<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-82851
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 3, 2001
P R O S P E C T U S S U P P L E M E N T
(To Prospectus dated August 5, 1999)
[LOGO OF MCLEOD USA APPEARS HERE]
$450,000,000
McLeodUSA Incorporated
% Senior Notes due 2009
--------
The notes will bear interest at the rate of % per year. Interest on the
notes is payable on January 1 and July 1 of each year, beginning on July 1,
2001. The notes will mature on January , 2009. Upon a change of control of
our company, you will be able to require us to repurchase your notes. The price
we will pay you for your notes is set forth in this prospectus supplement.
The notes will be unsecured, will rank equally with all our existing and
future senior unsecured indebtedness and will be effectively subordinated to
all our existing and future secured indebtedness to the extent of the assets
that secure such indebtedness and to all of our subsidiaries' existing or
future indebtedness, whether or not secured.
You should read this entire prospectus supplement and the accompanying
prospectus to understand all of the terms of the notes.
--------
Investing in the notes involves risks. See "Risk Factors" beginning on page
S-11.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the related prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
--------
<TABLE>
<CAPTION>
Per Note Total
-------- -----------
<S> <C> <C>
Public Offering Price..................................... % $
Underwriting Discount..................................... % $
Proceeds to the Company (before expenses)................. % $
</TABLE>
Interest on the notes will accrue from January , 2001 to date of delivery
--------
The underwriters are offering the notes subject to several conditions. The
underwriters expect to deliver the notes to purchasers on or about January ,
2001.
--------
Joint Book-Running Managers
Salomon Smith Barney Goldman, Sachs & Co.
JP Morgan
January , 2001
<PAGE>
You should rely only on the information provided or incorporated by reference
in this prospectus supplement and accompanying prospectus. Neither we nor the
underwriters have authorized anyone to provide you with different or
inconsistent information. You should assume that the information in this
prospectus supplement and accompanying prospectus is accurate only as of the
date on the front cover of such documents. Our business, financial information,
results of operations and prospects may have changed since those dates.
If it is against the law in any state to make an offer to sell these
securities (or to solicit an offer from someone to buy these securities), then
this offer does not apply to any person in that state, and no offer or
solicitation is made by this prospectus supplement or the accompanying
prospectus to any such person.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................... S-1
Risk Factors............................................................... S-11
Cautionary Note Regarding Forward-Looking Statements....................... S-19
Use of Proceeds............................................................ S-19
Capitalization............................................................. S-20
Selected Consolidated Financial Data....................................... S-21
Pro Forma Financial Data................................................... S-25
Description of the Notes................................................... S-31
Other Indebtedness......................................................... S-64
Underwriting............................................................... S-66
Legal Matters.............................................................. S-68
Experts.................................................................... S-68
Where You Can Find More Information........................................ S-68
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus....................................................... 1
Where You Can Find More Information......................................... 1
Cautionary Note Regarding Forward-Looking Statements........................ 2
About McLeodUSA............................................................. 3
Coverage Ratios............................................................. 4
Use of Proceeds............................................................. 4
Description of Common Stock................................................. 5
Description of Preferred Stock.............................................. 10
Description of Depositary Shares............................................ 13
Description of Debt Securities.............................................. 16
Description of Warrants..................................................... 27
Description of Stock Purchase Contracts and Stock Purchase Units............ 29
Description of Subscription Rights.......................................... 30
Plan of Distribution........................................................ 31
Legal Matters............................................................... 32
Experts..................................................................... 32
</TABLE>
<PAGE>
SUMMARY
The following summary highlights selected information about us. It does not
contain all of the information that is important to you. You should carefully
read this entire prospectus supplement and accompanying prospectus and the
other documents to which those documents refer you. See "Where You Can Find
More Information." In addition, you should carefully consider the factors set
forth under the caption "Risk Factors." Unless otherwise indicated, dollar
amounts over $1 million have been rounded to one decimal place and dollar
amounts less than $1 million have been rounded to the nearest thousand.
Our Company
We provide selected telecommunications services to customers nationwide. We
provide integrated communications services, including local services, in many
Midwest, Southwest, Northwest and Rocky Mountain states. We provide long
distance and advanced data services in all 50 states. We are a facilities-based
telecommunications provider with, as of September 30, 2000, 375 ATM switches,
37 voice switches, nearly 905,000 local lines and more than 9,500 employees.
Our network is capable of transmitting integrated next-generation data,
Internet, video and voice services, reaching 800 cities and approximately 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 51 million.
McLeodUSA is a Nasdaq-100 company traded under the symbol "MCLD."
Our integrated communications services include 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 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 to provide increased control and service quality and a base for
growth.
Our Strategy
We want to be the leading and most admired provider of communications services
in our markets.
The principal elements of our business strategy are to:
Provide integrated communications services. We believe we can rapidly penetrate
our target markets and build customer loyalty by providing an integrated
product offering to business and residential customers.
S-1
<PAGE>
Build customer share through branding. We believe we will create and strengthen
brand awareness in our target markets by branding our communications services
with the trade name McLeodUSA in combination with the distinctive black-and-
yellow motif of our telephone directories.
Provide outstanding customer service. Our customer service representatives are
available 24 hours a day, seven days a week, to answer customer calls. Our
customer-focused software and systems allow our representatives immediate
access to our customer and network data, enabling a rapid and effective
response to customer requests.
Emphasize small and medium sized businesses. We primarily target small and
medium sized businesses because we believe we can rapidly capture customer
share by providing face-to-face business sales and strong service support to
these customers.
Expand our fiber optic communications network. We are strategically building a
state-of-the-art fiber optic communications network to deliver multiple
services and reduce operating costs.
Expand our intra-city fiber optic communications network. Within selected
cities, we plan to extend our network directly to certain customers' locations.
This will allow us to provide expanded services and reduce the expense of
leasing communications facilities from the existing local telephone company.
Explore acquisitions and strategic alliances. We plan to pursue acquisitions,
joint ventures and strategic alliances that expand or complement our business.
Leverage proven management team. Our executive management team consists of
veteran telecommunications managers who successfully implemented similar
customer-focused telecommunications strategies in the past.
----------------
As of September 30, 2000, based on our business plan, capital requirements and
growth projections as of that date, we estimated that we would require
approximately $1.8 billion through 2002 to fund our planned capital
expenditures and operating expenses. We expect to meet these funding needs
through various sources, including our existing cash balances, net proceeds
from the sale of the notes, our existing lines of credit, prospective sales of
selected assets, exercises of outstanding options and cash flow 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 networks
. adding voice, data and ATM switches
. expanding operations in existing and new markets
. funding general corporate expenses
. integrating acquisitions
. constructing, acquiring, developing or improving telecommunication assets
In addition, in the event vendor financing arrangements are available on terms
that allow rates of return comparable to current capital projects and are
otherwise favorable to us, we may use such financing to accelerate or increment
the development of our national network.
Our estimate of future capital requirements is a forward-looking statement
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. The actual amount and timing of our future
capital requirements is subject to risks and uncertainties and may differ
materially from our estimates. Accordingly, we may need additional capital to
continue to expand our markets, operations, facilities, network and services.
See "Risk Factors--Failure to Raise Necessary Capital Could Restrict Our
Ability to Develop Our Network and Services and Engage in Strategic
Acquisitions."
----------------
Our principal executive offices are located at McLeodUSA Technology Park, 6400
C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone number
is (319) 790-7800.
S-2
<PAGE>
The Offering
Securities Offered.......... $450 million principal amount of % Senior
Notes due January , 2009.
Interest.................... Interest on the notes will accrue at the rate
of % per year and will be payable in cash
semi-annually in arrears on January 1 and July
1 of each year, commencing July 1, 2001.
Ranking..................... The notes will not be secured by any assets
and:
. will be subordinated to all of our and our
subsidiaries' 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
supplement
. will be subordinated to all liabilities of
our subsidiaries, including trade payables
. will rank equal in right of payment with all
of our existing and future senior unsecured
indebtedness
. will rank senior in right of payment to all
of our existing and future subordinated
indebtedness
As of September 30, 2000:
. we and our subsidiaries had total secured
indebtedness of $630 million
. our subsidiaries had total liabilities of
$537.2 million
. we had $1.7 billion of outstanding senior
unsecured indebtedness that will rank equal
in right of payment with the notes
. we had no outstanding subordinated
indebtedness
See "Description of the Notes--General" and
"Other Indebtedness--Senior Secured Credit
Facilities."
Change of Control........... Upon a Change of Control, as defined in this
prospectus supplement, you will have the right
to require us to repurchase all or any part of
your 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 re-
purchase the notes upon a Change of Control.
See "Description of the Notes--Repurchase at
the Option of Holders upon a Change of Con-
trol."
S-3
<PAGE>
Certain Covenants........... The indenture governing the notes contains
certain covenants which, among other things,
restrict our ability and the ability of our
subsidiaries to:
. incur additional indebtedness
. pay dividends
. make distributions in respect of our or our
subsidiaries' capital stock
. make other restricted payments
. enter into sale and leaseback transactions
. create liens
. enter into transactions with affiliates or
related persons
. sell assets
. consolidate, merge or sell all or
substantially all of our or our
subsidiaries' assets
These covenants are subject to important
exceptions and qualifications. See "Description
of the Notes--Certain Covenants."
Use of Proceeds............. The net proceeds from the offering will be used
to fund:
. development and construction costs of our
fiber optic network and construction,
acquisition, development and improvement of
telecommunications assets
. market expansion activities and
. additional working capital and general
corporate purposes
See "Use of Proceeds."
Risk Factors
You should consider carefully all of the information contained and
incorporated by reference in this prospectus supplement and accompanying
prospectus, including the information set forth under the caption "Risk
Factors," before making an investment in the notes.
S-4
<PAGE>
Recent Developments
Acquisition of CapRock Communications Corp.
Acquisition. On December 7, 2000, we completed our acquisition of CapRock
Communications Corp., a Texas corporation, pursuant to an Agreement and Plan of
Merger dated as of October 2, 2000. CapRock is now a wholly-owned subsidiary of
McLeodUSA.
Pursuant to the merger agreement, each share of CapRock common stock was
converted into the right to receive 0.3876 of a share of our Class A common
stock and cash in lieu of fractional shares. We issued approximately 15 million
shares of our Class A common stock in exchange for shares of CapRock common
stock. We also issued $360 million of our senior notes in exchange for the
cancellation of outstanding CapRock senior notes of equal principal amount.
Litigation. Several class action complaints have been 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 April 28, 2000 through
July 6, 2000. The lawsuits principally allege that prior to the merger CapRock
made material misstatements or omissions of fact in violation of Section 10(b)
of the Securities Exchange Act. The named defendants in these lawsuits include
CapRock and certain of its officers and directors. The plaintiffs in the
lawsuits seek monetary damages. The defendants intend to file a motion to
dismiss at the appropriate time. We believe that these lawsuits are without
merit and intend to vigorously defend the lawsuits.
On October 6, 2000, a class action complaint was filed in the County Court at
Law of Dallas County, Texas on behalf of CapRock stockholders. This complaint
names as defendants CapRock and each member of its board of directors prior to
the merger and principally alleges that the directors violated fiduciary duties
owed to CapRock stockholders in connection with entering into the merger
agreement. The plaintiffs in the lawsuit seek unspecified monetary damages.
While plaintiffs also sought an injunction in their pleadings, no application
for such an injunction was brought to the court. We believe that the lawsuit is
without merit and intend to vigorously defend the lawsuit.
On October 6, 2000, a complaint in a derivative action was filed in the
United States District Court for the Northern District of Texas. The complaint
names as defendants certain directors of CapRock. The complaint principally
alleges that the directors prior to the merger negligently and/or intentionally
violated fiduciary duties owed to CapRock stockholders, and that CapRock
suffered damage, in connection with the misstatements or omissions of fact
alleged in the class action cases first described above. The plaintiffs in the
lawsuit principally seek unspecified monetary damages. The defendants have
filed a motion to dismiss this action and that motion is pending. We believe
the lawsuit is without merit and intend to vigorously defend the lawsuit.
