Date or at the date on which the
Transaction or the Special Partnership Transaction, as the case may be, is
consummated (to the extent such Indebtedness Incurred after the Closing Date was
incurred without violation of the CapRock indenture);
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(xxiii) Liens granted after the Closing Date on any assets or Capital
Stock of CapRock or its Restricted Subsidiaries created in favor of the Holders;
(xxiv) Liens with respect to the assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to CapRock or a Wholly-Owned Restricted
Subsidiary to secure Indebtedness owing to CapRock or such other Restricted
Subsidiary;
(xxv) Liens securing Indebtedness that is Incurred to refinance secured
Indebtedness permitted to be Incurred under clause (iii) of the definition of
"Permitted Indebtedness"; PROVIDED THAT such Liens do not extend to or cover any
property or assets of CapRock or any Restricted Subsidiary other than the
property or assets securing the Indebtedness being refinanced; or
(xxvi) any extension, renewal or replacement, in whole or in part, of
any Lien described in the foregoing clauses (i) through (xxv); PROVIDED THAT any
such extension, renewal or replacement shall be no more restricted in any
material respect than the Lien so extended, renewed or replaced and shall not
extend to any additional property or assets.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference equity,
whether outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
"pro forma" means, with respect to the preparation of financial
statements to show the effect of any particular transaction, the preparation of
such financial statements in accordance with Article 11 of Regulation S-X.
"Redeemable Stock" means any class or series of Capital Stock of any
Person that by its terms or otherwise is (i) required to be redeemed prior to
the Stated Maturity of the CapRock notes, (ii) redeemable at the option of the
holder of such class or series of Capital Stock at any time prior to the Stated
Maturity of the CapRock notes or (iii) convertible into or exchangeable for
Capital Stock referred to in clause (i) or (ii) above or Indebtedness having a
scheduled maturity prior to the Stated Maturity of the CapRock notes; PROVIDED
THAT any Capital Stock that would not constitute Redeemable Stock but for
provisions thereof giving holders thereof the right to require such Person to
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to the Stated Maturity of the CapRock
notes shall not constitute Redeemable Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are no more favorable in
any material respect to the holders of such Capital Stock than the provisions
contained in "Limitation on Asset Sales" and "Repurchase of CapRock Notes Upon a
Change of Control" covenants described above are to the holders of the CapRock
notes and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to
CapRock's repurchase of such CapRock notes as are required to be repurchased
pursuant to the "Limitation on Asset Sales" and "Repurchase of CapRock Notes
Upon a Change of Control" covenants described above.
"Restricted Payment" means
(i) a declaration or payment of any dividend or the making of any
distribution on or with respect to CapRock's Capital Stock (other than (x)
dividends or distributions payable solely in shares of CapRock's Capital Stock
(other than Redeemable Stock) or in options, warrants or other rights to acquire
shares of such Capital Stock and (y) dividends or distributions payable to
CapRock or any Wholly-Owned Restricted Subsidiary),
(ii) a payment made by CapRock or any Restricted Subsidiary used to
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) CapRock or an Unrestricted Subsidiary (including options, warrants
or other rights to acquire such shares of Capital Stock) held by any Person or
(B) a Restricted Subsidiary (including options, warrants or other rights to
acquire such shares of Capital Stock) held by any Affiliate of CapRock (other
than a Wholly-Owned Restricted Subsidiary) or any holder (or any Affiliate of
such holder) of 5% or more of any class of Capital Stock of CapRock (including
options, warrants or other rights to acquire such shares
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of Capital Stock) (other than (x) payments payable solely in shares of
Capital Stock (other than Redeemable Stock) of CapRock or in options,
warrants or other rights to acquire shares of such Capital Stock and (y)
payments payable to CapRock or any Wholly-Owned Restricted Subsidiary),
(iii) any voluntary or optional principal payment, or voluntary or
optional redemption, repurchase, defeasance, or other acquisition or retirement
for value, of Indebtedness of CapRock that is subordinated in right of payment
to the CapRock notes (other than, in each case, the purchase, repurchase or
acquisition of Indebtedness either in anticipation of satisfying a sinking fund
obligation, principal installment or final maturity that in any case is due
within one year after the date of such purchase, repurchase or acquisition), or
(iv) any Investment, other than a Permitted Investment, in any Person.
The consummation of the transactions contemplated by the Transaction or
the Special Partnership Transaction shall not constitute "Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of CapRock other than an
Unrestricted Subsidiary.
"SEC" means the Securities and Exchange Commission.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended, together with the rules and regulations promulgated thereunder.
"Special Partnership Transaction" means the statutory merger or
interest exchange between CapRock Telecommunications Corp. and CapRock Fiber
Network, LTD. that would be required to be consummated in the event the Special
Offer to Purchase is made and any CapRock notes remain outstanding after the
payment of all CapRock notes tendered in such Special Offer to Purchase.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"Subsidiary" means, with respect to any Person, any corporation,
association or other business entity of which more than 50% of the voting power
of the outstanding Voting Stock is owned, directly or indirectly, by such Person
and one or more other Subsidiaries of such Person.
"Subsidiary Guarantee" has the meaning given it under the caption
"Limitation on Issuances of Guarantees by Restricted Subsidiaries."
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses) that are
utilized by such Person, directly or indirectly, in the Telecommunications
Business and including any computer systems used in a Telecommunications
Business. Telecommunications Assets shall also include a majority of the Voting
Stock of another Person, if such Voting Stock is acquired by CapRock or a
Restricted Subsidiary and all or substantially all the assets of such other
Person comprise Telecommunications Assets; and such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of CapRock pursuant to the CapRock indenture. The determination of
what constitutes Telecommunications Assets shall be made by the Board of
Directors of CapRock and evidenced by a Board Resolution delivered to the
trustee.
"Telecommunications Business" means the business of (i) transmitting or
providing services relating to the transmission of voice, video, signals, data
or Internet services; (ii) constructing, creating, developing, owning,
operating, and marketing one or more communications networks, related, ancillary
or complementary network transmission equipment, information systems, software,
and other related, ancillary or complimentary assets and devices; (iii)
planning, designing, and consulting with respect to the matters described in
clauses (i) and (ii); and (iv)
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evaluating, participating and pursuing any other activity or opportunity that
is related, ancillary, or complementary to those identified in clauses (i),
(ii) and (iii) above, as determined in good faith by the Board of Directors
of CapRock.
"Temporary Cash Investment" means any of the following:
(i) direct obligations of the United States of America or any agency
thereof or obligations fully and unconditionally guaranteed by the United States
of America or any agency thereof with a maturity of 365 days or less,
(ii) time deposit accounts, certificates of deposit and money market
deposits maturing within one year of the date of acquisition thereof issued by a
bank or trust company which is organized under the laws of the United States of
America, any state thereof or any foreign country recognized by the United
States of America, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50 million (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or such similar
equivalent rating) or higher by at least one nationally recognized statistical
rating organization (as defined in Rule 436 under the Securities Act) or any
money-market fund sponsored by a registered broker dealer or mutual fund
distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered into
with a bank meeting the qualifications described in clause (ii) above,
(iv) commercial paper, maturing not more than one year after the date
of acquisition, issued by a corporation (other than an Affiliate of CapRock)
organized and in existence under the laws of the United States of America, any
state thereof or any foreign country recognized by the United States of America
with a rating at the time as of which any investment therein is made of "P-1"
(or higher) according to Moody's Investors Service, Inc. or "A-1" (or higher)
according to Standard & Poor's Ratings Service, and
(v) securities with maturities of six months or less from the date of
acquisition issued or fully and unconditionally guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Service or Moody's Investors Service, Inc.
"Trade Payables" means, with respect to any Person, any accounts
payable or any other indebtedness or monetary obligation to trade creditors
created, assumed or Guaranteed by such Person or any of its Subsidiaries arising
in the ordinary course of business in connection with the acquisition of goods
or services.
"Transaction" means the transactions contemplated by the Merger
Agreement (also referred to herein from time to time as the Combination).
"Transition Period" means the period between the Closing Date and the
consummation of the Transaction or the payment date for CapRock notes tendered
in the Special Offer to Purchase, as the case may be.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of CapRock, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of CapRock may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither CapRock nor any other Subsidiary
is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii)
no default with respect to any Indebtedness of such Subsidiary would permit
(upon notice, lapse of time or otherwise) any holder of any other Indebtedness
of CapRock or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the "Limitation on Restricted Payments" covenant, (iv) neither
CapRock nor any Restricted Subsidiary has a contract, agreement, arrangement,
understanding or obligation of any kind, whether written or oral, with such
Subsidiary on terms more favorable to such Subsidiary than those that might be
obtained at the time from
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persons who are not Affiliates of CapRock, and (v) neither CapRock nor any
other Subsidiary has any obligation (1) to subscribe for additional shares of
Capital Stock or other equity interests in such Subsidiary, or (2) to
maintain or preserve such Subsidiary's financial condition or to cause such
Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of CapRock shall be evidenced to the
trustee by filing a Board Resolution with the trustee giving effect to such
designation. The Board of Directors of CapRock may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if, immediately after giving effect to
such designation, there would be no Default or Event of Default under the
CapRock indenture and CapRock could incur $1.00 of additional Indebtedness
under clause (i) of the first paragraph of the "Limitation on Indebtedness"
covenant described above pursuant to the "Limitation on Indebtedness"
covenant.
"Vendor Credit Facility" means any agreement entered into with one or
more vendors, suppliers or lessors of telecommunications equipment or assets
(including any agreement entered into with any such vendor, supplier or lessor
or any financial institution acting on behalf of any such vendor, supplier or
lessor) in order to finance the acquisition or construction of
telecommunications equipment or assets, as such agreement may be amended,
modified, supplemented, refunded, refinanced, restructured, renewed or replaced
from time to time; PROVIDED THAT (i) any equipment or other assets acquired or
leased under or pursuant to such Vendor Credit Facility are received by CapRock
or a Restricted Subsidiary and (ii) all obligations with respect to or under
such Vendor Credit Facility or any amendment, modification, supplement,
refunding, refinancing, restructuring, renewal or replacement thereof are owed,
whether directly or indirectly as the case may be, to a Person who is not an
Affiliate of CapRock or any of its Subsidiaries and no such Affiliate shall act
as a facilitator or conduit or in a similar capacity with respect thereto.