On December 20, 2000, a 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 in CapRock's June 2000 public offering. The complaint
names as defendants CapRock, certain of its officers and directors prior to the
merger, and Salomon Smith Barney Inc. and Bear Stearns & Co., Inc., as
underwriters of the offering. The complaint principally alleges that the
registration statement for the offering contained materially false and
misleading statements and omitted certain material information about CapRock in
violation of Section 11 of the Securities Act. The plaintiffs in the lawsuit
seek rescission of their purchase of CapRock common stock in the offering
and/or monetary damages. The defendants intend to file a motion to dismiss at
the appropriate time. We believe the lawsuit is without merit and intend to
vigorously defend the lawsuit.
Executive Management
Clark E. McLeod, our Chairman and Chief Executive Officer, has announced that
Stephen C. Gray, our President and Chief Operating Officer, has been named Co-
Chief Executive Officer effective January 4, 2001,
S-5
<PAGE>
joining Mr. McLeod with that title. Mr. McLeod will continue to concentrate on
external relations, expanding his focus to broaden the industry relationships
important to continued strategic and stockholder growth. While becoming Co-
Chief Executive Officer, Mr. Gray will continue his responsibilities as
President and Chief Operating Officer, driving execution of our internal
operations and building on his previous achievements. The title change
recognizes that Messrs. McLeod and Gray have shared leadership of McLeodUSA
since it was founded.
Roy A. Wilkens, our Data Network President and CEO of Network and Data
Services operations, will continue to serve in his current role. Mr. Wilkens
and the team he has assembled continue to develop enhancements to our national
network and associated next-generation services. Mr. Wilkens' role will be
evolving as appropriate during the remainder of his employment as his team
takes on more responsibility and our network and related operations and
services become more fully developed.
S-6
<PAGE>
Summary Consolidated Financial Data
The information in the following unaudited table is based on historical
financial information included in our prior SEC filings, including our annual
report on Form 10-K for the fiscal year ended December 31, 1999 and the
quarterly report on Form 10-Q for the quarter ended September 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." Our audited
historical financial statements 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 we had acquired as of September 30, 2000:
<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>
In addition, we acquired CapRock Communications Corp. on December 7, 2000.
See "Recent Developments."
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 pro forma 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 reflects the following debt and equity
securities that we had outstanding as of September 30, 2000:
<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 16, 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 convertible preferred stock...... $287 million August 11, 1999
Series B redeemable convertible preferred
stock.................................... $687 million September 15, 1999
Series C redeemable convertible preferred
stock.................................... $313 million September 15, 1999
Senior Secured Credit Facilities.......... $575 million May 31, 2000
</TABLE>
S-7
<PAGE>
The information in the table reflects the following debt securities issued in
connection with our acquisition of CapRock in exchange for the cancellation of
outstanding CapRock senior notes having the same principal amount and interest
rate:
<TABLE>
<CAPTION>
Description of Securities Principal Amount Date Issued
------------------------- ---------------- -----------------
<S> <C> <C>
12% senior notes due July 15, 2008........... $150 million December 14, 2000
11 1/2% senior notes due May 1, 2009......... $210 million December 14, 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, the Senior Secured Credit Facilities, the 12% senior notes and
the 11 1/2% senior notes as if each had occurred at the beginning of 1999. See
"Other Indebtedness."
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date received one additional share of our Class A
common stock for each share held. Distribution of the additional shares took
place on July 26, 1999. On February 29, 2000, we announced that our 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 our Class A common stock for each share held. Distribution of the
additional shares took place on April 24, 2000. All information in the summary
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 nine months ended September 30, 1999 and 2000, earnings were insufficient
to cover fixed charges by $182.9 million and $354.4 million, respectively. On a
pro forma basis, earnings would not have been sufficient to cover fixed charges
by $524.1 million and $478.1 million for the year ended December 31, 1999 and
the nine months ended September 30, 2000, respectively.
(table begins on the next page)
S-8
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
Pro Forma
1995 1996 1997 1998 1999 1999(1)
-------- -------- -------- --------- --------- -----------
(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 89,107 190,695 346,957
Other................ -- 2,380 4,632 5,575 -- --
-------- -------- -------- --------- --------- ----------
Total operating
expenses............ 39,556 109,533 337,255 678,821 1,040,467 1,527,846
Operating loss........ (10,558) (28,210) (69,369) (74,675) (131,675) (317,179)
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) (501,084)
Preferred stock
dividends............ -- -- -- -- (17,727) (54,375)
-------- -------- -------- --------- --------- ----------
Loss applicable to
common stock......... $(11,329) $(22,346) $(79,910) $(124,912) $(238,009) $ (555,459)
======== ======== ======== ========= ========= ==========
Loss per common
share................ $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
======== ======== ======== ========= ========= ==========
Weighted average
common shares
outstanding.......... 168,024 243,036 329,844 376,842 443,130 559,738
======== ======== ======== ========= ========= ==========
Ratio of earnings to
fixed charges........ -- -- -- -- -- --
======== ======== ======== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1999 2000 2000(2)
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operations Statement Data:
Revenue.................................. $ 644,875 $ 986,727 $1,208,682
--------- --------- ----------
Operating expenses:
Cost of service......................... 327,438 548,612 726,301
Selling, general and administrative..... 282,385 403,905 484,398
Depreciation and amortization........... 130,583 276,834 334,405
Other................................... -- -- 872
--------- --------- ----------
Total operating expenses................ 740,406 1,229,351 1,545,976
Operating loss........................... (95,531) (242,624) (337,294)
Interest income (expense), net........... (79,326) (70,537) (99,601)
Other income............................. 7,555 1,227 1,232
Income taxes............................. -- -- --
--------- --------- ----------
Net loss before extraordinary charge..... (167,302) (311,934) (435,663)
Extraordinary charge for early retirement
of debt................................. -- (24,446) (24,446)
--------- --------- ----------
Net loss................................. (167,302) (336,380) (460,109)
Preferred stock dividends................ (4,125) (40,806) (40,806)
--------- --------- ----------
Loss applicable to common stock.......... $(171,427) $(377,186) $ 500,915
========= ========= ==========
Loss per common share.................... $ (.39) $ (.69) $ (.84)
========= ========= ==========
Weighted average common shares
outstanding............................. 434,946 547,313 592,937
========= ========= ==========
Ratio of earnings to fixed charges....... -- -- --
========= ========= ==========
</TABLE>
S-9
<PAGE>
Summary Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30, 2000
-------------------------------------------------- -----------------------
Pro
1995 1996 1997 1998 1999 Actual Forma(3)
------- -------- ---------- ---------- ---------- ----------- -----------
(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 $ 959,403 $1,128,889
Working capital
(deficit)............. $(1,208) $185,968 $ 378,617 $ 613,236 $1,272,794 $ 397,445 $ 323,318
Property and equipment,
net................... $16,119 $ 92,123 $ 373,804 $ 629,746 $1,270,032 $2,162,321 $2,691,883
Total assets........... $28,986 $452,994 $1,345,652 $1,925,197 $4,203,147 $6,669,726 $7,468,997
Long-term debt......... $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,763,775 $2,371,282 $2,731,282
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 $2,703,932 $2,899,590
</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(4).............. $(8,723) $(17,345) $(31,462) $ 20,007 $ 59,020 $ 29,778
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1999 2000 2000
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures
Property, plant and equipment............ $375,235 $ 877,195 $1,248,307
Business acquisitions.................... $691,087 $2,067,457 $2,303,272
EBITDA(4)................................ $ 35,052 $ 34,210 $ (2,017)
</TABLE>
--------
(1) Calculation of Unaudited Pro Forma Condensed Consolidated Statement of
Operations for twelve months ended December 31, 1999 is on page S-28.
(2) Calculation of Unaudited Pro Forma Condensed Consolidated Statement of
Operations for nine months ended September 30, 2000 is on page S-29.
(3) Calculation of Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 2000 is on page S-26.
(4) 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.
S-10
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors before investing in
our securities. You should also consider the other information in this
prospectus supplement and accompanying 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 supplement. 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.
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 September 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 senior
secured credit facilities. We also had $1.0 billion of redeemable convertible
preferred stock and $2.7 billion of stockholders' equity. In December 2000, we
added $360 million of long term debt in connection with the completion of the
acquisition of CapRock Communications Corp. 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 and the agreements
governing our Senior Secured Credit Facilities impose operating and financial
restrictions. In addition, under the terms of our Senior Secured 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.
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 our operating income from our subsidiaries. Our ability to pay our
obligations, including our obligation to pay principal and interest on the
notes, depends on receiving dividends and other payments from our subsidiaries,
raising additional funds in a public or private equity or debt offering or
selling assets. Our subsidiaries constitute separate legal entities and have no
obligation to pay any amounts due on the notes or to make funds available to
us. Our subsidiaries' ability to pay dividends or make other payments or
advances to us will depend on their operating results and the requirements of
applicable law.
S-11
<PAGE>
The Notes Are Subordinate to Our Subsidiaries' Obligations and Our Own Secured
Obligations.
The notes will be effectively subordinated in right of payment to all
liabilities of our subsidiaries. This means that in the event of a bankruptcy,
liquidation or reorganization, our subsidiaries must pay their creditors in
full before we could use their assets to pay you. As of September 30, 2000, our
subsidiaries had total liabilities after the elimination of loans and advances
from us to our subsidiaries of approximately $537.2 million. In addition, the
indenture governing the notes and the indentures governing our 10 1/2% senior
discount notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior notes,
8 1/8% senior notes, 12% senior notes, and 11 1/2% senior notes, which we refer
to collectively as our indentures, permit us and our subsidiaries to incur
additional debt, including additional debt under our Senior Secured Credit
Facilities. See "Other Indebtedness."
The notes will be unsecured and will be subordinated to our secured debt.
This means if we default on any of our secured debt, including our Senior
Secured Credit Facilities, 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 September 30, 2000, we had total secured debt of
approximately $630 million. The indentures permit us and our subsidiaries to
incur additional secured debt, including unlimited purchase money debt.
Fluctuations in the Market Price of Our Class A Common Stock May Make it More
Difficult for Us to Raise Capital.
The market price of our Class A common stock is extremely volatile and has
fluctuated over a wide range. These fluctuations may impair our ability to
raise capital by offering equity securities. The market price may continue to
fluctuate significantly in response to various factors, including:
. market conditions in the industry
. announcements or actions by competitors
. sales of large amounts of our Class A common stock in the public market
or the perception that such sales could occur
. quarterly variations in operating results or growth rates
. changes in estimates by securities analysts
. regulatory and judicial actions
. general economic conditions
We May Not Be Able to Successfully Integrate Acquired Companies into Our
Operations, Which Could Slow Our Growth.
The integration of acquired companies into our operations involves a number
of risks, including:
. difficulty integrating 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 acquisition transactions could slow our growth or lower the
quality of our services, which could reduce customer demand and adversely
affect our business and our ability to repay the notes.
Continued Rapid Growth of Our Network, Services and Subscribers Could Be Slowed
if We Cannot Manage this Growth.
We have rapidly expanded and developed our network, services and subscribers.
This has placed and will continue to place significant demands on our
management, operational and financial systems and procedures and controls. We
may not be able to manage our anticipated growth effectively, which would harm
our business, results of operations and financial condition and our ability to
repay the notes.
Further expansion and development will depend on a number of factors,
including:
. cooperation of existing local telephone companies
. regulatory, legislative and other governmental developments
S-12
<PAGE>
. 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 to pay amounts due on the 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:
<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 9 months of 2000.......................................... $377.2 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. 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 September 30, 2000, based on our business plan, capital requirements
and growth projections as of that date, we estimated that we would require
approximately $1.8 billion through 2002 to fund our planned capital
expenditures and operating expenses. We expect to meet these funding needs
through various sources, including our existing cash balances, net proceeds
from the sale of the notes, our existing lines of credit, prospective sales of
selected assets, exercises of outstanding options and cash flow 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, data and ATM switches
. expanding operations in existing and new markets
. funding general corporate expenses
. integrating acquisitions
. constructing, acquiring, developing or improving telecommunications
assets
In addition, in the event vendor financing arrangements are available on
terms that allow rates of return comparable to current capital projects and are
otherwise favorable to us, we may use such financing to accelerate or increment
the development of our national network.
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
S-13
<PAGE>
an ongoing basis. We may require additional financing if we pursue any of these
opportunities.
We may meet any additional capital needs by issuing additional debt or equity
securities or borrowing funds from one or more lenders. We cannot assure you
that we will have timely access to additional financing sources on acceptable
terms. If we do not, we may not be able to expand our markets, operations,
facilities, network and services as we intend.
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 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. 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 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 1998 and 1999,
SBC/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.
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 without a corresponding wholesale price reduction. If the
Qwest proposals are approved, it could cause us to reduce prices and 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 the MegaBells that would
prevent or deter us from using their service or communications network
elements. If the MegaBells successfully withdraw, limit our access to services
or successfully charge us extraordinary costs in any location, we may not be
able to offer communications services in those locations, which would harm our
business.
We anticipate that the MegaBells may also pursue legislation in states within
our target market area to reduce state regulatory oversight over their rates
and operations. If adopted, these initiatives could make it more difficult for
us to challenge MegaBell actions in the future which could harm our business.
S-14
<PAGE>
We also anticipate that the MegaBells will pursue federal legislative and
regulatory initiatives to undermine the Telecom Act of 1996 requirement to
open local networks. If successful, these initiatives could make it more
difficult to offer services on a profitable and competitive basis.
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, SBC, BellSouth and Verizon, currently dominate
their local communications 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. Many other companies, including
AT&T, WorldCom and Sprint, also compete in the local and long distance
marketplace.
Other competitors may include cable television providers, providers of
communications network facilities dedicated to particular customers, microwave
and satellite carriers, wireless telecommunications providers, private
networks owned by large end-users, municipalities, electrical utilities 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, and
is presently seeking authority for Oklahoma, Missouri, Arkansas and Kansas.
Qwest has indicated its intention to seek authority in all 14 states where it
provides local service.
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 markets.
We May Not Develop or Make a Profit from Wireless Services.
Developing wireless services involves a high degree of risk and will impose
significant demands on our management and financial resources. It could
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 or enter into other
sophisticated long-term agreements. 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. Our PCS licenses are subject to
revocation if we fail to provide substantial service with them by April 2002.
We may decide not to include wireless services in our package of integrated
communications services. We may decide to sell some or all of our wireless
licenses. Even if we do offer wireless services, we may not develop wireless
services ourselves. 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
S-15
<PAGE>
. 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 eight or more wireless competitors in each of our potential target
wireless markets. We could face additional competition from users of other
wireless technologies including, but not limited to, unlicensed spectrum,
satellites and lasers.
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 and bring to market 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, our Chairman and Co-Chief
Executive Officer, and Stephen C. Gray, our President and Co-Chief Executive
Officer.
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
S-16
<PAGE>
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 comply with federal and state tariff requirements
. failure to maintain proper federal, state and municipal certifications or
authorizations
. 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
Our Management and Principal Stockholders Have Significant Ownership of
McLeodUSA and May Have Different Interests Than the Noteholders and Other
Stockholders.
Certain decisions concerning our operations or financial structure may
present conflicts of interests between our stockholders and the holders of the
notes. For example, if we encounter financial difficulties or are unable to pay
our debts as they mature, the interests of our stockholders might conflict with
those of the holders of the notes. In addition, our stockholders may have an
interest in pursuing acquisitions, divestitures, financings or other
transactions that in their judgment could enhance their equity investment, even
though such transactions might involve additional risk to the holders of the
notes.
Alliant Energy Corporation, M/C Investors L.L.C., Media/Communications
Partners III Limited Partnership, Richard Lumpkin and various trusts for the
benefit of his family, Clark and Mary McLeod, and the directors and executive
officers of McLeodUSA beneficially owned approximately 25% of our outstanding
Class A common stock as of September 30, 2000. These stockholders may have
substantial influence over management policy and many corporate actions
requiring a stockholder vote, including election of the board of directors.
Conflicts of interest may arise between the interests of these stockholders and
our other stockholders. For example, the fact that these stockholders hold so
much McLeodUSA Class A common stock could make it more difficult for a third
party to acquire McLeodUSA. You should expect these stockholders may resolve
any conflicts in their favor to the detriment of holders of the notes.
Preferred Stockholders May Have Interests Which Compete with the Interests of
Common Stockholders and with the Interests of Noteholders.
Holders of our preferred stock have the ability to convert their shares into
approximately 112 million shares of our Class A common stock. Potential
conflicts of interest may arise among holders of our Class A common stock,
holders of our preferred stock and noteholders with respect to, among other
things, the payment of dividends, conversion rights, asset dispositions or
liquidation matters, and operation and financial decisions of our board of
directors. In addition, the holders of our preferred stock have class voting
rights on specified actions requiring stockholder approval.
Holders of Series B preferred stock are entitled to receive, if declared by
our board of directors, cumulative dividends at an annual rate of $127.273 per
share. Furthermore, during the 180-day period commencing on September 15, 2009,
the holders of our Series B preferred stock and Series C preferred stock have
the right to cause us to redeem, in whole or in part, the outstanding shares of
Series B preferred stock and Series C preferred stock. In addition, an
agreement relating to these securities imposes certain conditions on the
incurrence of indebtedness by us and our subsidiaries. Based on these rights,
these preferred stockholders may have interests which compete with the
interests of the noteholders.
There Is No Established Trading Market for the Notes Which Could Make It More
Difficult for You to Sell Your Notes and Could Adversely Affect Their Price.
The notes constitute a new issue of securities for which no established
trading market exists. Consequently, it may be more difficult for you to sell
your notes. If the notes are traded after their initial issuance, they may
trade at a discount, depending upon:
. our financial condition
. prevailing interest rates
S-17
<PAGE>
. the market for similar securities
. other factors beyond our control, including general economic conditions
We do not intend to apply for a listing or quotation of the notes on any
securities exchange. We cannot assure you of the development or liquidity of
any trading market for the notes following the offering.
S-18
<PAGE>
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement and accompanying prospectus and the information
incorporated by reference in them include "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. We intend the forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements in these
sections. All statements regarding our expected financial position and
operating results, our business strategy, our management personnel, our
financing plans, our future capital requirements, forecasted demographic and
economic trends relating to our industry, our ability to complete acquisitions,
to realize anticipated cost savings and other benefits from acquisitions and to
recover acquisition-related costs, and similar matters are forward-looking
statements. These statements are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results to differ
materially from the statements. The forward-looking information is based on
various factors and was derived using numerous assumptions. In some cases, you
can identify these statements by our use of forward-looking words such as
"may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe,"
"predict," "potential" or "intend." You should be aware that these statements
only reflect our predictions. Actual events or results may differ
substantially. Important factors that could cause our actual results to be
materially different from our expectations include those discussed in this
prospectus supplement under the caption "Risk Factors." We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.
USE OF PROCEEDS
We will use the net proceeds from the sale of the notes along with funds
available from prior offerings and from other financing sources: (1) to fund
development and construction costs of our fiber optic network, including
national and intra-city fiber optic networks, and construction, acquisition,
development and improvement of telecommunications assets; (2) to fund market
expansion activities in existing and new markets as well as acquisitions, joint
ventures and strategic alliances; and (3) for additional working capital and
other general corporate purposes, including funding operating deficits and net
losses.
S-19
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of September 30, 2000, (1) on
a historical basis, (2) on a pro forma basis to reflect our acquisition of
CapRock as if the acquisition had occurred on September 30, 2000, and (3) as
adjusted to reflect the sale of $ million aggregate principal amount of the
notes offered hereby, net of our estimated offering expenses and the
underwriting discount. You should read this table together with our
consolidated financial statements and related notes and the other financial
data appearing elsewhere, or incorporated by reference, into this prospectus
supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
September 30, 2000
--------------------------------
As
Historical Pro Forma Adjusted
---------- ---------- --------
(dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 353,620 $ 356,695 $
Investments in available-for-sale securities.. 226,267 273,492
---------- ---------- -----
Total cash, cash equivalents and
investments in
available-for-sale securities............ $ 579,887 $ 630,187
========== ========== =====
Short-term debt............................... $ 29,103 $ 29,103
Long-term debt................................ 2,371,282 2,731,282
---------- ---------- -----
2,400,385 2,760,385
Redeemable convertible preferred stock
Series B preferred stock, redeemable,
convertible, $.01 par value, 275,000 shares
authorized, issued and outstanding......... 687,500 687,500
Series C preferred stock, redeemable,
convertible, $.01 par value, 125,000 shares
authorized, issued and outstanding......... 312,500 312,500
---------- ---------- -----
1,000,000 1,000,000
Stockholders' equity:
Class A common stock, $.01 par value,
2,000,000,000 shares authorized;
585,128,506 shares issued and outstanding,
actual..................................... 5,851 6,001
Class B common stock, convertible, $.01 par
value, 22,000,000 shares authorized; none
issued or outstanding...................... -- -- --
Series A preferred stock, convertible, $.01
par value, 1,149,580 shares authorized,
issued and outstanding..................... 11 11 --
Class II preferred stock, $.001 par value,
10,000,000 shares authorized; none issued
or outstanding............................. -- -- --
Additional paid-in capital.................. 3,518,626 3,714,134
Accumulated deficit......................... (872,444) (872,444)
Accumulated other comprehensive income...... 51,888 51,888
---------- ---------- -----
Total stockholders' equity................ 2,703,932 2,899,590
---------- ---------- -----
Total capitalization...................... $6,104,317 $6,659,975 $
========== ========== =====
</TABLE>
S-20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The information in the following unaudited table is based on historical
financial information included in our prior SEC filings, including our annual
report on Form 10-K for the fiscal year ended December 31, 1999 and the
quarterly report on Form 10-Q for the quarter ended September 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." Our audited
historical financial statements 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 we had acquired as of September 30, 2000:
<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>
In addition, we acquired CapRock Communications Corp. on December 7, 2000.
See "Recent Developments."
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 pro forma 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 reflects the following debt and equity
securities that we had outstanding as of September 30, 2000:
<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 16, 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 convertible preferred stock.. $287 million August 11, 1999
Series B redeemable convertible
preferred stock...................... $687 million September 15, 1999
Series C redeemable convertible
preferred stock...................... $313 million September 15, 1999
Senior Secured Credit Facilities...... $575 million May 31, 2000
</TABLE>
S-21
<PAGE>
The information in the table reflects the following debt securities issued in
connection with our acquisition of CapRock in exchange for the cancellation of
outstanding CapRock senior notes having the same principal amount and interest
rate:
<TABLE>
<CAPTION>
Description of Securities Principal Amount Date Issued
------------------------- ---------------- -----------------
<S> <C> <C>
12% senior notes due July 15, 2008....... $150 million December 14, 2000
11 1/2% senior notes due May 1, 2009..... $210 million December 14, 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, the Senior Secured Credit Facilities, the 12% senior notes and
the 11 1/2% senior notes as if each had occurred at the beginning of 1999. See
"Other Indebtedness."
On June 30, 1999, we announced that our board of directors had declared a
two-for-one stock split to be effected in the form of a stock dividend. The
record date for the stock split was July 12, 1999. Stockholders of record at
the market close on that date received one additional share of our Class A
common stock for each share held. Distribution of the additional shares took
place on July 26, 1999. On February 29, 2000, we announced that our 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 our 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 nine months ended September 30, 1999 and 2000, earnings were insufficient
to cover fixed charges by $182.9 million and $354.4 million, respectively. On a
pro forma basis, earnings would not have been sufficient to cover fixed charges
by $524.1 million and $478.1 million for the year ended December 31, 1999 and
the nine months ended September 30, 2000, respectively.