"Voting Stock" means with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly-Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals or other
shares issued to Persons as mandated by applicable law) by such Person or one or
more Wholly-Owned Subsidiaries of such Person.
BOOK-ENTRY; DELIVERY AND FORM
The CapRock notes are represented by one or more permanent global
certificates in definitive, fully registered form. This global note was
deposited upon issuance with The Depository Trust Company, New York, New York
and registered in the name of a nominee of The Depository Trust Company.
THE GLOBAL NOTE
Pursuant to procedures established by The Depository Trust Company,
(1) upon the issuance of the global note, The Depository Trust Company
or its custodian credited, on its internal system, the principal amount of the
individual beneficial interests represented by the global note to the respective
accounts of persons who have accounts with such depositary and
(2) ownership of beneficial interests in the global note is shown on,
and the transfer of ownership will be effected only through, records maintained
by The Depository Trust Company or its nominee, with respect to interests of
participants, and the records of participants, with respect to interests of
persons other than participants.
Ownership of beneficial interests in the global notes is limited to
persons who have accounts with The Depository Trust Company or persons who hold
interests through participants.
So long as The Depository Trust Company or its nominee is the
registered owner or holder of the CapRock notes, The Depository Trust Company
(or the nominee) will be considered the sole owner or holder of the CapRock
notes represented by the global note for all purposes under the CapRock
indenture. No beneficial owner of an
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interest in the global note will be able to transfer that interest except in
accordance with The Depository Trust Company's procedures.
Payments of interest, principal and other amounts due on the global
note are made to The Depository Trust Company or its nominee as the registered
owner. None of CapRock, the trustee or any paying agent has any responsibility
or liability for any aspect of the records relating to or payments made on
account of beneficial ownership interests in the global note or for maintaining,
supervising or reviewing any records relating to this beneficial ownership
interest.
We expect that The Depository Trust Company or its nominee, upon
receipt of any payment of interest, principal or other amounts due on the global
note, will credit participants' accounts with payments in amounts proportionate
to their respective beneficial interests in the global note as shown on the
records of The Depository Trust Company. We also expect that payments by
participants to owners of beneficial interests in the global note held through
such participants will be governed by standing instructions and customary
practice, as is the case with securities held for the accounts of customers
registered in the names of nominees for those customers. These payments will be
the responsibility of the participants.
Transfers between participants in The Depository Trust Company are
effected in the ordinary way through The Depository Trust Company's settlement
system in accordance with The Depository Trust Company rules and are settled in
same day funds.
The Depository Trust Company has advised us that it will take any
action permitted to be taken by a holder of CapRock notes, including the
presentation of CapRock notes for exchange as described below, only at the
direction of a participant to whose account The Depository Trust Company
interests in the global note are credited. Further, The Depository Trust Company
will take action only as to such portion of the CapRock notes as to which the
participant has given such direction. However, if there is an Event of Default
under the CapRock indenture, The Depository Trust Company will exchange the
global note for certificated notes, which it will distribute to its
participants.
The Depository Trust Company has advised us as follows: The Depository
Trust Company is a limited purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the Uniform Commercial Code and a "Clearing
Agency" registered under the provisions of Section 17A of the Exchange Act. The
Depository Trust Company was created to hold securities for its participants and
facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates. Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to The Depository Trust Company system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly.
Although The Depository Trust Company has agreed to the foregoing
procedures in order to facilitate transfers of interests in the global note
among participants of The Depository Trust Company, it is under no obligation to
perform those procedures, and those procedures may be discontinued at any time.
Neither CapRock nor the trustee will have any responsibility for the performance
by The Depository Trust Company or its participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED SECURITIES.
If (1) The Depository Trust Company is at any time unwilling or unable
to continue as a depositary for the global note and a successor depositary is
not appointed by CapRock within 90 days or (2) an Event of Default under the
CapRock indenture has occurred and is continuing with respect to the CapRock
notes, certificated notes will be issued in exchange for the global note.
122
<PAGE>
THE PROPOSED AMENDMENTS
On October 11, 2000, CapRock commenced a solicitation of consents from
the holders of the CapRock notes to amend the CapRock indenture as summarized
below. Capitalized terms used below that are not otherwise defined below shall
have the meanings assigned to them in the CapRock indenture.
The proposed amendments amend the CapRock indenture to permit a merger
of CapRock with McLeodUSA or any wholly-owned subsidiary of McLeodUSA and to
allow the merger to be consummated without triggering the change of control
provisions of the CapRock indenture. We refer to these amendments as the Merger
Amendments.
Except for the amendment to Section 5.01(c) which is more particularly
described below, the proposed amendments would also eliminate in their entirety
from the CapRock indenture the following covenants and the references to such
covenants, as well as the events of default and definitions related solely to
such covenants. We refer to these amendments as the Covenant Amendments. The
Covenants Amendments replace the text of each of the following articles,
sections or subsections of the CapRock indenture with the words "Intentionally
Omitted":
<TABLE>
<S> <C>
SECTION 5.01(c)......................... EVENTS OF DEFAULT. Defines an "Event
of Default" to include a default in
the performance or breach of the
provisions of Article 8 or the
failure to make or consummate an
Offer to Purchase in accordance with
Section 10.10, Section 10.15 or
Section 10.21. Section 5.01(c) is
being amended to remove the
references to Article 8, Section
10.10 and Section 10.15. The
reference to Section 10.21 in the
CapRock indenture remains.
SECTION 7.04............................ REPORTS BY ISSUER. Requires CapRock
to file annual and quarterly reports
and other required documents with
the SEC, to provide copies of such
reports and documents to the Trustee
and to provide summaries of certain
reports and documents to the
Holders.
ARTICLE 8............................... CONSOLIDATION, MERGER, SALE OF
ASSETS, ETC. Prohibits CapRock from
consolidating, merging, selling or
otherwise transferring all or
substantially all of its assets
unless certain conditions are met.
SECTION 10.04........................... CORPORATE EXISTENCE. Requires
CapRock to maintain the corporate
existence, rights, licenses and
franchises of CapRock and its
Restricted Subsidiaries.
SECTION 10.05........................... PAYMENT OF TAXES AND OTHER CLAIMS.
Requires CapRock to pay or discharge
all material taxes, assessments and
governmental charges levied or
imposed on CapRock or any of its
Restricted Subsidiaries before such
taxes, assessments and governmental
charges become delinquent.
SECTION 10.06........................... MAINTENANCE OF PROPERTIES. Requires
CapRock to cause all material
properties owned, or used or held
for use in the conduct of business,
by CapRock or any of its Restricted
Subsidiaries to be maintained and
kept in good condition.
SECTION 10.07........................... INSURANCE. Requires CapRock to
insure all of its and its Restricted
Subsidiaries' properties against
loss or damage to the extent that
property of similar character is
usually and customarily insured.
</TABLE>
123
<PAGE>
<TABLE>
<S> <C>
SECTION 10.10........................... REPURCHASE OF CAPROCK NOTES UPON A
CHANGE OF CONTROL. Requires CapRock
to offer to purchase the CapRock
notes governed by the CapRock
indenture within 30 days of a
"Change of Control," at a price
equal to 101% of the unpaid
principal amount of the CapRock
notes, plus accrued and unpaid
interest.
SECTION 10.11........................... LIMITATION ON INDEBTEDNESS.
Restricts the ability of CapRock and
its Restricted Subsidiaries to
incur, directly or indirectly,
Indebtedness.
SECTION 10.13........................... LIMITATION ON RESTRICTED PAYMENTS.
Restricts the ability of CapRock and
its Restricted Subsidiaries to make
Restricted Payments, including
payment of dividends on or purchases
of CapRock's Capital Stock,
purchases of subordinated
indebtedness or making Investments.
SECTION 10.14........................... LIMITATION ON TRANSACTIONS WITH
STOCKHOLDERS AND AFFILIATES.
Restricts the ability of CapRock and
its Restricted Subsidiaries to enter
into or suffer to exist any
transaction with any of their
respective Affiliates (except for
transactions solely between CapRock
and any of its Wholly-Owned
Restricted Subsidiaries or solely
between Wholly-Owned Restricted
Subsidiaries) or any holder of 5% or
more of the Capital Stock of
CapRock.
SECTION 10.15........................... LIMITATION ON ASSET SALES. Restricts
the ability of CapRock and its
Restricted Subsidiaries to sell,
transfer or lease capital stock of
Restricted Securities, assets of
CapRock or Restricted Subsidiaries
which constitute all or
substantially all of an operating
unit or business and other property
of CapRock or a Restricted
Subsidiary outside the ordinary
course of business.
SECTION 10.16........................... LIMITATION ON LIENS. Restricts the
ability of CapRock and its
Restricted Subsidiaries to create,
incur, assume or suffer to exist any
Liens of any kind against or upon
any property or assets of CapRock or
any Restricted Subsidiary or any
shares of Capital Stock or
Indebtedness of any Restricted
Subsidiary.
SECTION 10.18........................... LIMITATION ON THE ISSUANCE AND SALE
OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Restricts the ability
of CapRock to sell or otherwise
convey or dispose of any Capital
Stock of a Restricted Subsidiary and
restricts the ability of CapRock's
Restricted Subsidiaries to issue,
sell or otherwise convey or dispose
of any of their Capital Stock.
SECTION 10.19........................... LIMITATION ON DIVIDEND AND OTHER
PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES. Restricts
the ability of CapRock and its
Restricted Subsidiaries to limit any
Restricted Subsidiary's ability to
pay dividends, to pay Indebtedness
owed to CapRock or any Restricted
Subsidiary, to make loans or
advances to CapRock or any
Restricted Subsidiary, or to
transfer any of its properties to
CapRock or to the other Restricted
Subsidiaries.