(table begins on the next page)
S-22
<PAGE>
Selected Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------
Pro Forma
1995 1996 1997 1998 1999 1999(1)
-------- -------- -------- --------- --------- -----------
(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 89,107 190,695 346,957
Other................ -- 2,380 4,632 5,575 -- --
-------- -------- -------- --------- --------- ----------
Total operating
expenses............ 39,556 109,533 337,255 678,821 1,040,467 1,527,846
Operating loss......... (10,558) (28,210) (69,369) (74,675) (131,675) (317,179)
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) (501,084)
Preferred stock
dividends............. -- -- -- -- (17,727) (54,375)
-------- -------- -------- --------- --------- ----------
Loss applicable to
common stock.......... $(11,329) $(22,346) $(79,910) $(124,912) $(238,009) $ (555,459)
======== ======== ======== ========= ========= ==========
Loss per common
share................. $ (.07) $ (.09) $ (.24) $ (.33) $ (.54) $ (.99)
======== ======== ======== ========= ========= ==========
Weighted average
common shares
outstanding........... 168,024 243,036 329,844 376,842 443,130 559,738
======== ======== ======== ========= ========= ==========
Ratio of earnings to
fixed charges......... -- -- -- -- -- --
======== ======== ======== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1999 2000 2000(2)
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Operations Statement Data:
Revenue.................................. $ 644,875 $ 986,727 $ 1,208,682
--------- --------- -----------
Operating expenses:
Cost of service........................ 327,438 548,612 726,301
Selling, general and administrative.... 282,385 403,905 484,398
Depreciation and amortization.......... 130,583 276,834 334,405
Other.................................. -- -- 872
--------- --------- -----------
Total operating expenses............... 740,406 1,229,351 1,545,976
Operating loss........................... (95,531) (242,624) (337,294)
Interest income (expense), net........... (79,326) (70,537) (99,601)
Other income............................. 7,555 1,227 1,232
Income taxes............................. -- -- --
--------- --------- -----------
Net loss before extraordinary charge..... (167,302) (311,934) (435,663)
Extraordinary charge for early
retirement of debt...................... -- (24,446) (24,446)
--------- --------- -----------
Net loss................................. (167,302) (336,380) (460,109)
Preferred stock dividends................ (4,125) (40,806) (40,806)
--------- --------- -----------
Loss applicable to common stock.......... $(171,427) $(377,186) $ 500,915
========= ========= ===========
Loss per common share.................... $ (.39) $ (.69) $ (.84)
========= ========= ===========
Weighted average common shares
outstanding............................. 434,946 547,313 592,937
========= ========= ===========
Ratio of earnings to fixed charges....... -- -- --
========= ========= ===========
</TABLE>
S-23
<PAGE>
Selected Consolidated Financial Data
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31, September 30, 2000
-------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 Actual Pro Forma(3)
------- -------- ---------- ---------- ---------- ----------- ------------
(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 $ 959,403 $1,128,889
Working capital
(deficit).............. $(1,208) $185,968 $ 378,617 $ 613,236 $1,272,794 $ 397,445 $ 323,318
Property and equipment,
net.................... $16,119 $ 92,123 $ 373,804 $ 629,746 $1,270,032 $2,162,321 $2,691,883
Total assets............ $28,986 $452,994 $1,345,652 $1,925,197 $4,203,147 $6,669,726 $7,468,997
Long-term debt.......... $ 3,600 $ 2,573 $ 613,384 $1,245,170 $1,763,775 $2,371,282 $2,731,282
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 $2,703,932 $2,899,590
</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(4)............... $(8,723) $(17,345) $(31,462) $ 20,007 $ 59,020 $ 29,778
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-----------------------------------
Pro Forma
1999 2000 2000
----------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Other Financial Data:
Capital expenditures
Property, plant and equipment.............. $375,235 $ 877,195 $1,248,307
Business acquisitions...................... $691,087 $2,067,457 $2,303,272
EBITDA(4).................................. $ 35,052 $ 34,210 $ (2,017)
</TABLE>
--------
(1) Calculation of Unaudited Pro Forma Condensed Consolidated Statement of
Operations for twelve months ended December 31, 1999 is on page S-28.
(2) Calculation of Unaudited Pro Forma Condensed Consolidated Statement of
Operations for nine months ended September 30, 2000 is on page S-29.
(3) Calculation of Unaudited Pro Forma Condensed Consolidated Balance Sheet as
of September 30, 2000 is on page S-26.
(4) 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 flow as a measure of liquidity.
S-24
<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 acquisition of CapRock Communications Corp. in December 2000
. the issuance of the 12% senior notes and 11 1/2% senior notes in
December 2000 in exchange for the cancellation of CapRock senior notes
having the same principal amount and interest rate
For purposes of this pro forma presentation, the issuances 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
acquisition of CapRock and the issuance of the 12% senior notes and the 11 1/2%
senior notes were consummated on September 30, 2000.
The Unaudited Pro Forma Condensed Consolidated Statements of Operations
include the operations of Ovation, the operations of Splitrock, and the
operations of CapRock as if the acquisitions of Ovation, Splitrock and 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 each of the following
began on January 1, 1999: (1) the payment of interest related to the 8 1/8%
senior notes and the Senior Secured Credit Facilities, (2) the payment of
dividends related to the Preferred Stock Issuances and (3) the additional
depreciation and amortization due to the increased value of tangible and
intangible assets acquired through the acquisitions of Ovation, Splitrock and
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 our consolidated financial statements and the related notes
thereto included in our 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 8 1/8% senior notes 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 of CapRock among the
various assets to be acquired, we have 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. We intend to more fully evaluate the acquired assets of
CapRock 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 any of these transactions 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)
S-25
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Balance Sheets
(In thousands, except share and per share information)
As of September 30, 2000
<TABLE>
<CAPTION>
Adjustments for Pro Forma for
CapRock CapRock
McLeodUSA CapRock Acquisition (1) Acquisition
---------- -------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash
equivalents........... $ 579,887 $ 50,300 $ -- $ 630,187
Other current assets... 379,516 137,087 (17,901)(2) 498,702
---------- -------- ------- ----------
Total Current Assets... 959,403 187,387 (17,901) 1,128,889
Property and Equipment,
net................... 2,162,321 529,562 -- 2,691,883
Intangible assets...... 3,379,122 -- 79,630 (1) 3,458,752
Other assets........... 168,880 20,593 -- 189,473
---------- -------- ------- ----------
Total Assets........... $6,669,726 $737,542 $61,729 $7,468,997
========== ======== ======= ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current Liabilities.... $ 561,958 $222,037 $21,576 (3) $ 805,571
Long-term debt, less
current maturities.... 2,371,282 348,576 11,424 (4) 2,731,282
Other long-term
liabilities........... 32,554 5,825 (5,825)(2) 32,554
---------- -------- ------- ----------
Total Liabilities...... 2,965,794 576,438 27,175 3,569,407
---------- -------- ------- ----------
Redeemable convertible
preferred stock....... 1,000,000 -- -- 1,000,000
---------- -------- ------- ----------
Stockholders' Equity:
Preferred stock........ 11 -- -- 11
Common stock........... 5,851 388 (238) 6,001
Additional paid-in
capital............... 3,518,626 191,759 3,749 3,714,134
Treasury Stock, at
cost.................. -- (678) 678 --
Retained earnings
(deficit)............. (872,444) (30,176) 30,176 (872,444)
Accumulated other
comprehensive income.. 51,888 (189) 189 51,888
---------- -------- ------- ----------
Total Stockholders'
Equity................ 2,703,932 161,104 34,554 2,899,590
---------- -------- ------- ----------
Total Liabilities and
Stockholders' Equity.. $6,669,726 $737,542 $61,729 $7,468,997
========== ======== ======= ==========
</TABLE>
--------
(1) The adjustment for the acquisition of CapRock reflects the preliminary
allocation of the net purchase price of CapRock to the net assets of
CapRock that were acquired, including intangible assets, and records the
issuance of 15,009,924 shares of our Class A common stock valued at $13.77
per share. The value of $13.77 per share represents the average closing
price of our Class A common stock on the Nasdaq National 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 the total of: (1) the product of (A) the sum of (x) the total
number of outstanding CapRock common stock options with exercise prices
below the closing price of $5.38 (totaling 381,944) as of December 7,
2000, multiplied by the conversion ratio of 0.3876, plus (y) the total
number of shares of our Class A common stock issued (15,009,924)
multiplied by (B) $13.77, the value of a share of our Class A common stock
(calculated as described above), minus (2) the aggregate option proceeds
to be received (approximately $0.9 million) plus (3) the principal amount
of outstanding CapRock senior notes ($360 million) and the estimated
liabilities directly attributable to the merger ($11 million). The
allocation of the net purchase price to the net assets, excluding debt,
(approximately $499 million) and debt ($360 million) of CapRock as of
September 30, 2000, results in goodwill of approximately $80 million.
S-26
<PAGE>
(2) To eliminate CapRock's deferred tax assets and deferred tax liabilities.
We are in a net deferred tax asset position 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 and other matters directly attributable to the merger
under EITF 95-3.
(4) Reflects write-off of debt issuance costs and unaccreted discount on
Caprock's senior notes.
S-27
<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 for Adjustment Pro Forma Adjustments Pro Forma
Splitrock for Credit for Credit CapRock As for CapRock for CapRock
Acquisition(2) Facilities Facilities 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 3,982(5) 346,957
Other.................. -- -- -- -- -- --
---------- -------- ---------- -------- ------- ----------
Total operating
expenses.............. 1,341,955 -- 1,341,955 181,909 3,982 1,527,846
---------- -------- ---------- -------- ------- ----------
Operating income
(loss)................. (323,911) -- (323,911) 10,714 (3,982) (317,179)
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) (9,487) (501,084)
Preferred stock
dividends.............. (54,375) -- (54,375) -- -- (54,375)
---------- -------- ---------- -------- ------- ----------
Earnings applicable to
common stock........... $ (500,105) $(36,493) $ (536,598) $ (9,374) $(9,487) $ (555,459)
========== ======== ========== ======== ======= ==========
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 15,010 559,738
========== ========== ======= ==========
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. We have included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
(2) The "Pro Forma for Splitrock Acquisition" information is derived from the
Pro Forma Financial Statements that we filed with the SEC on a Current
Report on Form 8-K/A on June 13, 2000.
(3) We used cash on hand and funds drawn from the 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 Statement of Operations."
(5) To amortize intangibles acquired in the merger over 20 years.
(6) To eliminate CapRock's income tax benefit.