SECTION 10.20........................... LIMITATION ON SALE-LEASEBACK
TRANSACTIONS. Restricts the ability
of CapRock and its Restricted
Subsidiaries to enter into any
sale-leaseback transaction involving
any of its assets or properties
unless certain conditions are met.
</TABLE>
124
<PAGE>
<TABLE>
<S> <C>
SECTION 10.22........................... COMMISSION REPORTS AND REPORTS TO
HOLDERS. Requires CapRock to file
annual and quarterly reports and
other required documents with the
SEC and to provide copies of such
reports and documents to the Trustee
and the Holders.
SECTION 10.23........................... LIMITATION ON ISSUANCES OF
GUARANTEES BY RESTRICTED
SUBSIDIARIES. Limits the ability of
CapRock's Restricted Subsidiaries to
guarantee any indebtedness of
CapRock unless such Restricted
Subsidiary also guarantees CapRock's
obligations under the CapRock notes.
</TABLE>
The Merger Amendments will become effective upon (a) receipt of the
consent of the holders of at least a majority of the aggregate principal amount
of the CapRock notes and (b) execution by CapRock and the trustee of a
supplemental indenture. The Covenant Amendments will become effective upon (a)
receipt of the consent of the holders of at least a majority of the aggregate
principal amount of the CapRock notes, (b) execution by CapRock and the Trustee
of a supplemental indenture and (c) the later of (i) the effective time of the
merger of CapRock with a wholly-owned subsidiary of McLeodUSA and (ii) 20
business days following commencement of the exchange offer. The form of the
supplemental indenture which embodies the proposed amendments has been filed as
an exhibit to the registration statement of which this prospectus forms a part,
and is considered a part of this document.
125
<PAGE>
LEGAL MATTERS
The legality of the McLeodUSA notes offered by this prospectus are
being passed upon for McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C.,
special counsel for McLeodUSA.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
ended December 31, 1999, 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 Splitrock Services, Inc. as of
December 31, 1999 and 1998, and for the period from March 5, 1997 (date of
inception) to December 31, 1997 and for each of the two years in the period
ended December 31, 1999 included in this registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included in reliance upon the
authority of said firm as experts in giving said reports.
The consolidated financial statements of CapRock Communications Corp.
as of December 31, 1998 and 1999 and for each of the years in the three-year
period ended December 31, 1999 are incorporated by reference in this
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing.
126
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the SEC of which this
prospectus forms a part. The registration statement, including the attached
exhibits and schedules, contain additional relevant information about the
McLeodUSA notes. The rules and regulations of the SEC allow us to omit some of
the information included in the registration statement from this prospectus.
In addition, both McLeodUSA and CapRock have filed reports, proxy
statements and other information with the SEC under the Securities Exchange Act.
You may read and copy any of this information at the following locations of the
SEC:
<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, like McLeodUSA and CapRock,
that file electronically with the SEC. The address of that site is
http://www.sec.gov. The SEC file number for McLeodUSA's documents filed under
the Securities Exchange Act is 0-20763, and the SEC file number for CapRock's
documents filed under the Securities Exchange Act is 0-24581.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we can disclose important information to you by referring
you to another document filed separately with the SEC. The information
incorporated by reference is considered to be a part of this prospectus, except
for any such information that is superseded by information included directly in
this document.
This prospectus incorporates by reference the documents listed below that
we have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
- Our Annual Report on Form 10-K for our fiscal year ended December 31,
1999, filed on March 30, 2000
- Our Quarterly Reports on Form 10-Q for our quarterly periods ended
March 31, 2000 and June 30, 2000, filed on May 15, 2000 and August 14,
2000, respectively
- Our Current Reports on Form 8-K filed on January 19, 2000, January 21,
2000, February 3, 2000, February 11, 2000, March 14, 2000, April 14,
2000, May 24, 2000, June 1, 2000 and October 13, 2000 and our amended
Current Report on Form 8-K/A filed on June 13, 2000
- All documents filed with the SEC by us under Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act after the date of this
prospectus and before the offering is terminated, are considered to be
a part of this prospectus, effective the date such documents are filed
This prospectus also incorporates by reference the documents listed below
that CapRock has previously filed or will file with the SEC. They contain
important information about CapRock and its financial condition.
- CapRock's Annual Report on Form 10-K for its fiscal year ended
December 31, 1999, as filed on March 30, 2000
127
<PAGE>
- CapRock's Quarterly Reports on Form 10-Q for CapRock's quarterly
periods ended March 31, 2000 and June 30, 2000, filed on May 15, 2000
and August 14, 2000, respectively
- CapRock's Current Reports on Form 8-K, filed on April 20, 2000, July
10, 2000 (two), August 3, 2000, and August 16, 2000 and October 10,
2000
- All documents filed with the SEC by CapRock under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act after the date of
this prospectus and before the offering is terminated are considered
to be a part of this prospectus, effective the date such documents are
filed
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Internet Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 790-7775
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request any
documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
You should make your request at least five business days prior to the expiration
of the exchange offer in order to ensure timely delivery of these documents
before the exchange offer expires.
The indenture that will govern the McLeodUSA notes requires us to furnish
the trustee with annual reports containing consolidated financial statements
audited by our independent public accountants and with quarterly reports
containing unaudited condensed consolidated financial statements for each of the
first three quarters of each fiscal year.
All information contained in or considered a part of this prospectus
relating to McLeodUSA has been supplied by McLeodUSA, and all such information
relating to CapRock has been supplied by CapRock.
128
<PAGE>
SPLITROCK SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants......................................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999.............................. F-3
Consolidated Statements of Operations and Comprehensive Loss for the Period
from Inception (March 5, 1997) Through December 31, 1997 and the years
ended December 31, 1998 and 1999........................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Period from Inception
(March 5, 1997) Through December 31, 1999 .............................................. F-5
Consolidated Statements of Cash Flows for the Period from Inception (March 5,
1997) Through December 31, 1997 and the years ended December 31, 1998 and 1999.......... F-6
Notes to Consolidated Financial Statements................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Splitrock Services, Inc.:
We have audited the accompanying consolidated balance sheets of Splitrock
Services, Inc. and subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of operations and comprehensive loss, stockholders'
equity, and cash flows for the period from inception (March 5, 1997) to December
31, 1997 and for each of the two years in the period ended December 31, 1999.
These financial statements are the responsibility of Splitrock Services, Inc.'s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Splitrock Services,
Inc. and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the period from inception (March 5, 1997) to
December 31, 1997 and for each of the two years in the period ended December 31,
1999 in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 16, 2000
F-2
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents........................................................ $ 28,330 $ 92,593
Unrestricted investments -- short term........................................... 120,475 5,441
Restricted investments -- short term............................................. 39,476 33,646
Accounts receivable, net of $537 and $1,403 allowance in 1998 and 1999,
respectively................................................................... 3,205 11,292
Prepaid expenses and other current assets........................................ 480 2,975
---------- --------
Total current assets......................................................... 191,966 145,947
---------- --------
Restricted investments -- long term................................................. 19,001 140
Deposits............................................................................ 270 11,910
Property and equipment, net......................................................... 73,899 120,863
Intangibles, net.................................................................... 11,005 22,426
---------- --------
$ 296,141 $301,286
========== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of capital lease obligations.................................. $ 9,121 $ 21,089
Accounts payable................................................................. 21,582 2,906
Accrued interest payable......................................................... 13,375 14,141
Accrued liabilities.............................................................. 15,894 31,013
---------- --------
Total current liabilities...................................................... 59,972 69,149
Senior notes payable ($261,000 face value net of unamortized discount )............. 258,217 258,387
Capital lease obligations........................................................... 8,243 18,934
---------- --------
Total liabilities............................................................ 326,432 346,470
Commitments and contingencies
Stockholders' deficit:
Preferred stock, $.001 par value, 25,000,000 shares authorized, no shares issued. - -
Common stock, $.001 par value, 150,000,000 shares authorized, 46,624,845
and 57,030,590 shares issued and outstanding as of December 31, 1998 and
1999, respectively............................................................. 47 57
Common stock warrants............................................................ 2,849 1,750
Additional paid-in capital....................................................... 34,717 124,461
Accumulated other comprehensive income (loss).................................... 47 (180)
Accumulated deficit.............................................................. (67,951) (171,272)
----------- ---------
Total stockholders' deficit.................................................. (30,291) (45,184)
$ 296,141 $301,286
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Period from
Inception
(March 5, 1997) Year Ended Year Ended
to December 31, December 31, December 31,
1997 1998 1999
--------------- ------------ -------------
<S> <C> <C> <C>
Revenue........................................................... $ 22,708 $ 63,611 $ 89,556
Operating expenses:
Splitrock network costs........................................ 2,362 32,912 87,398
Legacy network costs........................................... 25,804 58,292 31,904
Selling, general and administrative............................ 1,276 6,390 21,386
Depreciation and amortization.................................. 3,500 13,850 27,322
----------- ----------- -------------
32,942 111,444 168,010
----------- ----------- -------------
Loss from operations.............................................. (10,234) (47,833) (78,454)
Other income (expense):
Interest income................................................ 348 5,393 7,714
Interest expense............................................... (235) (15,390) (32,581)
------------ ------------ --------------
Loss before income taxes.......................................... (10,121) (57,830) (103,321)
Provision for income taxes........................................ - - -
----------- ----------- -------------
Net loss.......................................................... (10,121) (57,830) (103,321)
Other comprehensive income (loss):
Unrealized gain (loss) on securities........................... - 47 (180)
----------- ----------- --------------
Comprehensive loss................................................ $ (10,121) $ (57,783) $ (103,501)
============ ============ ==============
Net loss per share - basic and diluted............................ $ (0.42) $ (1.30) $ (2.03)
=========== ============ ==============
Weighted average shares - basic and diluted....................... 24,109,823 44,388,948 50,866,855
=========== ========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Period From Inception (March 5, 1997) Through December 31, 1999
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Common Stock Accumulated
-------------------- Common Additional Other Com- Accumu-
Par Stock Paid-in prehensive lated
Shares Value Warrants Capital Income (Loss) Deficit Total
---------- ------ -------- ------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization .......... 15,764,000 $ 16 $ -- $ 12 $ -- $ -- $ 28
Issuance of Common Stock for
cash of $1.11 per share and
warrant .................... 18,466,400 18 -- 20,482 -- -- 20,500
Conversion of note payable to
Common Stock at $1.11
per share .................. 9,008,000 9 -- 9,991 -- -- 10,000
Net loss ........................ -- -- -- -- -- $ (10,121) (10,121)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .... 43,238,400 43 -- 30,485 -- (10,121) 20,407
Unrealized gain on securities -- -- -- -- 47 -- 47
Issuance of warrants to
purchase 1,487,791 shares of
Common Stock in connection
with Senior Notes (Note 5) . -- -- 2,849 -- -- -- 2,849
Exercise of stock options and
Warrant .................... 3,386,445 4 -- 4,232 -- -- 4,236
Net loss ..................... -- -- -- -- -- (57,830) (57,830)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 .... 46,624,845 47 2,849 34,717 47 (67,951) (30,291)
Unrealized loss on securities -- -- -- -- (227) -- (227)
Exercise of stock options and
warrants ................... 713,117 1 (1,099) 1,322 -- -- 224
Sale of Common Stock under
public offering, net of
expenses ................... 9,692,628 9 -- 88,422 -- -- 88,431
Net loss ..................... -- -- -- -- -- (103,321) (103,321)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 .... 57,030,590 $ 57 $ 1,750 $ 124,461 $ (180) $ (171,272) $ (45,184)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SPLITROCK SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from Inception
(March 5, 1997) Year Ended Year Ended
to December 31, December 31, December 31,
1997 1998 1999
--------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ............................................. $ (10,121) $ (57,830) $(103,321)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ...................... 3,500 13,850 27,322
Amortization of debt discount and deferred
financing costs .................................... -- 467 1,114
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ......... (4,252) 1,047 (8,087)
Increase in prepaid and other current assets ....... (221) (259) (2,495)
Increase (decrease) in accounts payable and accrued
liabilities ...................................... 8,861 28,615 (3,557)
Increase in accrued interest payable ............... -- 13,375 766
--------- --------- ---------
Net cash used in operating activities .............. (2,233) (735) (88,258)
--------- --------- ---------
Cash flows from investing activities:
Purchase of equipment ................................ (16,969) (45,261) (39,464)
(Purchase) liquidation of unrestricted investments ... -- (119,462) 114,807
Reinvestment of interest earned on unrestricted
investments ........................................ -- (966) --
Reinvestment of interest earned on restricted
investments ........................................ -- (1,725) 28,194
Increase in deposits ................................. (229) (41) (11,640)
Increase in intangibles .............................. -- (2,057) (12,509)
--------- --------- ---------
Net cash provided by (used in)investing activities (17,198) (169,512) 79,388
Cash flows from financing activities:
Proceeds from initial public offering, net of
offering costs ..................................... -- -- 88,422
Proceeds from senior notes payable and
warrants issued .................................... -- 261,000 --
Proceeds from notes payable to stockholder ........... 11,750 10,000 --
Repayments of notes payable to stockholder ........... (750) (11,000) --
Proceeds from notes payable .......................... -- 1,477 --
Repayments of notes payable .......................... -- (1,477) --
Financing costs incurred ............................. -- (9,501) (2,079)
Restriction of cash under senior note agreement ...... -- (56,752) --
Sale of common stock and exercise of stock options
and warrants ....................................... 20,528 4,236 224
Proceeds from sale-leaseback of equipment ............ 1,152 960 --
Principal payments on capital lease obligations ...... (2,067) (11,548) (9,931)
Restriction of cash under credit agreement ........... (3,472) 3,472 (3,503)
--------- --------- ---------
Net cash provided by financing activities ........ 27,141 190,867 73,133
--------- --------- ---------
Increase in cash and cash equivalents ................... 7,710 20,620 64,263
Cash and cash equivalents:
Beginning of period .................................. -- 7,710 28,330
--------- --------- ---------
End of period ........................................ $ 7,710 $ 28,330 $ 92,593
========= ========= =========
Supplemental cash flow information:
Cash paid for interest ............................... $ 235 $ 1,536 $ 30,679
========= ========= =========
Noncash investing and financing activities:
Assumption of capital lease obligations and
other liabilities (Note 2) ......................... $ 5,900 $ -- $ --
========= ========= =========
Capital lease obligations incurred ................... $ 20,916 $ 4,792 $ 32,590
========= ========= =========
Conversion of note payable to stockholder
into common stock .................................. $ 10,000 $ -- $ --
========= ========= =========
Approximately $18,400 of the increase in accounts
payable and accrued liabilities at December 31,
1998, were related to equipment purchases.
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Splitrock Services, Inc. ("the Company") was formed on March 5, 1997 as
a Texas corporation and was reincorporated in Delaware on May 8, 1998. The
Company provides high-quality, nationwide telecommunication services on a
flexible multi-service platform.
On October 29, 1999 the Company formed Splitrock Leasing, LLC, a
wholly-owned subsidiary. The accompanying consolidated financial statements
include the operations of Splitrock Leasing, LLC. Significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
The Company effected a 0.563-for-1 reverse stock split of its common
stock on July 12, 1999. All share and per share amounts included in these
consolidated financial statements have been retroactively adjusted to give
effect to the reverse stock split.
The following is a summary of the Company's significant accounting
policies:
USE OF ESTIMATES. The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as disclosures of
contingent assets and liabilities. Because of inherent uncertainties in this
process, actual future results could differ from those expected at the reporting
date. Management believes the estimates are reasonable.
CASH AND CASH EQUIVALENTS AND INVESTMENTS. The Company considers highly
liquid investments with an original maturity of three months or less from the
date of purchase to be classified as cash and cash equivalents. Cash and cash
equivalents are stated at cost, which approximates fair value.
Short-term investments have original maturities of more than three
months and a remaining maturity of less than one year at the date of purchase.
At December 31, 1998 and 1999, cash equivalents and short-term investments
consisted primarily of money market funds and securities of the highest grade.
All short- term investments have been classified as available for sale under the
provisions of Statement of Financial Accounting Standards No. ("SFAS") 115,
Accounting for Certain Investments in Debt and Equity Securities, and have
various maturity dates which do not exceed one year. Available for sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method.
The following is a summary of the investments classified as
restricted and unrestricted as of December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Gains Unrealized Losses Fair Value
---------------------- ------------------ ----------------------- ----------------------
1998 1999 1998 1999 1998 1999 1998 1999
--------- --------- --------- ----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale securities:
Money market funds ........ $ 23,557 $ 3,944 $ -- $ -- $ -- $ -- $ 23,557 $ 3,944
Corporate notes ........... 108,496 5,414 3 -- (80) (3) 108,419 5,411
Municipal securities ...... 12,061 -- -- -- (6) -- 12,055 --
U.S. Treasury notes ....... 34,791 30,049 181 5 (51) (182) 34,921 29,872
--------- --------- --------- ----- --------- --------- --------- ---------
$ 178,905 $ 39,407 $ 184 $ 5 $ (137) $ (185) $ 178,952 $ 39,227
========= ========= ========= ===== ========= ========= ========= =========
</TABLE>
At December 31, 1997, restricted investments represented collateral to
support an outstanding letter of credit. Restricted investments as of December
31, 1998, represented escrowed funds that, together with interest received
thereon, will be sufficient to pay, when due, the first four semi-annual
interest payments on the Senior
F-7
<PAGE>
Notes. As of December 31, 1999, restricted investments included $3,500 held
as collateral to support outstanding letters of credits with the remainder
were held that, together with interest received thereon, will be sufficient
to pay, when due, the next two semi-annual interest payments on the Senior
Notes.
CONCENTRATION OF CREDIT RISK. Financial instruments which potentially
subject the Company to concentration of credit risk are primarily cash and cash
equivalents, investments and accounts receivable. The Company's cash investment
policies limit investments to short-term, investment grade instruments with
quality financial institutions. The Company's revenues and its accounts
receivable balances for the periods ended December 31, 1998 and 1999, were
largely derived from services provided to Prodigy, the Company's major customer
during the periods. Prodigy was the Company's only customer from inception
through December 31, 1997 and during 1998 and 1999 represented 99% and 85.5%,
respectively, of the Company's revenue. Management believes that the risk of
incurring material losses related to credit risks is remote.
FAIR VALUES OF FINANCIAL INSTRUMENTS. Due to the short-term nature of
the Company's financial instruments, management believes the carrying values of
the Company's assets, short-term liabilities and lease obligations approximate
their fair values. The fair value of the Company's Senior Notes (Note 5) at
December 31, 1999, approximates $241,000, based upon quoted market prices.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Shelters are depreciated using the straight-line method over the estimated
useful life of twenty years. Depreciation and amortization of all other property
and equipment, including assets under capital leases, is initiated as it is
placed into service using the straight-line method over the estimated useful
lives of three to ten years from the date of installation.
COMPUTER SOFTWARE. Effective January 1, 1999, the Company adopted the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position ("SOP") 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use. This standard requires that certain costs related
to the development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. This SOP also requires
that costs related to the preliminary project stage, data conversion and the
post-implementation/operation stage of an internal-use computer software
development project be expensed as incurred.
DEPOSITS AND INTANGIBLES. At December 31, 1999, deposits include
$11,200 paid in connection with the fiber acquisition agreement with Level 3.
Intangibles consist primarily of debt issuance costs incurred in connection with
the issuance of our 11 3/4% Senior Notes, and other intangible assets such as
capitalized circuit charges, leasehold improvements and lease acquisition costs.
Debt issuance costs are amortized using the effective interest rate method. All
other intangibles are amortized by use of the straight-line method over their
estimated lives, which are generally two to five years. At December 31, 1998 and
1999, debt issuance costs, net of accumulated amortization, were $9,027 and
$10,183, respectively.