S-28
<PAGE>
McLeodUSA Incorporated and Subsidiaries
Unaudited Pro Forma Condensed Consolidated Statements of Operations
(In thousands, except per share information)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
-------------------------------------------------------------------------------------------------------
Adjustments Pro Forma Adjustments Pro Forma Adjustments
for Splitrock for Splitrock for Credit for Credit for CapRock
McLeodUSA Splitrock(2) Acquisition(2) Acquisition Facilities Facilities CapRock Acquisition
--------- ------------ -------------- ------------- ----------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operations
Statement Data:
Revenue.......... $ 986,727 $ 35,037 $ -- $1,021,764 $ -- $1,021,764 $186,918 $ --
--------- -------- --------- ---------- -------- ---------- -------- --------
Operating
expenses:
Cost of service.. 548,612 42,580 -- 591,192 -- 591,192 135,109 --
Selling, general
and
administrative... 403,905 10.012 -- 413,917 -- 413,917 70,481 --
Depreciation and
amortization..... 276,834 12,470 27,097 316,401 -- 316,401 15,018 2,986(4)
Other............ -- 872 -- 872 -- 872 -- --
--------- -------- --------- ---------- -------- ---------- -------- --------
Total operating
expenses........ 1,229,351 65,934 27,097 1,322,382 -- 1,322,382 220,608 2,986
--------- -------- --------- ---------- -------- ---------- -------- --------
Operating income
(loss)........... (242,624) (30,897) (27,097) (300,618) -- (300,618) (33,690) (2,986)
Interest income
(expense), net... (70,537) (6,302) -- (76,839) (15,086)(3) (91,925) (7,676) --
Other
nonoperating
income
(expense)........ 1,227 -- -- 1,227 -- 1,227 5 --
Income taxes..... -- -- -- -- -- -- 9,118 (9,118)(5)
--------- -------- --------- ---------- -------- ---------- -------- --------
Net loss before
extraordinary
charge .......... (311,934) (37,199) (27,097) (376,230) (15,086) (391,316) (32,243) (12,104)
Extraordinary
charge for early
retirement of
debt............. (24,446) -- -- (24,446) -- (24,446) -- --
--------- -------- --------- ---------- -------- ---------- -------- --------
Net income
(loss)........... (336,380) (37,199) (27,097) (400,676) (15,086) (415,762) (32,243) (12,104)
Preferred stock
dividends........ (40,806) -- -- (40,806) -- (40,806) -- --
--------- -------- --------- ---------- -------- ---------- -------- --------
Earnings
applicable to
common stock..... $(377,186) $(37,199) $ (27,097) $ (441,482) $(15,086) $ (456,568) $(32,243) $(12,104)
========= ======== ========= ========== ======== ========== ======== ========
Loss per common
and common
equivalent
share............ $ (0.69) $ (0.76) $ (0.79)
========= ========== ==========
Weighted average
common and common
equivalent shares
outstanding...... 547,313 30,614 577,927 577,927 15,010
========= ========= ========== ========== ========
Other Financial
Data:
EBITDA(1)........ $ 34,210 $(17,555) $ -- $ 16,655 $ -- $ 16,655 $(18,672) $ --
<CAPTION>
Pro Forma
for CapRock
Acquisition
------------
<S> <C>
Operations
Statement Data:
Revenue.......... $1,208,682
------------
Operating
expenses:
Cost of service.. 726,301
Selling, general
and
administrative... 484,398
Depreciation and
amortization..... 334,405
Other............ 872
------------
Total operating
expenses........ 1,545,976
------------
Operating income
(loss)........... (337,294)
Interest income
(expense), net... (99,601)
Other
nonoperating
income
(expense)........ 1,232
Income taxes..... --
------------
Net loss before
extraordinary
charge .......... (435,663)
Extraordinary
charge for early
retirement of
debt............. (24,446)
------------
Net income
(loss)........... (460,109)
Preferred stock
dividends........ (40,806)
------------
Earnings
applicable to
common stock..... $ (500,915)
============
Loss per common
and common
equivalent
share............ $ (0.84)
============
Weighted average
common and common
equivalent shares
outstanding...... 592,937
============
Other Financial
Data:
EBITDA(1)........ $ (2,017)
</TABLE>
----
(1) EBITDA consists of operating loss before depreciation, amortization and
other nonrecurring operating expenses. We have included EBITDA data
because it is a measure commonly used in the industry. EBITDA is not a
measure of financial performance under generally accepted accounting
principles and should not be considered an alternative to net income as a
measure of performance or to cash flows as a measure of liquidity.
(2) The "Splitrock" column represents Splitrock's Statement of Operations for
the period of January 1, 2000 through March 30, 2000, the date of our
acquisition of Splitrock. The Splitrock financial statements and the
information in the "Adjustments for Splitrock Acquisition" column are from
the Pro Forma Financial Statements that were filed by us with the SEC on a
Current Report on Form 8-K/A on June 13, 2000.
(3) We used cash on hand and funds drawn from the 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."
(4) To amortize intangibles acquired in the merger over 20 years.
(5) To eliminate CapRock's income tax benefit.
S-29
<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 has been filed by CapRock with the SEC. 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
--------------------------------------
Pro Forma
Adjustments for for May 1999
CapRock May 1999 Notes 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) $ (0.19) $ (0.30)
======== ======= ========
Weighted average common and common
equivalent shares outstanding........ 31,727 -- 31,727
======== ======= ========
</TABLE>
S-30
<PAGE>
DESCRIPTION OF THE NOTES
Please read the following information concerning the notes and the indenture
in conjunction with the statements under "Description of Debt Securities" in
the accompanying prospectus, which the following information supplements and,
in the event of any inconsistencies, supercedes. The following information is a
summary and does not purport to be complete.
General
The notes will be issued under an indenture, which we refer to as the base
indenture, as supplemented by a first supplemental indenture, which we refer to
as the supplemental indenture, between McLeodUSA and United States Trust
Company of New York, as trustee. We refer to the base indenture and the
supplemental indenture taken together as the indenture. For purposes of this
description of the notes, "McLeodUSA," "we," "our" or "us" refers to McLeodUSA
Incorporated and does not include its subsidiaries except for purposes of
financial data determined on a consolidated basis.
The terms of the notes include those stated in the indenture and those made a
part of the indenture by reference to the Trust Indenture Act of 1939 as in
effect on the date of the base indenture. The notes will be subject to all of
those terms, and holders of the notes are referred to the indenture and the
Trust Indenture Act for a complete statement of the applicable terms. A copy of
the indenture will be filed with the SEC and is available from McLeodUSA on
request. The statements and definitions of terms under this caption relating to
the notes and the indenture are summaries and do not purport to be complete.
These summaries make use of terms defined in the indenture and are qualified in
their entirety by express reference to the indenture. Some of the terms used in
this description are defined below under "--Definitions."
The notes will rank equal in right of payment with our 10 1/2% senior
discount notes, 9 1/4% senior notes, 8 3/8% senior notes, 9 1/2% senior notes,
8 1/8% senior notes, 11 1/2% senior notes and 12% senior notes, and all other
existing and future senior unsecured indebtedness of McLeodUSA and will rank
senior in right of payment to all existing and future subordinated indebtedness
of McLeodUSA. As of September 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, 8 1/8% senior
notes, 11 1/2% senior notes and 12% senior notes, had no outstanding
indebtedness that would rank equal with the notes. For a summary description of
these notes and other outstanding indebtedness of McLeodUSA, see "Other
Indebtedness." The notes will not be secured by any assets and will be
effectively subordinated to any existing and future secured indebtedness of
McLeodUSA and its subsidiaries, including our Senior Secured Credit Facilities
and any Senior Credit Facility or any Qualified Receivable Facility we may
enter into, to the extent of the value of the assets securing such
indebtedness. As of September 30, 2000, the total secured indebtedness of
McLeodUSA and its subsidiaries was approximately $630 million.
The operations of McLeodUSA are conducted through its subsidiaries and,
therefore, McLeodUSA depends upon cash flow from those entities to meet its
obligations. The subsidiaries will have no direct obligation to pay amounts due
on the notes and will not guarantee the notes. As a result, the notes will be
effectively subordinated to all existing and future third-party indebtedness,
including our Senior Secured Credit Facilities and any Senior Credit Facility
or any applicable Qualified Receivable Facility we may enter into, and other
liabilities of subsidiaries of McLeodUSA, including trade payables. As of
September 30, 2000, the total liabilities of subsidiaries of McLeodUSA, after
the elimination of loans and advances by McLeodUSA to its subsidiaries, were
approximately $537.2 million. Any rights McLeodUSA or its creditors, including
the holders of notes, may have to participate in the assets of any subsidiary
of McLeodUSA upon any liquidation or reorganization of any such subsidiary will
be subject to the prior claims of that subsidiary's creditors, including trade
creditors.
Principal, Maturity and Interest
The notes will be limited in principal amount to $450 million and will mature
on January , 2009. Interest on the notes will accrue at the rate of % per
annum and will be payable in cash semi-annually in arrears on January 1 and
July 1 of each year, commencing July 1, 2001. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
S-31
<PAGE>
Principal and interest will be payable at the office of the Paying Agent but,
at the option of McLeodUSA, interest may be paid by check mailed to the
registered holders at their registered addresses. The notes will be issued
without coupons and in fully registered form only, in minimum denominations of
$1,000 and any integral multiples of $1,000 in excess thereof. Unless otherwise
designated by McLeodUSA, the office or agency of McLeodUSA in New York will be
the office of the trustee maintained for such purpose. The notes will be issued
only against payment therefor in immediately available funds.
Book-Entry System
The notes will initially be issued in the form of one or more fully-
registered global securities, which we refer to herein as Global Securities,
held in book-entry form. This means that McLeodUSA will not issue certificates
for the notes to the holders. Instead, the notes will be deposited with the
trustee as custodian for The Depository Trust Company ("DTC"), which will act
as the depository for the notes. DTC or its nominee will initially be the sole
registered holder of the notes for all purposes under the indenture. Except as
set forth below, a Global Security may not be transferred except as a whole by
DTC to a nominee of DTC or by a nominee of DTC to DTC.
The notes, if any, that are issued as described below under "--Certificated
Notes" will be issued in definitive form. Upon the transfer of a note in
definitive form, such note will, unless the Global Security has previously been
exchanged for notes in definitive form, be exchanged for an interest in the
Global Security representing the principal amount notes being transferred.
DTC has advised McLeodUSA that it is a limited-purpose trust company
organized under the Banking Law of the State of New York, a "banking
organization" within the meaning of the 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. DTC holds securities that its participants ("direct
participants") deposit with DTC and facilitates the clearance and settlement of
securities transactions among its direct participants in such securities
through electronic book-entry changes in accounts of the direct participants,
thereby eliminating the need for physical movement of securities certificates.
DTC's direct participants include securities brokers and dealers including the
underwriters, banks, trust companies, clearing corporations and various other
organizations. DTC is owned by a number of its direct participants and by the
New York Stock Exchange, Inc., the American Stock Exchange LLC and the National
Association of Securities Dealers, Inc. Access to DTC'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 direct
participant, either directly or indirectly ("indirect participants").
Purchases of notes under the DTC system must be made by or through direct
participants, which will receive a credit for the notes on DTC's records. The
ownership interest of each actual purchaser of each note ("beneficial owner")
is in turn to be recorded on the direct and indirect participants' records.
Beneficial owners will not receive written confirmation from DTC of their
purchase, but beneficial owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the direct or indirect participant through which the beneficial
owner entered into the transaction. Transfers of ownership interests in notes
represented by Global Securities are to be accomplished by entries made on the
books of direct and indirect participants acting on behalf of beneficial
owners. Beneficial owners will not receive certificates representing their
ownership interests in notes, except in the event that use of the book-entry
system for the notes is discontinued. 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.
To facilitate subsequent transfers, all notes deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co. or such other name as may be requested by an authorized
representative of DTC. The deposit of notes with DTC and their registration in
the name of Cede & Co. or such other nominee do not effect any change in
beneficial ownership. DTC has no knowledge of the actual
S-32
<PAGE>
beneficial owners of the notes; DTC's records reflect only the identity of the
direct participants to whose accounts such notes are credited, which may or may
not be the beneficial owners. The direct and indirect participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct participants,
by direct participants to indirect participants, and by direct participants and
indirect participants to beneficial owners will be governed by arrangements
among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
All payments of principal of, premium on, if any, or interest on notes
represented by a Global Security will be made to Cede & Co. (or such other
nominee of DTC). McLeodUSA has been advised that DTC's practice is to credit
direct participants' accounts, upon DTC's receipt of funds and corresponding
detail information from McLeodUSA or the trustee, on the payable date in
accordance with their respective holdings shown on DTC's records. McLeodUSA
expects that payments by participants to beneficial owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the sole responsibility of such participant and not of DTC,
McLeodUSA, or the trustee, subject to any statutory or regulatory requirements
as may be in effect from time to time.
Payment of principal, premium, if any, and interest to Cede & Co. (or other
nominee of DTC) is the responsibility of McLeodUSA or the trustee, disbursement
of such payments to direct participants shall be the responsibility of DTC, and
disbursement of such payments to the beneficial owners shall be the
responsibility of direct and indirect participants. None of McLeodUSA, the
trustee, any agent of McLeodUSA or the underwriters will have any
responsibility or liability for:
1. any aspect of DTC's reports relating to or payments made on account of
beneficial ownership interests in a Global Security representing any
notes or for maintaining, supervising or reviewing any of DTC's records
relating to such beneficial ownership interests or
2. any other matter relating to the actions and practices of DTC or any of
its participants.
So long as DTC or its nominee is the registered owner or holder of such
Global Security, DTC or such nominee, as the case may be, will be considered
the sole owner or holder of the notes represented by such Global Security for
the purposes of receiving payment on the notes, receiving notices and for all
other purposes under the indenture and the notes. Beneficial interests in notes
will be evidenced only by, and transfers thereof will be effected only through,
records maintained by DTC 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 indenture. Accordingly, each person owning a beneficial
interest in a Global Security must rely on the procedures of DTC and, if such
person is not a participant, on the procedures of the participant through which
such person owns its interest, to exercise any rights of a holder under the
indenture. McLeodUSA understands that, under existing industry practices, in
the event that McLeodUSA requests any action of holders or that an owner of a
beneficial interest in a Global Security desires to give or take any action
that a holder is entitled to give or take under the indenture, DTC 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.
S-33
<PAGE>
DTC has advised McLeodUSA that it will take any action permitted to be taken
by a holder of notes, including the presentation of notes for exchange as
described below, only at the direction of one or more participants to whose
account with DTC interests in the Global Security are credited and only in
respect of such portion of the aggregate principal amount of the notes as to
which such participant or participants has or have given such direction.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that McLeodUSA believes to be reliable, but
McLeodUSA takes no responsibility for the accuracy thereof.
Certificated Notes
The notes represented by a Global Security are exchangeable for certificated
notes only if:
. DTC notifies McLeodUSA that it is unwilling or unable to continue as a
depository for such Global Security or if at any time DTC ceases to be a
clearing agency registered under the Securities Exchange Act, and a
successor depository is not appointed by within 90 days
. McLeodUSA executes and delivers to the trustee a notice that such Global
Security shall be so transferable, registrable and exchangeable, and such
transfer shall be registrable, or
. there shall have occurred and be continuing an Event of Default with
respect to the notes represented by such Global Security and the
beneficial owners representing a majority in principal amount of the
notes represented by such Global Security advise DTC to cease acting as
the depository for such Global Security
Any Global Security that is exchangeable for certificated notes pursuant to the
preceding sentence will be transferred to, and registered and exchanged for,
certificated notes in authorized denominations and registered in such names as
DTC 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 DTC or its nominee. In the
event that a Global Security becomes exchangeable for certificated notes:
. certificated notes will be issued only in fully registered form in
denominations of $1,000 or integral multiples thereof
. payment of principal, any repurchase price, and interest on the
certificated notes will be payable, and the transfer of the certificated
notes will be registrable, at the office or agency we maintain for such
purposes, and
. no service charge will be made for any issuance of the certificated
notes, although McLeodUSA may require payment of a sum sufficient to
cover any tax or governmental charge imposed in connection therewith
Mandatory Redemption
Except as set forth under "--Repurchase at the Option of Holders upon a
Change of Control" and "--Asset Sales," McLeodUSA is not required to make
mandatory redemption payments or sinking fund payments with respect to the
notes.
Repurchase at the Option of Holders upon a Change of Control
Upon the occurrence of a Change of Control, each holder shall have the right
to require McLeodUSA to repurchase all or any part, equal to $1,000 principal
amount or an integral multiple thereof, of such holder's notes pursuant to the
offer described below (the "Change of Control Offer") at a purchase price (the
"Change of Control Purchase Price") equal to 101% of the principal amount of
the notes plus accrued and unpaid interest, if any, to any Change of Control
Payment Date.
S-34
<PAGE>
Within 30 days following any Change of Control, McLeodUSA or the trustee, at
the request and expense of McLeodUSA, shall mail a notice to each holder
stating:
. that a Change of Control has occurred and a Change of Control Offer is
being made pursuant to the covenant described under "--Repurchase at the
Option of Holders upon a Change of Control" and that all notes timely
tendered will be accepted for payment
. the Change of Control Purchase Price and the purchase date (the "Change
of Control Payment Date"), which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed
. that any notes or portions thereof not tendered or accepted for payment
will continue to accrue interest
. that, unless McLeodUSA defaults in the payment of the Change of Control
Purchase Price, all notes or portions thereof accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest
from and after the Change of Control Payment Date
. that holders electing to have any notes or portions thereof purchased
under a Change of Control Offer will be required to surrender their notes
before the close of business on the third Business Day preceding the
Change of Control Payment Date
. that holders will be entitled to withdraw their election if the Paying
Agent receives, not later than the close of business on the second
Business Day preceding the Change of Control Payment Date, a telegram,
telex, facsimile transmission or letter setting forth the name of the
holder, the principal amount of notes delivered for purchase, and a
statement that such holder is withdrawing its election to have such notes
or portions thereof purchased
. that holders electing to have notes purchased under the Change of Control
Offer must specify the principal amount that is being tendered for
purchase, which principal amount must be $1,000 or an integral multiple
thereof
. that holders whose notes are being purchased only in part will be issued
new notes equal in principal amount to the unpurchased portion of the
note or notes surrendered, which unpurchased portion must be equal to
$1,000 in principal amount or an integral multiple thereof, and
. any other information necessary to enable any holder to tender notes and
to have such notes purchased pursuant to the indenture
McLeodUSA will comply with the requirements of Section 14(e) under the
Securities Exchange Act and any other securities laws or regulations, to
the extent such laws and regulations are applicable, in connection with the
repurchase of notes under a Change of Control Offer.
On the Change of Control Payment Date, McLeodUSA will:
. accept for payment notes or portions thereof properly tendered under the
Change of Control Offer
. irrevocably deposit with the Paying Agent in immediately available funds
an amount equal to the Change of Control Purchase Price in respect of all
notes or portions thereof accepted, and
. deliver, or cause to be delivered, to the trustee the notes accepted
together with a Company Certificate listing the notes or portions thereof
tendered to McLeodUSA and accepted for payment
The Paying Agent shall promptly mail to each holder of accepted notes payment
in an amount equal to the Change of Control Purchase Price for such notes, and
the trustee shall promptly authenticate and mail to each holder a new note
equal in principal amount to any unpurchased portion of the notes surrendered,
if any; provided that each such new note shall be in a principal amount of
$1,000 or any integral multiple thereof.
The existence of the holders' right to require, subject to several
conditions, McLeodUSA to repurchase notes upon a Change of Control may deter a
third party from acquiring McLeodUSA in a transaction that constitutes a Change
of Control. If a Change of Control Offer is made, there can be no assurance
that McLeodUSA will have sufficient funds to pay the Change of Control Purchase
Price for all notes tendered by holders seeking to accept the Change of Control
Offer. In addition, instruments governing other indebtedness of
S-35
<PAGE>
McLeodUSA may prohibit McLeodUSA from purchasing any 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
notes tendered pursuant to such offer or at a time when McLeodUSA is prohibited
from purchasing the notes, and McLeodUSA is unable either to obtain the consent
of the holders of the relevant indebtedness or to repay such indebtedness, an
Event of Default would occur under the indenture. In addition, one of the
events that constitutes a Change of Control under the indenture is a sale,
conveyance, transfer or lease of all or substantially all of the property of
McLeodUSA. The indenture is governed by New York law, and there is no
established definition under New York law of "substantially all" of the assets
of a corporation. Accordingly, if McLeodUSA were to engage in a transaction in
which it disposed of less than all of its assets, a question of interpretation
could arise as to whether such disposition was of "substantially all" of the
assets of McLeodUSA and whether McLeodUSA was required to make a Change of
Control Offer.
Except as described herein with respect to a Change of Control the indenture
does not contain any other provisions that permit holders of notes to require
that McLeodUSA repurchase or redeem notes in the event of a takeover,
recapitalization or similar restructuring.
Asset Sales
McLeodUSA will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless:
. McLeodUSA or such Restricted Subsidiary, as the case may be, receives
consideration for such Asset Sale at least equal to the Fair Market
Value, as evidenced by a Board Resolution delivered to the trustee, of
the Property or assets sold or otherwise disposed of
. at least 75% of the consideration received by McLeodUSA or such
Restricted Subsidiary for such Property or assets consists of
(a) cash, readily-marketable cash equivalents, and/or Telecommunications
Assets
(b) shares of publicly-traded Voting Stock of any Person engaged in the
Telecommunications Business in the United States, or
(c) the assumption of Indebtedness of McLeodUSA or such Restricted
Subsidiary, other than Indebtedness that is subordinated to the notes, and
the release of McLeodUSA or the Restricted Subsidiary, as the case may be,
from all liability on the Indebtedness assumed, and
. McLeodUSA or such Restricted Subsidiary, as the case may be, uses the Net
Cash Proceeds from such Asset Sale in the manner set forth in the next
paragraph.
Within 360 days after any Asset Sale, McLeodUSA or such Restricted
Subsidiary, as the case may be, may at its option:
. reinvest an amount equal to the Net Cash Proceeds, or any portion
thereof, from such Asset Sale in Telecommunications Assets or in Capital
Stock of any Person engaged in the Telecommunications Business and/or
. apply an amount equal to such Net Cash Proceeds, or remaining Net Cash
Proceeds, to the permanent reduction of Indebtedness of McLeodUSA, other
than Indebtedness to a Restricted Subsidiary, that is senior to or ranks
equally with the notes or to the permanent reduction of Indebtedness or
preferred stock of any Restricted Subsidiary, other than Indebtedness to,
or preferred stock owned by, McLeodUSA or another Restricted Subsidiary.
Any Net Cash Proceeds from any Asset Sale that are not used to reinvest in
Telecommunications Assets or in Capital Stock of any Person engaged in the
Telecommunications Business and/or to reduce senior or equally ranked
Indebtedness of McLeodUSA or Indebtedness or preferred stock of its Restricted
Subsidiaries within 360 days of such Asset Sale shall constitute Excess
Proceeds.
S-36
<PAGE>
If at any time the aggregate amount of Excess Proceeds calculated as of such
date exceeds $25 million, McLeodUSA shall, within 30 days, use such Excess
Proceeds to make an offer to purchase (an "Asset Sale Offer") from all holders
of notes on a pro rata basis with the holders of all other Indebtedness that
ranks equally with the notes and that requires McLeodUSA to make an offer
equivalent to an Asset Sale Offer, notes in an aggregate principal amount
equal to the maximum principal amount that may be purchased out of Excess
Proceeds, at a purchase price (the "Asset Sale Purchase Price") in cash equal
to 100% of the principal amount thereof plus accrued and unpaid interest, if
any, to the purchase date, in accordance with the procedures set forth in the
indenture. Upon completion of an Asset Sale Offer, including payment of the
Asset Sale Purchase Price, any surplus Excess Proceeds that were the subject
of such offer shall cease to be Excess Proceeds, and McLeodUSA may then use
such amounts for general corporate purposes.
McLeodUSA will comply with the requirements of Section 14(e) under the
Securities Exchange Act and any other securities laws or regulations, to the
extent such laws and regulations are applicable, in connection with the
repurchase of notes pursuant to an Asset Sale Offer.
Covenants
Set forth below are several covenants that are contained in the indenture:
Limitation on Consolidated Indebtedness
McLeodUSA will not, and will not permit any Restricted Subsidiary to, Incur
any Indebtedness after the Issue Date unless either:
A. the ratio of:
. the aggregate consolidated principal amount of Indebtedness of
McLeodUSA outstanding as of the most recent available quarterly or
annual balance sheet, after giving pro forma effect to the
Incurrence of such Indebtedness and any other Indebtedness Incurred
since such balance sheet date and the receipt and application of the
proceeds thereof, to
. Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters immediately preceding the Incurrence of such
Indebtedness for which consolidated financial statements of
McLeodUSA have been filed with the SEC or have otherwise become
publicly available, determined on a pro forma basis as if any such
Indebtedness had been Incurred and the proceeds thereof had been
applied at the beginning of such four fiscal quarters
would be less than 5.5 to 1.0 for such four-quarter periods ending
prior to December 31, 2002 and 5.0 to 1.0 for such periods ending
thereafter, or
B. McLeodUSA's Consolidated Capital Ratio as of the most recent quarterly
or annual balance sheet of McLeodUSA that has been filed with the SEC
or has otherwise become publicly available, after giving pro forma
effect to:
. the Incurrence of such Indebtedness and any other Indebtedness
Incurred since such balance sheet date, and
. paid-in capital received since such balance sheet date or
concurrently with the Incurrence of such Indebtedness, and in each
case the receipt and application of the proceeds thereof,
is less than 2.0 to 1.0.