LONG-LIVED ASSETS. The Company reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The carrying amount of a long-lived
asset is considered impaired when anticipated undiscounted cash flows expected
to result from the use of the asset and its eventual disposition are less than
its carrying amount. The Company believes that no material impairment exists at
December 31, 1999.
INCOME TAXES. Deferred tax assets and liabilities are determined based
on the temporary differences between the consolidated financial statement
carrying amounts and the tax bases of assets and liabilities using the enacted
tax rates in effect in the years in which the differences are expected to
reverse. In estimating future tax consequences, all expected future events are
considered with the exception of enacted changes in the tax law or rates.
STOCK-BASED COMPENSATION. The Company has adopted SFAS No. 123,
Accounting for Stock-Based Compensation, for disclosure purposes. Under SFAS No.
123, the Company measures compensation expense for its stock-based employee
compensation plan using the intrinsic value method prescribed in Accounting
Principles Board ("APB") No. 25, Accounting for Stock Issued to Employees. The
Company provides disclosure of the effect
F-8
<PAGE>
on net income as if the fair value-based method prescribed in SFAS No. 123
has been applied in measuring compensation expense.
REVENUE RECOGNITION. The Company recognizes revenue when services are
provided and collectibility is deemed probable under its agreement with the
customer.
LEGACY NETWORK COSTS. Legacy network costs contain all expenses
incurred in connection with operating and decommissioning legacy networks. This
includes facility fees, line charges for legacy network POPs, certain personnel
costs, occupancy costs, equipment maintenance costs and access fees.
COMPREHENSIVE LOSS. Effective January 1, 1998, the Company adopted SFAS
No. 130, Reporting Comprehensive Income, as displayed in its Consolidated
Statements of Operations and Comprehensive Loss for all periods presented. This
SFAS establishes standards for reporting and display of comprehensive income and
its components. The Company's comprehensive loss is comprised of net loss and
unrealized gains and losses on available for sale securities.
NET LOSS PER SHARE. Basic and diluted net loss per share have been
computed in accordance with SFAS No. 128, Earnings Per Share. SFAS No. 128
requires the Company to report both basic earnings (loss) per share, which is
based on the weighted average number of common shares outstanding, and diluted
earnings (loss) per share, which is based on the weighted average number of
common shares outstanding and all dilutive potential common shares outstanding.
At December 31, 1998, options to acquire 1,801,882 shares of Common Stock at the
weighted-average exercise price of $2.31 and warrants to acquire 1,487,791
shares of Common Stock at $0.02 and at December 31, 1999, options to acquire
4,286,855 shares of Common Stock at the weighted-average exercise price of $7.78
and warrants to acquire 914,730 shares of Common Stock at an exercise price of
$0.02 were not included in the computation of diluted earnings per share because
their effect is anti-dilutive.
SEGMENT REPORTING. The Company conducts its business within one
segment. The Company presents its consolidated financial statements to reflect
how the "key operating decision maker" views the business and has made the
appropriate enterprise-wide disclosures in accordance with SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"), which is effective for
fiscal years beginning after June 15, 1999, and establishes accounting and
reporting standards for derivative instruments. In June 1999, the FASB issued
SFAS No. 137, which deferred the effective date of SFAS No. 133 to June 15,
2000. The Company has historically not engaged in derivative instrument
activity. The adoption of this standard is not expected to have a material
effect on the Company's financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides
guidance on applying generally accepted accounting principles to revenue
recognition issues in financial statements. The Company adopted SAB 101 as
required in the first quarter of 2000 and the adoption of this standard did not
have a material effect on its financial position or results of operations.
2. Prodigy Agreement
On June 24, 1997, the Company entered a four-year Full Service
Agreement with Prodigy, in which the Company agreed to provide certain network
services to Prodigy from July 1, 1997 through June 30, 2001 for the lower of a
price per hour of usage or a price per subscriber as stipulated. Monthly minimum
service charges under this contract have increased from $3,000 to $4,000 and
will increase to $4,500 on July 1, 2000. Monthly maximum service charges are
based on average usage per subscriber and the number of subscribers. Prodigy may
terminate the Full Service Agreement without termination charges in an event of
default by the Company; such defaults include documented failures (without cure)
to meet certain network performance standards. The agreement also allows
F-9
<PAGE>
Prodigy to terminate its arrangement with the Company at any time upon the
payment of a termination charge. In February 2000, the Company amended the
pricing and extended the terms under its Full Service Agreement with Prodigy
(see Note 11).
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Telecommunications network equipment and shelters............................... $ 43,275 $ 76,103
Software........................................................................ 2,186 4,352
Furniture, fixtures and office equipment........................................ 1,749 5,429
Telecommunications network equipment under construction......................... 13,289 9,982
------------ -------------
60,499 95,866
Less -- accumulated depreciation................................................ (10,392) (21,884)
------------- -------
Purchased property and equipment, net...................................... 50,107 73,982
------------ -------------
Leased telecommunications network equipment..................................... 29,102 51,315
Leased Software................................................................. -- 4,410
Leased office equipment......................................................... 1,496 1,492
------------ -------------
30,598 57,217
Less -- accumulated amortization................................................ (6,806) (10,336)
------------- -------------
Leased property and equipment, net......................................... 23,792 46,881
------------ -------------
Property and equipment, net..................................................... $ 73,899 $ 120,863
============ =============
</TABLE>
4. Accrued Liabilities
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------
1998 1999
---- ----
<S> <C> <C>
Access and transmission telecommunications line costs (Note 7)........... $ 3,172 $ 16,490
Telecommunications network equipment and shelters........................ 9,900 8,608
Other.................................................................... 2,822 5,915
------------ -------------
Accrued liabilities...................................................... $ 15,894 $ 31,013
============ =============
</TABLE>
5. Indebtedness
The components of indebtedness are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Senior Notes, net of unamortized discount of $2,783 and $2,613........... $ 258,217 $ 258,387
------------ -------------
$ 258,217 $ 258,387
============ =============
</TABLE>
On July 24, 1998, the Company sold 261 units consisting of $261,000 principal
amount of 11 3/4% Senior Notes due 2008 ("Senior Notes") and warrants to
purchase 1,487,791 shares of common stock ("the Senior Notes Offering"). Upon
issuance, the Senior Notes were recorded in the Company's consolidated financial
statements net of a $2,849 discount. The discount was attributable to the
Company's estimate of the value of the warrants based on an independent third
party valuation. The discount is amortized as a component of interest expense
over the life of the Senior Notes using the effective interest method. This
amortization will result in an increase in the consolidated
F-10
<PAGE>
financial statement balance of the Senior Notes to a $261,000 face value by
2008. In November 1998, the Senior Notes were exchanged for substantially the
same terms in an offering registered under the Securities Act.
Upon the occurrence of a change of control (as defined in the Indenture
for the Senior Notes) the Company will be required to make an offer to
repurchase all Senior Notes properly tendered at a price equal to 101% of the
principal amount plus accrued and unpaid interest to the date of repurchase. On
January 6, 2000, the Company signed a definitive merger agreement, if approved,
that will constitute a change in control (see Note 11). The indenture also
provides for redemption of the Senior Notes at any time, in whole or in part, on
or after July 15, 2003 at a premium through July 15, 2005. In addition, on or
prior to July 15, 2001, the Company may redeem up to 35% of the original
aggregate principal amount of the Senior Notes at a premium with the proceeds of
one or more equity offerings.
The Senior Note indenture also restricts the Company's ability to incur
additional indebtedness, to create liens or other encumbrances, to make certain
payments, investments, loans and guarantees and to sell or otherwise dispose of
a substantial portion of assets to, or merge or consolidate with, an
unaffiliated entity. In October 1999, the Company paid the holders of the Senior
Notes $2,100 in consideration for modified terms which allowed the Company to
enter into a commitment for approximately $122,000 of capital lease financing.
In connection with the Senior Notes Offering, the Company repaid $1,477
outstanding under a credit facility and refinanced $11,000 of indebtedness owed
to Linsang Partners L.L.C. ("Linsang"), a stockholder of the Company. In
connection with the refinancing, Linsang acquired 11,000 units in the Senior
Notes Offering. The net proceeds to the Company, after the Senior Notes Offering
expenses and retirement and refinancing of debt, approximated $239,000.
In December 1997, the Company borrowed $1,000 from Linsang. The
unsecured note had a stated rate of interest of 9.75% and provided for monthly
interest payments beginning February 1, 1998, with the principal due on demand
after December 31, 1998, and maturing December 31, 2002. During 1998, the
Company borrowed $10,000 from Linsang on terms substantially the same as the
previous note. The Linsang notes were refinanced in July 1998, in connection
with the Senior Notes offering, as stated above.
6. Income Taxes
A provision for income taxes for the periods ended December 31, 1997,
1998 and 1999 has not been recognized as the Company had operating losses for
both tax and financial reporting purposes. Due to the uncertainty surrounding
the timing of realizing the benefits of its favorable tax attributes in future
tax returns, the Company has recorded a full valuation allowance against its
otherwise recognizable net deferred tax asset.
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- ----
<S> <C> <C>
Net operating loss carryforwards................................................ $ 22,465 $ 65,758
Depreciation.................................................................... 3,325 4,965
Other........................................................................... 429 1,082
------------ -------------
Deferred tax assets........................................................ 26,219 71,805
------------ -------------
Leases.......................................................................... (474) (6,750)
------------ -------------
Deferred tax liabilities................................................... (474) (6,750)
------------ -------------
Net deferred tax assets......................................................... 25,745 65,055
Valuation allowance............................................................. (25,745) (65,055)
------------- -------------
Net deferred tax assets......................................................... $ -- $ --
------------ -------------
</TABLE>
The Company's net operating loss carryforward totals approximately
$173,000 of which approximately
F-11
<PAGE>
$9,500 expires in 2012, $55,100 expires in 2018 and the remainder in 2019.
Certain changes in ownership of the Company could result in limitations on
the Company's ability to utilize the losses.