Notwithstanding the foregoing limitation, McLeodUSA and any Restricted
Subsidiary may Incur each and all of the following:
1. Indebtedness under Senior Credit Facilities in an aggregate principal
amount outstanding or available at any one time not to exceed $250
million, and any renewal, extension, refinancing or refunding thereof in
an amount which, together with any principal amount remaining
outstanding or available
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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 100% of the cost of the construction,
acquisition or improvement of the applicable Telecommunications Assets
4. Indebtedness owed by McLeodUSA to any Restricted Subsidiary of McLeodUSA
or Indebtedness owed by a Restricted Subsidiary of McLeodUSA to
McLeodUSA or a Restricted Subsidiary of McLeodUSA; provided that upon
either
(x) the transfer or other disposition by such Restricted Subsidiary or
McLeodUSA of any Indebtedness so permitted to a Person other than
McLeodUSA or another Restricted Subsidiary of McLeodUSA, or
(y) the issuance, other than directors' qualifying shares, sale,
lease, transfer or other disposition of shares of Capital Stock,
including by consolidation or merger, of such Restricted
Subsidiary to a Person other than McLeodUSA or another Restricted
Subsidiary, if such issuance, sale, lease, transfer or other
disposition, as the case may be, shall cause such Restricted
Subsidiary to cease to be a Restricted Subsidiary of McLeodUSA,
the provisions of this clause 4 shall no longer be applicable to such
Indebtedness and such Indebtedness shall be deemed to have been
Incurred at the time of such transfer or other disposition
5. Indebtedness Incurred to renew, extend, refinance or refund (each, a
"refinancing") the notes or Indebtedness outstanding at the date of the
supplemental indenture or Purchase Money Indebtedness Incurred pursuant
to clause 3 above in an aggregate principal amount not to exceed the
aggregate principal amount of and accrued interest on the Indebtedness
so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the
Indebtedness so refinanced or the amount of any premium reasonably
determined by McLeodUSA as necessary to accomplish such refinancing by
means of a tender offer or privately negotiated repurchase, plus the
expenses of McLeodUSA incurred in connection with such refinancing;
provided that Indebtedness the proceeds of which are used to refinance
the notes or Indebtedness which ranks equally to the notes or
Indebtedness which is subordinate in right of payment to the notes shall
only be permitted under this clause 5 if
(A) in the case of any refinancing of the notes or Indebtedness which
ranks equally to the notes, the refinancing Indebtedness is made
equal in rank to the notes or constitutes Subordinated
Indebtedness, and, in the case of any refinancing of Subordinated
Indebtedness, the refinancing Indebtedness constitutes
Subordinated Indebtedness, and
(B) in any case, the refinancing Indebtedness by its terms, or by the
terms of any agreement or instrument pursuant to which such
Indebtedness is issued,
(x) does not provide for payments of principal of such Indebtedness
at stated maturity or by way of a sinking fund applicable
thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by McLeodUSA, including any
redemption,
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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 $50 million at any time outstanding
Notwithstanding any other provision of this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, the maximum amount of Indebtedness that
McLeodUSA or a Restricted Subsidiary may Incur pursuant to this "--Covenants--
Limitation on Consolidated Indebtedness" covenant shall not be deemed to be
exceeded due solely as the result of fluctuations in the exchange rates of
currencies.
For purposes of determining any particular amount of Indebtedness under this
"--Covenants--Limitation on Consolidated Indebtedness" covenant:
1. Guarantees, Liens or obligations with respect to letters of credit
supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included and
2. any Liens granted pursuant to the equal and ratable provisions referred
to in the "--Covenants--Limitation on Liens" covenant described below
shall not be treated as Indebtedness
For purposes of determining compliance with this "--Covenants--Limitation on
Consolidated Indebtedness" covenant, in the event that an item of Indebtedness
meets the criteria of more than one of the types of Indebtedness described in
the above clauses, McLeodUSA, in its sole discretion, shall classify such item
of Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
Limitation on Indebtedness and Preferred Stock of Restricted Subsidiaries
McLeodUSA will not permit any Restricted Subsidiary of McLeodUSA to Incur
any Indebtedness or issue any Preferred Stock except:
1. Indebtedness or Preferred Stock outstanding on the date of the
supplemental indenture after giving effect to the application of the
proceeds of the notes
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2. Indebtedness Incurred or Preferred Stock issued to and held by McLeodUSA
or a Restricted Subsidiary of McLeodUSA, provided that such Indebtedness
or Preferred Stock is at all times held by McLeodUSA or a 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
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
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(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 under 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, $50 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 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,
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(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 subordinated in
right of payment to the notes, or (C) Indebtedness of a Restricted
Subsidiary of McLeodUSA, in exchange for, or out of the proceeds of the
substantially concurrent sale of, Qualified Stock of McLeodUSA
3. retiring any Indebtedness of McLeodUSA subordinated in right of payment
to the notes in exchange for, or out of the proceeds of, the
substantially concurrent incurrence of Indebtedness of McLeodUSA (other
than Indebtedness to a Subsidiary of McLeodUSA), provided that such new
Indebtedness (A) is subordinated in right of payment to the notes at
least to the same extent as, (B) has an Average Life at least as long
as, and (C) has no scheduled principal payments due in any amount
earlier than, any equivalent amount of principal under the Indebtedness
so retired
4. retiring any Indebtedness of a Restricted Subsidiary of McLeodUSA in
exchange for, or out of the proceeds of, the substantially concurrent
incurrence of Indebtedness of McLeodUSA or any Restricted Subsidiary
that is permitted under the covenant described under "--Covenants--
Limitation on Consolidated Indebtedness" (in the case of Indebtedness of
McLeodUSA) and "--Covenants--Limitation on Indebtedness and Preferred
Stock of Restricted Subsidiaries" (in the case of Indebtedness of
Restricted Subsidiaries) and that (A) is not secured by any assets of
McLeodUSA or any Restricted Subsidiary to a greater extent than the
retired Indebtedness was so secured, (B) has an Average Life at least as
long as the retired Indebtedness, and (C) is subordinated in right of
payment to the notes at least to the same extent as the retired
Indebtedness
5. retiring any Capital Stock or options to acquire Capital Stock of
McLeodUSA or any Restricted Subsidiary of McLeodUSA held by any
directors, officers or employees of McLeodUSA or any Restricted
Subsidiary, provided that the aggregate price paid for all such retired
Capital Stock shall not exceed, in the aggregate, the sum of $2 million
plus the aggregate cash proceeds received by McLeodUSA subsequent to the
Issue Date from issuances of Capital Stock or options to acquire Capital
Stock by McLeodUSA to directors, officers or employees of McLeodUSA and
its Subsidiaries
6. making payments or distributions to dissenting stockholders pursuant to
applicable law in connection with a consolidation, merger or transfer of
assets permitted under "--Consolidation, Merger, Conveyance, Lease or
Transfer"
7. retiring any Capital Stock of McLeodUSA to the extent necessary (as
determined in good faith by a majority of the disinterested members of
the Board of Directors, whose determination shall be conclusive and
evidenced by a resolution thereof) to prevent the loss, or to secure the
renewal or reinstatement, of any license or franchise held by McLeodUSA
or any Restricted Subsidiary from any governmental agency
8. making Investments in any Person primarily engaged in the
Telecommunications Business; provided, that the aggregate amount of such
Investments does not exceed at any time the sum of
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(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 a Company Certificate
stating that such Restricted Payment is permitted and setting forth the basis
upon which the required calculations were computed, which calculations may be
based upon McLeodUSA's latest available financial statements.
Limitation on Liens
McLeodUSA may not, and may not permit any Restricted Subsidiary of McLeodUSA
to, Incur or suffer to exist any Lien on or with respect to any property or
assets now owned or hereafter acquired to secure any Indebtedness without
making, or causing such Restricted Subsidiary to make, effective provision for
securing the notes (x) equally and ratably with such Indebtedness as to such
property for so long as such Indebtedness will be so secured or (y) in the
event such Indebtedness is Indebtedness of McLeodUSA which is subordinate in
right of payment to the notes, prior to such Indebtedness as to such property
for so long as such Indebtedness will be so secured.
The foregoing restrictions shall not apply to:
1. Liens existing on the date of the supplemental indenture and securing
Indebtedness outstanding on the date of the supplemental 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 the Consolidated
Cash Flow Available for Fixed Charges of McLeodUSA for the four full
fiscal quarters preceding the Incurrence of such Lien for which
consolidated financial statements of McLeodUSA have been filed with the
SEC or become publicly available, determined on a pro forma basis as if
such Indebtedness had been Incurred and the proceeds thereof had been
applied at the beginning of such four fiscal quarters
3. Liens in favor of McLeodUSA or any Wholly-Owned Restricted Subsidiary of
McLeodUSA
4. Liens on Property of McLeodUSA or a Restricted Subsidiary acquired,
constructed or constituting improvements made after the Issue Date of
the notes to secure Purchase Money Indebtedness which is otherwise
permitted under the supplemental 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
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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 the Consolidated Tangible Assets of
McLeodUSA
8. Liens granted after the Issue Date pursuant to the immediately preceding
paragraph to secure the notes, and
9. Permitted Liens
Limitation on Sale and Leaseback Transactions
McLeodUSA will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, enter into, assume, Guarantee or otherwise become
liable with respect to any Sale and Leaseback Transaction (other than a Sale
and Leaseback Transaction between McLeodUSA or a Restricted Subsidiary on the
one hand and a Restricted Subsidiary or McLeodUSA on the other hand), unless:
1. McLeodUSA or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Sale and Leaseback Transaction at
least equal to the Fair Market Value, as evidenced by a Board Resolution
delivered to the trustee, of the Property subject to such transaction
2. the Attributable Indebtedness of McLeodUSA or such Restricted Subsidiary
with respect thereto is included as Indebtedness and would be permitted
by the covenant described under "--Covenants--Limitation on Consolidated
Indebtedness" or "--Covenants--Limitation on Indebtedness and Preferred
Stock of Restricted Subsidiaries," as the case may be
3. McLeodUSA or such Restricted Subsidiary would be permitted to create a
Lien on such Property without securing the notes by the covenant
described under "--Covenants--Limitation on Liens," and
4. the Net Cash Proceeds from such transaction are applied in accordance
with the covenant described under "--Asset Sales,"
provided that McLeodUSA shall be permitted to enter into Sale and Leaseback
Transactions for up to $30 million with respect to construction of its
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.
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Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries
Except for the items described below, McLeodUSA will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, cause or suffer to exist
or become effective, or enter into, any encumbrance or restriction, other than
by law or regulation, on the ability of any Restricted Subsidiary to:
1. pay dividends or make any other distributions in respect of its Capital
Stock or pay any Indebtedness or other obligation owed to McLeodUSA or
any Restricted Subsidiary,
2. make loans or advances to McLeodUSA or any Restricted Subsidiary, or
3. transfer any of its Property to McLeodUSA or any other Restricted
Subsidiary.
The following items are exceptions to the limitations described above:
(a) any encumbrance or restriction existing as of the Issue Date or any
other agreement relating to any Existing Indebtedness or any
Indebtedness under a Senior Credit Facility or a Qualified Receivable
Facility otherwise permitted under the supplemental 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 supplemental 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
supplemental 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
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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 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 $5 million, a
certificate of the chief executive, operating or financial officer of
McLeodUSA evidencing such officer's determination that such Affiliate
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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 $15
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 for
comparative purposes, is otherwise on terms that, taken as a whole, McLeodUSA
has determined to be fair to McLeodUSA or the relevant Restricted Subsidiary.