7. Commitments and Contingencies
The Company leases office space, equipment facilities and equipment
under noncancelable operating and capital leases expiring through the year 2003.
Rent expense for noncancelable operating leases amounted to $663 in 1998 and
$5,131 in 1999.
Future minimum payments by year end in the aggregate related to
noncancelable operating and capital leases at December 31, 1999 are:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases Total
------ --------- -----
<S> <C> <C> <C>
2000 ........................................................................... $ 22,956 $ 6,207 $ 29,163
2001 ........................................................................... 11,004 7,061 18,065
2002 ........................................................................... 10,366 6,962 17,328
2003 ........................................................................... 384 6,912 7,296
2004 ........................................................................... -- 5,806 5,806
-------- -------- ----------
Total minimum lease payments........................................... $ 44,710 $ 32,948 $ 77,658
======== ======== ==========
Less amount representing interest...................................... (4,687)
--------
Present value of minimum capital lease payments................................. $ 40,023
========
</TABLE>
The Company leases telephone lines from competitive local exchange
suppliers, interexchange carriers and long distance telephone companies
primarily for access and transport purposes ("line costs"). These line costs are
leased under both cancelable and noncancelable operating leases over periods
ranging from month-to-month to five years and are included in Network operating
costs on the consolidated statement of operations. The Company has commitments
to certain of these telecommunication vendors to meet certain minimum usage
volumes. Additionally, the Company is subject to certain cancellation penalties,
which could become applicable upon termination of a number of these agreements.
The cancellation penalties typically require a payment of certain percentage of
the remaining amounts due under the contract, depending on the year in which
cancellation may occur. Line costs included in the Splitrock Network operating
costs were $22,617 and $67,131 during the year ended December 31, 1998 and 1999,
respectively. Line costs incurred during both years comprise a substantial
portion of the Network operating costs.
In October 1999, the Company entered into lease financing arrangements
with a third party leasing company to fund up to $122,000 of purchase
commitments for equipment, including optronics equipment. These lease
arrangements were originally structured as an operating lease, but were
converted to a capital lease after the Company obtained the necessary consents
from the holders of the Senior Notes. The consents were received on November 24,
1999. Capital leases require payments on a monthly basis over periods ranging
from 30 to 48 months, with implicit interest rates of 9% to 12%.
The Company has an agreement with a telecommunication supplier to
provide certain installation services for the Company. The minimum amount of
services for which the Company is required to pay is approximately $1,300. As of
December 31, 1999, the Company has incurred approximately $1,000 of such amount
in connection with this agreement.
In April 1999, the Company entered into a cost sharing agreement with a
national telecommunications provider (the Provider). The agreement grants the
Company an exclusive 20 year indefeasible right to use (IRU) in four dark fibers
in the nationwide fiber optic communication system currently under construction
by the Provider with an option to acquire the indefeasible rights to use up to
12 additional dark fibers, which expires April 26, 2000. The Company made an
initial payment of $11,200 to the Provider and is required to make additional
payments as dark fiber segments are accepted, which is expected to occur from
the first quarter of 2000 through the first quarter
F-12
<PAGE>
of 2001. The Company's remaining obligation to retain its IRU in the original
four dark fibers approximates $81,600. In addition the Company is obligated
to pay its pro-rata portion of the maintenance costs incurred by the Provider
for these fiber strands for the term of the IRU.
In connection with the fiber optic network deployment, in October 1999,
the Company committed to purchase a minimum of approximately $50,000 of fiber
optronics equipment, associated network management systems, and installation
services from Nortel. The equipment and services are expected to be delivered
through the next five quarters as the dark fiber network is available.
On November 4, 1999, Ericsson, Inc. filed a Demand for Arbitration on a
"contract dispute" pursuant to the Commercial Arbitration Rules with the
American Arbitration Association concerning the Network Implementation
Agreement, between the parties. The Company has filed a counterclaim and intends
to vigorously defend the dispute pursuant to state tort and contract causes of
action, including negligent misrepresentation, fraud in the inducement, breach
of contract, failure to timely perform, failure to perform in a good and
workmanlike manner, breach of the duty of good faith, failure of consideration
and failure of essential purpose. The Company is seeking damages by offset and
credit. Both parties are in the process of selecting arbitrators so that a
preliminary hearing can be scheduled.
8. Equity Transactions
The Company effected a 1-for-100 stock exchange on June 3, 1997, a
1-for-10 stock exchange on August 8, 1997 and a 0.563-for-1 reverse stock split
effected July 12, 1999. All share amounts included in these consolidated
financial statements have been adjusted to reflect the effect of the stock
exchanges and reverse stock split.
Warrants issued in connection with the Company's Senior Note Offering
are exercisable at $.02 per share at any time on or after July 26, 1999 through
July 15, 2008 for 1,487,791 shares of common stock. At December 31, 1999,
warrants for 914,730 shares of common stock remain unexercised.
On August 6, 1999, the Company completed its initial public offering of
its common stock pursuant to a Registration Statement filed with the SEC. The
Company sold 9,692,628 shares of common stock at a price of $10.00 per share,
which resulted in net proceeds of approximately $88,400 after deducting the
underwriting discount and other fees and expenses. The underwriters purchased
692,628 of these shares pursuant to an over-allotment option. In addition
157,372 additional shares were sold, under the same agreement, by certain
existing shareholders. The Company did not receive any of the proceeds from the
sale of the 157,372 shares.
9. Stock Options
The Company's 1997 and 1999 Incentive Share Plans provide for options
to purchase up to 11,260,000 shares of common stock to be granted to certain
directors, employees or consultants of the Company. Options under the Plans have
terms of ten years and are granted with an exercise price equivalent to market
value at the date of grant. Individual option grants vest over time, based upon
a schedule approved by the Board of Directors, which is generally four years.
All of the Company's common stock options vest automatically upon a change in
control of the Company, as defined (see Note 11).
F-13
<PAGE>
The following summarizes the activity for the Plans:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------- ---------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at beginning of fiscal year -- -- 1,058,440 $ 1.11 1,801,882 $ 2.31
Granted ..................................... 1,058,440 $ 1.11 1,443,251 $ 2.97 3,094,798 $ 10.77
Exercised ................................... -- -- 571,445 $ 1.94 140,056 $ 1.41
Canceled .................................... -- -- 128,364 $ 1.49 469,769 $ 8.34
--------- --------- ---------
Options outstanding at end of year ............ 1,058,440 $ 1.11 1,801,882 $ 2.31 4,286,855 $ 7.78
</TABLE>
The following table summarizes information about the Company's stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- -----------------------
Number Weighted- Number
Outstand- Average Weighted Exercisable Weighted
Range of ing At Remaining Average at Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1999 Life (Years) Price 1999 Price
------------ ------------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1.11 - $1.95............................... 1,186,739 7.74 $ 1.18 696,018 $1.14
$5.95 - $11.25.............................. 2,604,771 9.33 $ 9.10 97,581 $5.95
$13.88 - $24.19............................. 495,345 9.84 $16.70 - $ -
--------- ---- ------ ------- ------
$1.11 - $24.19.............................. 4,286,855 8.95 $ 7.78 793,598 $ 1.73
</TABLE>
In October 1996, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which allows the Company to account for its employee
stock-based compensation plans under APB No. 25 and the related interpretations.
According to APB No. 25, deferred compensation is recorded for stock-based
compensation grants based on the excess of the market value of the common stock
on the measurement date over the exercise price. The deferred compensation is
amortized over the vesting period of each unit of stock-based compensation
grant. If the exercise of the stock-based compensation grants is equal to the
market price of the Company's stock on the date of grant, no compensation
expense is recorded.
During the year ended December 31, 1998 and 1999, the Company
recognized compensation expense of $46 and $0 for options granted at a discount
from the then estimated fair market value of the Company's Common Stock.
Had compensation cost for the Company's stock option plan been
determined based on the estimated fair market value at the grant date,
consistent with the provisions of SFAS No. 123, the Company's pro forma net loss
would have been as follows:
<TABLE>
<CAPTION>
Pro forma
Period from
Inception
(March 5,
1997) Pro forma Pro forma
through Year ended Year ended
December 31, December 31, December 31,
1997 1998 1999
------------ ------------- ------------
<S> <C> <C> <C>
Net loss...................................................... $(10,141) $(58,254) $(105,322)
Net loss per share -- basic and diluted....................... (0.42) (1.31) (2.07)
</TABLE>
Options granted in 1997, 1998 and 1999 had weighted-average fair values
of $0.077, $1.00, and $6.42, respectively. For purposes of estimating the fair
value of options granted, the Company used no future dividends,
F-14
<PAGE>
used average U.S. government security interest rates for its risk-free
interest rates of 5.80%, 4.39% and 5.36%, assumed no volatility, 70.5% and
75% volatility, and assumed expected life of the options of five, four and
four years in 1997, 1998 and 1999, respectively.
10. Related Party Transactions
The Company's chairman of the Board of Directors (the "Chairman"), who
is also a shareholder of the Company, is the Chief Technical Officer of Lucent
Technologies, Inc. (the "Vendor") from which the Company purchased approximately
$427 in equipment through December 31, 1998 and $17,600 in products and services
during the year ended December 31, 1999.
Linsang, an affiliate of the Chairman, loaned $1,000 to the Company for
the purchase of certain network equipment in December 31, 1997. During 1998, the
affiliate made further advances of $10,000 under this agreement. The unsecured
notes had a stated rate of interest of 9.75% and provided for monthly interest
payments beginning February 1, 1998, with the principal due on demand after
December 31, 1998, and maturing December 31, 2002. The Notes were refinanced in
July 1998, in connection with the Senior Notes offering (Note 5).
A former director of the Company exercised a option to purchase 563,000
shares of the Company Common Stock for $1,100 in June 1998 and 11,260 shares of
the Company common stock for $22 in August 1999.
In September 1997, Orient Star Holdings, a wholly-owned subsidiary of
Carso Global Telecom, S.A. de C.V. (the controlling stockholder of Prodigy)
purchased 11,260,000 shares of the Company for $1.11 per share and paid $0.10,
for a warrant to purchase an additional 2,815,000 shares of the Company through
September 18, 1998 for $1.11 per share. The warrants were exercised in September
1998.
11. Subsequent Events
In February 2000, the Company revised its agreement with Prodigy to
convert the pricing formula from a subscriber based arrangement to a fixed
hourly fee for usage effective January 1, 2000. As part of this amendment, the
term of the contract was extended to December 31, 2001.
On March 30, 2000, the Company was acquired by a wholly-owned
subsidiary of McLeodUSA Incorporated ("McLeodUSA") pursuant to the Amended Plan
of Merger dated February 11, 2000. The acquisition of Splitrock Services by
McLeodUSA was effected through two separate but related transactions:
- a holding company reorganization, in which Splitrock Services, Inc. became
a wholly-owned subsidiary of its former subsidiary, Splitrock Holdings,
resulting in reductions to the number of authorized shares and the number
of shares issued and outstanding; and
- a merger of Southside Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of McLeodUSA, with and into Splitrock Holdings in
which Splitrock Holdings was the surviving corporation and became a
wholly-owned subsidiary of McLeodUSA.
Pursuant to these transactions, each of the Company's shareholders
ultimately received 0.5347 shares of McLeodUSA Class A common stock in exchange
for each share of Splitrock common stock owned. A substantial portion of the
Company's outstanding stock options became fully vested upon the merger pursuant
to a change of control provision in the Company's stock option plans. At the
time of the merger, each right to purchase a share of the Company's common stock
pursuant to an outstanding option or warrant was converted into an option or
warrant with a right to purchase 0.5347 of a share of McLeodUSA Class A common
stock.
In connection with the acquisition of the Company's stock by McLeodUSA,
the common stock of Splitrock Services, Inc. was delisted from The Nasdaq Stock
Market.
During March 2000, the Company issued 792,235 shares of its common
stock representing the shares
F-15
<PAGE>
underlying the common stock warrants outstanding as of that date. These
shares were issued to the warrant agent to be held in reserve until the
warrants are exercised by the warrant holders. Upon issuance of the shares,
the Company recorded the value of the warrants as common stock and additional
paid in capital. Upon the merger these shares converted to McLeodUSA Class A
common stock based on the 0.5347 exchange ratio. In connection with the
merger and conversion, McLeodUSA assumed the Company's obligations under the
Warrant Agreement dated July 24, 1998, as amended.
During March 2000, the Company settled its contract dispute with
Ericsson, Inc.
In July, 2000, the $261 million Splitrock Senior Notes were retired.
The total payment for these notes was approximately $316 million.
* * *
F-16
<PAGE>
$150,000,000
McLeodUSA
Incorporated
12% Senior Notes
Due 2008
LOGO
PROSPECTUS
Dated October ___, 2000
<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 non-derivative 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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<S> <C>
*2.1 Agreement and Plan of Merger by and among McLeodUSA, Cactus
Acquisition Corp. and Caprock Communications Corp., dated as
of October 2, 2000.
3.1 Amended and Restated Certificate of Incorporation of McLeodUSA
(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 McLeodUSA (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 to the Amended and Restated Certificate
of Incorporation of McLeodUSA (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 Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.8 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on May 15, 2000 (the "May 2000 Form 10-Q") and incorporated
herein by reference).
3.5 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.9 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on August 14, 2000 (the "August 2000 Form 10-Q") and
incorporated herein by reference).
3.6 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).
3.7 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).
3.8 Certificate of Designations of the Series B preferred stock, par
value $.01 per share, of McLeodUSA (filed as Exhibit 3.6 to the
Registration Statement on Form S-4, File No. 333-95941, filed
with the SEC on February 1, 2000 (the "February 2000 Form S-4")
and incorporated herein by reference).
3.9 Certificate of Designations of the Series C preferred stock, par
value $.01 per share, of McLeodUSA (filed as Exhibit 3.7 to the
February 2000 Form S-4 and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeodUSA (filed as
Exhibit 4.1 to the Initial Form S-1 and incorporated herein by
reference).
<PAGE>
4.2 Indenture dated March 4, 1997 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the 10
1/2% Senior Discount Notes Due 2007 of McLeodUSA (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
McLeodUSA, 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 McLeodUSA (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 McLeodUSA,
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 McLeodUSA, 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).
<PAGE>
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).
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 (filed as Exhibit
4.22 to the February 2000 Form S-4 and incorporated herein by
reference).
4.23 Form of Series C preferred stock certificate (filed as Exhibit
4.23 to the February 2000 Form S-4 and incorporated herein by
reference).
4.24 Second Amended and Restated November 1998 Stockholders'
Agreement dated December 17, 1999 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin and certain CCI
Shareholders (filed as Exhibit 4.24 to Annual Report on Form
10-K, File No. 0-20763, filed with the SEC on March 30, 2000
(the "1999 Form 10-K") and incorporated herein by reference).
<PAGE>
4.25 Second Amended and Restated January 1999 Stockholders' Agreement
dated December 17, 1999 by and among certain Alliant Entities,
Clark and Mary McLeod, Richard Lumpkin, certain CCI Shareholders
and the M/C Stockholders (filed as Exhibit 4.25 to the 1999 Form
10-K and incorporated herein by reference).
4.26 Stockholders' Agreement dated as of March 30, 2000 by and among
McLeodUSA, Kwok Li and Linsang Partners, LLC (filed as Exhibit
4.26 to the May 2000 Form 10-Q and incorporated herein by
reference).
4.27 Third Amended and Restated November 1998 Stockholders' Agreement
dated as of March 10, 2000 by and among by and among certain
Alliant Entities, Clark and Mary McLeod, Richard Lumpkin and
certain CCI Shareholders (filed as Exhibit 4.27 to the May 2000
Form 10-Q and incorporated herein by reference).
4.28 Third Amended and Restated January 1999 Stockholders' Agreement
dated as of March 10, 2000 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin, certain CCI
Shareholders and the M/C Stockholders (filed as Exhibit 4.28 to
the May 2000 Form 10-Q and incorporated herein by reference).
*4.29 Amendment No. 1 to Third Amended and Restated November 1998
Stockholders' Agreement, dated as of July 7, 2000.
*4.30 Amendment No. 1 to Third Amended and Restated January 1999
Stockholders' Agreement, dated as of July 7, 2000.
*4.31 Amended and Restated Stockholders' Agreement dated as of August
10, 2000, by and among McLeodUSA Incorporated, Kwok Li and
Linsang Partners, LLC.
4.32 Warrant Agreement dated as of July 29, 1998 by and between
Harris Trust Company of New York (formerly Bank of Montreal
Trust Company) and Splitrock Services, Inc. (filed as Exhibit
10.12 to the Registration Statement on Form S-4 of Splitrock
Services, Inc., File No. 333-61293, filed with the SEC on August
12, 1998 and incorporated herein by reference).
4.33 Form of Splitrock Warrant Certificate (filed as Exhibit 4.7 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on July 16, 1999 and incorporated herein by
reference).
4.34 First Supplemental Warrant Agreement by and between Splitrock
Services, Inc. and Harris Trust Company of New York, dated as of
February 24, 2000 (filed as Exhibit 4.11 to Post-Effective
Amendment No. 1 on Form S-3 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on March 13, 2000 and incorporated herein by
reference).
4.35 Second Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc. and Harris Trust
Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.37 to the May 2000 Form 10-Q and incorporated herein
by reference).
<PAGE>
4.36 Third Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc., McLeodUSA and Harris
Trust Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.38 to the May 2000 Form 10-Q and incorporated herein
by reference).
4.37 Credit Agreement dated as of May 31, 2000 among McLeodUSA,
various Lenders and The Chase Manhattan Bank, as Agent (filed as
Exhibit 4.39 to the August 2000 Form 10-Q and incorporated
herein by reference).
4.38 Form of Promissory Note under the Credit Agreement dated as of
May 31, 2000 among McLeodUSA, various Lenders and The Chase
Manhattan Bank, as Agent (filed as Exhibit 4.40 to the August
2000 Form 10-Q and incorporated herein by reference).
4.39 Indenture dated as of July 16, 1998, among CapRock
Communications Corp., CapRock Telecommunications, CapRock Fiber,
IWL Communications, Incorporated and PNC Bank, National
Association, Trustee (filed as Exhibit 4.1 to the Registration
Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-64699, filed with the SEC on September 29,
1998 and incorporated herein by reference).
4.40 Indenture dated as of May 18, 1999, between CapRock
Communications Corp. and Chase Manhattan Trust Company, National
Association, Trustee (filed as Exhibit 4.8 to the Registration
Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-82557, filed with the SEC on July 9, 1999
and incorporated herein by reference).
*4.41 Form of First Supplemental Indenture to Indenture dated as of
July 16, 1998, between CapRock Communications Corp., as Issuer,
and Chase Manhattan Trust Company, National Association, as
successor Trustee.
*4.42 Form of First Supplemental Indenture to Indenture dated as of
May 18, 1999, between CapRock Communications Corp., as Issuer,
and Chase Manhattan Trust Company, National Association, as
Trustee.
*4.43 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 12% Senior
Notes Due July 15, 2008 of McLeodUSA.
*4.44 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 11 1/2% Senior
Notes Due May 1, 2009 of McLeodUSA.
*5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
12% Senior Notes Due July 15, 2008 of McLeodUSA securities being
registered.
*5.2 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
11 1/2% Senior Notes Due May 1, 2009 of McLeodUSA being
registered.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibits 5.1 and
5.2).
*23.2 Consent of Arthur Andersen LLP regarding financial statements of
McLeodUSA.
*23.3 Consent of Arthur Andersen LLP regarding financial statements of
Splitrock Services, Inc.
*23.4 Consent of KPMG LLP regarding financial statements of
CapRock Communications Corp.
<PAGE>
24.1 Power of attorney (included on signature page).
*25.1 Statement of Eligibility of Trustee.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Broker Dealer Letter.
*99.4 Form of Letter to Clients.
*99.5 Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
</TABLE>
------------------
*Filed herewith.
(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, 1999 (File No.
0-20763), filed with the SEC on March 30, 2000, 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 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 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.
<PAGE>
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,
represent 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.
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 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 Securities 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 16th day
of October, 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 and Stephen C. Gray, 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, as of the 16th day of October, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <S>
/s/ Clark E. McLeod Chairman, Chief Executive Officer and Director
-------------------------- (Principal Executive Officer)
Clark E. McLeod
Vice Chairman and Director
--------------------------
Richard A. Lumpkin
/s/ Stephen C. Gray President, Chief Operating Officer and Director
--------------------------
Stephen C. Gray
/s/ Roy A. Wilkens Chief Technology Officer, President and Chief
-------------------------- Executive Officer of Network and Data Services
Roy A. Wilkens operations, and Director
<PAGE>
/s/ J. Lyle Patrick Group Vice President--Finance and Accounting and
-------------------------- Chief Financial and Accounting Officer
J. Lyle Patrick (Principal Financial Officer and
Principal Accounting Officer)
/s/ Anne K. Bingaman Director
--------------------------
Anne K. Bingaman
/s/ Erskine B. Bowles Director
--------------------------
Erskine B. Bowles
/s/ Peter H.O. Claudy Director
--------------------------
Peter H.O. Claudy
/s/ Thomas M. Collins Director
--------------------------
Thomas M. Collins
/s/ Robert J. Currey Director
--------------------------
Robert J. Currey
Director
--------------------------
Theodore J. Forstmann
/s/ Daniel R. Hesse Director
--------------------------
Daniel R. Hesse
/s/ James E. Hoffman Director
--------------------------
James E. Hoffman
Director
--------------------------
Paul D. Rhines
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <C>
*2.1 Agreement and Plan of Merger by and among McLeodUSA, Cactus
Acquisition Corp. and Caprock Communications Corp., dated as of
October 2, 2000.
3.1 Amended and Restated Certificate of Incorporation of McLeodUSA
(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 McLeodUSA (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 to the Amended and Restated Certificate
of Incorporation of McLeodUSA (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 Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.8 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on May 15, 2000 (the "May 2000 Form 10-Q") and incorporated
herein by reference).
3.5 Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of McLeodUSA (filed as Exhibit 3.9 to the
Quarterly Report on Form 10-Q, File No. 0-20763, filed with the
SEC on August 14, 2000 (the "August 2000 Form 10-Q") and
incorporated herein by reference).
3.6 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).
3.7 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).
3.8 Certificate of Designations of the Series B preferred stock, par
value $.01 per share, of McLeodUSA (filed as Exhibit 3.6 to the
Registration Statement on Form S-4, File No. 333-95941, filed
with the SEC on February 1, 2000 (the "February 2000 Form S-4")
and incorporated herein by reference).
3.9 Certificate of Designations of the Series C preferred stock, par
value $.01 per share, of McLeodUSA (filed as Exhibit 3.7 to the
February 2000 Form S-4 and incorporated herein by reference).
4.1 Form of Class A Common Stock Certificate of McLeodUSA (filed as
Exhibit 4.1 to the Initial Form S-1 and incorporated herein by
reference).
<PAGE>
4.2 Indenture dated March 4, 1997 between McLeodUSA and United
States Trust Company of New York, as Trustee, relating to the
10 1/2% Senior Discount Notes Due 2007 of McLeodUSA (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
McLeodUSA, 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 McLeodUSA (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 McLeodUSA,
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 McLeodUSA, 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).
<PAGE>
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).
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 (filed as Exhibit
4.22 to the February 2000 Form S-4 and incorporated herein by
reference).
4.23 Form of Series C preferred stock certificate (filed as Exhibit
4.23 to the February 2000 Form S-4 and incorporated herein by
reference).
4.24 Second Amended and Restated November 1998 Stockholders'
Agreement dated December 17, 1999 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin and certain CCI
Shareholders (filed as Exhibit 4.24 to Annual Report on Form
10-K, File No. 0-20763, filed with the SEC on March 30, 2000
(the "1999 Form 10-K") and incorporated herein by reference).
<PAGE>
4.25 Second Amended and Restated January 1999 Stockholders' Agreement
dated December 17, 1999 by and among certain Alliant Entities,
Clark and Mary McLeod, Richard Lumpkin, certain CCI Shareholders
and the M/C Stockholders (filed as Exhibit 4.25 to the 1999 Form
10-K and incorporated herein by reference).
4.26 Stockholders' Agreement dated as of March 30, 2000 by and among
McLeodUSA, Kwok Li and Linsang Partners, LLC (filed as Exhibit
4.26 to the May 2000 Form 10-Q and incorporated herein by
reference).
4.27 Third Amended and Restated November 1998 Stockholders' Agreement
dated as of March 10, 2000 by and among by and among certain
Alliant Entities, Clark and Mary McLeod, Richard Lumpkin and
certain CCI Shareholders (filed as Exhibit 4.27 to the May 2000
Form 10-Q and incorporated herein by reference).
4.28 Third Amended and Restated January 1999 Stockholders' Agreement
dated as of March 10, 2000 by and among certain Alliant
Entities, Clark and Mary McLeod, Richard Lumpkin, certain CCI
Shareholders and the M/C Stockholders (filed as Exhibit 4.28 to
the May 2000 Form 10-Q and incorporated herein by reference).
*4.29 Amendment No. 1 to Third Amended and Restated November 1998
Stockholders' Agreement, dated as of July 7, 2000.
*4.30 Amendment No. 1 to Third Amended and Restated January 1999
Stockholders' Agreement, dated as of July 7, 2000.
*4.31 Amended and Restated Stockholders' Agreement dated as of August
10, 2000, by and among McLeodUSA Incorporated, Kwok Li and
Linsang Partners, LLC.
4.32 Warrant Agreement dated as of July 29, 1998 by and between
Harris Trust Company of New York (formerly Bank of Montreal
Trust Company) and Splitrock Services, Inc. (filed as Exhibit
10.12 to the Registration Statement on Form S-4 of Splitrock
Services, Inc., File No. 333-61293, filed with the SEC on August
12, 1998 and incorporated herein by reference).
4.33 Form of Splitrock Warrant Certificate (filed as Exhibit 4.7 to
Post-Effective Amendment No. 1 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on July 16, 1999 and incorporated herein by
reference).
4.34 First Supplemental Warrant Agreement by and between Splitrock
Services, Inc. and Harris Trust Company of New York, dated as of
February 24, 2000 (filed as Exhibit 4.11 to Post-Effective
Amendment No. 1 on Form S-3 to the Registration Statement on
Form S-1 of Splitrock Services, Inc., File No. 333-63001, filed
with the SEC on March 13, 2000 and incorporated herein by
reference).
4.35 Second Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc. and Harris Trust
Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.37 to the May 2000 Form 10-Q and incorporated herein
by reference).
<PAGE>
4.36 Third Supplemental Warrant Agreement by and between Splitrock
Services, Inc., Splitrock Holdings, Inc., McLeodUSA and Harris
Trust Company of New York, dated as of March 30, 2000 (filed as
Exhibit 4.38 to the May 2000 Form 10-Q and incorporated herein
by reference).
4.37 Credit Agreement dated as of May 31, 2000 among McLeodUSA,
various Lenders and The Chase Manhattan Bank, as Agent (filed as
Exhibit 4.39 to the August 2000 Form 10-Q and incorporated
herein by reference).
4.38 Form of Promissory Note under the Credit Agreement dated as of
May 31, 2000 among McLeodUSA, various Lenders and The Chase
Manhattan Bank, as Agent (filed as Exhibit 4.40 to the August
2000 Form 10-Q and incorporated herein by reference).
4.39 Indenture dated as of July 16, 1998, among CapRock
Communications Corp., CapRock Telecommunications, CapRock Fiber,
IWL Communications, Incorporated and PNC Bank, National
Association, Trustee (filed as Exhibit 4.1 to the Registration
Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-64699, filed with the SEC on September 29,
1998 and incorporated herein by reference).
4.40 Indenture dated as of May 18, 1999, between CapRock
Communications Corp. and Chase Manhattan Trust Company, National
Association, Trustee (filed as Exhibit 4.8 to the Registration
Statement on Form S-4, as amended, of CapRock Communications
Corp., File No. 333-82557, filed with the SEC on July 9, 1999
and incorporated herein by reference).
*4.41 Form of First Supplemental Indenture to Indenture dated as of
July 16, 1998, between CapRock Communications Corp., as Issuer,
and Chase Manhattan Trust Company, National Association, as
successor Trustee.
*4.42 Form of First Supplemental Indenture to Indenture dated as of
May 18, 1999, between CapRock Communications Corp., as Issuer,
and Chase Manhattan Trust Company, National Association, as
Trustee.
*4.43 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 12% Senior
Notes Due July 15, 2008 of McLeodUSA.
*4.44 Form of Indenture between McLeodUSA and United States Trust
Company of New York, as Trustee, relating to the 11 1/2% Senior
Notes Due May 1, 2009 of McLeodUSA.
*5.1 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
12% Senior Notes Due July 15, 2008 of McLeodUSA being
registered.
*5.2 Opinion of Hogan & Hartson L.L.P. regarding the legality of the
11 1/2% Senior Notes Due May 1, 2009 of McLeodUSA being
registered.
23.1 Consent of Hogan & Hartson L.L.P. (included in Exhibits 5.1 and
5.2).
*23.2 Consent of Arthur Andersen LLP regarding financial statements of
McLeodUSA.
*23.3 Consent of Arthur Andersen LLP regarding financial statements of
Splitrock Services, Inc.
*23.4 Consent of KPMG LLP regarding financial statements of CapRock
Communications Corp.
<PAGE>
24.1 Power of attorney (included on signature page).
*25.1 Statement of Eligibility of Trustee.
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Broker Dealer Letter.
*99.4 Form of Letter to Clients.
*99.5 Form of Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
</TABLE>
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*Filed herewith.