Restricted and Unrestricted Subsidiaries
(a) McLeodUSA may designate a Subsidiary (including a newly formed or newly
acquired Subsidiary) of McLeodUSA or any of its Restricted Subsidiaries
as an Unrestricted Subsidiary if such Subsidiary does not have any
obligations which, if in Default, would result in a cross default on
Indebtedness of McLeodUSA or a Restricted Subsidiary (other than
Indebtedness to McLeodUSA or a Wholly-Owned Restricted Subsidiary), and
. such Subsidiary has total assets of $1,000 or less,
. such Subsidiary has assets of more than $1,000 and an Investment in
such Subsidiary in an amount equal to the Fair Market Value of such
Subsidiary would then be permitted under the first paragraph of "--
Covenants--Limitation on Restricted Payments" or
. such designation is effective immediately upon such Person becoming
a Subsidiary.
Unless so designated as an Unrestricted Subsidiary, any Person that
becomes a Subsidiary of McLeodUSA or any of its Restricted Subsidiaries
shall be classified as a Restricted Subsidiary thereof.
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(b) McLeodUSA will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series
of transactions that would result in a Person (other than a newly formed
Subsidiary having no outstanding Indebtedness (other than Indebtedness
to McLeodUSA or a Restricted Subsidiary) at the date of determination)
becoming a Restricted Subsidiary (whether through an acquisition, the
redesignation of an Unrestricted Subsidiary or otherwise) unless, after
giving effect to such action, transaction or series of transactions, on
a pro forma basis, (A) McLeodUSA could incur at least $1.00 of
additional Indebtedness pursuant to the first paragraph of "--
Covenants--Limitation on Consolidated Indebtedness" and (B) no Default
or Event of Default would occur.
(c) Subject to clause (b), an Unrestricted Subsidiary may be redesignated as
a Restricted Subsidiary. The designation of a Subsidiary as an
Unrestricted Subsidiary or the designation of an Unrestricted Subsidiary
as a Restricted Subsidiary in compliance with clause (b) shall be made
by the Board of 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
The following covenant replaces the covenant under the heading "Merger,
Consolidation or Sale of Assets" in the accompanying prospectus.
McLeodUSA will not, in any transaction or series of related transactions,
consolidate with, or merge with or into, any other Person or permit any other
Person to merge with or into McLeodUSA, other than a merger of a Restricted
Subsidiary into McLeodUSA in which McLeodUSA is the continuing corporation, or
sell, convey, assign, transfer, lease or otherwise dispose of all or
substantially all of the Property and assets of McLeodUSA and the Restricted
Subsidiaries taken as a whole to any other Person, unless:
. either (a) McLeodUSA shall be the continuing corporation or (b) the
corporation, if other than McLeodUSA, formed by such consolidation or
into which McLeodUSA is merged, or the Person which acquires, by sale,
assignment, conveyance, transfer, lease or disposition, all or
substantially all of the Property and assets of McLeodUSA and the
Restricted Subsidiaries taken as a whole (such corporation or Person,
the "Surviving Entity"), shall be a corporation organized and validly
existing under the laws of the United States of America, any political
subdivision thereof, any state thereof or the District of Columbia, and
shall expressly assume, by a supplemental indenture, the due and
punctual payment of the principal of (and premium, if any) and interest
on all the notes and the performance of McLeodUSA's covenants and
obligations under the indenture
. immediately after giving effect to such transaction or series of related
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 related transactions, no
Default or Event of Default shall have occurred and be continuing
. immediately after giving effect to such transaction or series of related
transactions on a pro forma basis, including, without limitation, any
Indebtedness incurred or anticipated to be incurred in
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connection with or in respect of such transaction or series of
transactions, McLeodUSA (or the Surviving Entity, if McLeodUSA is not
continuing) would (A) be permitted to Incur at least $1.00 of additional
Indebtedness pursuant to the first paragraph of "--Covenants--Limitation
on Consolidated Indebtedness" and (B) have a Consolidated Net Worth that
is not less than the Consolidated Net Worth of McLeodUSA immediately
before such transaction or series of transactions, and
. if, as a result of any such transaction, Property of McLeodUSA would
become subject to a Lien prohibited by the provisions of the indenture
described under "--Covenants --Limitation on Liens" above, McLeodUSA or
the successor entity to McLeodUSA shall have secured the notes as
required thereby
Events of Default
Each of the following is an "Event of Default" under the indenture:
(a) default in the payment of interest on any note when the same becomes
due and payable, and the continuance of such default for a period of
30 days
(b) default in the payment of the principal of (or premium, if any, on)
any note when the same becomes due and payable at its Maturity, or
the failure to make an offer to purchase any note as required
(c) default in the performance, or breach, of any covenant or agreement
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 indenture or the notes (other than a covenant or
warranty addressed in (a), (b) or (c) above) and continuance of such
Default or breach for a period of 60 days after written notice
thereof has been given to McLeodUSA by the trustee or to McLeodUSA
and the trustee by holders of at least 25% of the aggregate
principal amount of the outstanding notes
(e) default under any Indebtedness of McLeodUSA or any Restricted
Subsidiary having a principal amount outstanding of at least $10
million, which default either (i) has resulted in the acceleration
of the maturity of such Indebtedness prior to its express maturity,
(ii) constitutes a failure to pay such Indebtedness when due and
payable after the expiration of any applicable grace period, or
(iii) has resulted in such Indebtedness becoming or being declared
due and payable
(f) the entry by a court of competent jurisdiction of one or more final
judgments against McLeodUSA or any Restricted Subsidiary for the
payment of money (other than to the extent covered by insurance as
to which the insurance company has acknowledged coverage and other
than to the extent covered by an indemnity given by an insurance
company) in an aggregate amount in excess of $10 million which is
not discharged, waived, 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
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(h) one or more of the following:
. the commencement by McLeodUSA or any Restricted Subsidiary of a voluntary
case or proceeding under U.S. bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal, state or foreign bankruptcy,
insolvency or other similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent
. the consent by McLeodUSA or any Restricted Subsidiary to the entry of a
decree or order for relief in respect of McLeodUSA or any Restricted
Subsidiary in an involuntary case or proceeding under U.S. bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state or foreign bankruptcy, insolvency or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against
McLeodUSA or any Restricted Subsidiary
. the filing by McLeodUSA or any Restricted Subsidiary of a petition or
answer or consent seeking reorganization or relief under U.S. bankruptcy
laws, as now or hereafter constituted, or any other applicable Federal,
state or foreign bankruptcy, insolvency or other similar law
. the consent by McLeodUSA or any Restricted Subsidiary to the filing of
such petition or to the appointment of or taking possession by a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
similar official of McLeodUSA or any Restricted Subsidiary or of any
substantial part of the Property or assets of McLeodUSA or any Restricted
Subsidiary, or the making by McLeodUSA or any Restricted Subsidiary of an
assignment for the benefit of creditors
. the admission by McLeodUSA or any Restricted Subsidiary in writing of its
inability to pay its debts generally as they become due
. the taking of corporate action by McLeodUSA or any Restricted Subsidiary
in furtherance of any such action.
If any Event of Default (other than an Event of Default specified in clause
(g) or (h) above) occurs and is continuing, then and in every such case, unless
the principal amount of the outstanding notes has become due and payable, the
trustee or the holders of not less than 25% of the outstanding aggregate
principal amount of the notes may declare the principal amount of the notes and
any accrued and unpaid interest on all the notes then outstanding to be
immediately due and payable by a notice in writing to McLeodUSA (and to the
trustee if given by holders of the notes), and upon any such declaration, such
principal amount and any accrued and unpaid interest will become and be
immediately due and payable. If any Event of Default specified in clause (g) or
(h) above occurs, the principal amount of the notes and any accrued and unpaid
interest on the notes then outstanding shall become immediately due and payable
without notice to McLeodUSA and without any declaration or other act on the
part of the trustee or any holder of any notes. In the event of a declaration
of acceleration because an Event of Default set forth in clause (e) above has
occurred and is continuing, such declaration of acceleration shall be
automatically rescinded and annulled if the event of default triggering such
Event of Default pursuant to clause (e) shall be remedied, or cured or waived
by the holders of the relevant Indebtedness, within 60 days after such event of
default, provided that no judgment or decree for the payment of money due on
the notes has been obtained by the trustee. Under specified circumstances, the
holders of a majority in principal amount of the outstanding notes by notice to
McLeodUSA and the trustee may rescind an acceleration and its consequences.
McLeodUSA will be required to deliver to the trustee annually a statement
regarding compliance with the indenture, and McLeodUSA is required within 30
days after becoming aware of any Default or Event of Default, to deliver to the
trustee a statement describing such Default or Event of Default, its status and
what action McLeodUSA is taking or proposes to take with respect thereto. The
trustee may withhold from holders of the notes notice of any continuing Default
or Event of Default, other than relating to the payment of principal or
interest, if the trustee determines that withholding such notice is in the
holders' interest.
Amendment, Supplement and Waiver
The provisions of the indenture may be amended, supplemented or waived under
the conditions set forth in the accompanying prospectus under "Description of
Debt Securities -- Modification of the Indentures."
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Satisfaction and Discharge of the Indenture; Defeasance and Covenant Defeasance
The provisions of the base indenture regarding (a) satisfaction and discharge
of the obligations of McLeodUSA under the indenture and (b) defeasance and
covenant defeasance are described in the accompanying prospectus under
"Description of Debt Securities -- Satisfaction and Discharge of Indentures"
and "-- Defeasance and Covenant Defeasance," respectively. All such provisions
of the base indenture will apply to the notes. In addition, the covenant
defeasance provisions of the base indenture shall, pursuant to the supplemental
indenture, also apply to the provisions described in this prospectus supplement
under "Description of the Notes -- Repurchase at the Option of Holders upon a
Change of Control," "-- Asset Sales," "-- Covenants" and the third and fourth
bullet points in the second paragraph under "-- Consolidation, Merger,
Conveyance, Lease or Transfer."
The Trustee
United States Trust Company of New York is the trustee under the indenture
and its current address is 114 West 47th Street, New York, New York 10036.
The holders of not less than a majority in principal amount of the
outstanding notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the trustee,
subject to several exceptions. Except during the continuance of an Event of
Default, the trustee will perform only such duties as are specifically set
forth in the indenture. The indenture provides that in case an Event of Default
shall occur (which shall not be cured or waived), the trustee will be required,
in the exercise of its rights and powers under the indenture, to use the degree
of care of a prudent person in the conduct of such person's own affairs.
Subject to such provisions, the trustee will be under no obligation to exercise
any of its rights or powers under the indenture at the request of any of the
holders of the notes, unless such holders shall have offered to the trustee
indemnity satisfactory to it against any loss, liability or expense.
No Personal Liability of Controlling Persons, Directors, Officers, Employees
and Stockholders
No controlling Person, director, officer, employee, incorporator or
stockholder of McLeodUSA, as such, shall have any liability for any covenant,
agreement or other obligations of McLeodUSA under the notes or the indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation, solely by reason of its past, present or future status as a
controlling Person, director, officer, employee, incorporator or stockholder of
McLeodUSA. By accepting a note each holder waives and releases all such
liability (but only such liability). The waiver and release are part of the
consideration for issuance of the notes. Nonetheless, such waiver may not be
effective to waive liabilities under the federal securities laws and it has
been the view of the SEC that such a waiver is against public policy.
Transfer and Exchange
The outstanding notes are subject to various restrictions on transfer. A
holder may transfer or exchange notes in accordance with the indenture.
McLeodUSA, the Security Registrar and the trustee may require a holder, among
other things, to furnish appropriate endorsements and transfer documents and
McLeodUSA may require a holder to pay any taxes and fees required by law or
permitted by the indenture.
Definitions
Set forth below is a summary of several of the defined terms used in the
indenture. Reference is made to the indenture for the full definition of all
such terms, as well as any capitalized terms used herein for which no
definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person,
Indebtedness of any other Person existing at the time such other Person merged
with or into or became a Subsidiary of such specified Person; provided that
such Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, but excluding
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Indebtedness which is extinguished, retired or repaid in connection with such
other Person merging with or into or becoming a Subsidiary of such specified
Person.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person; provided that each Unrestricted Subsidiary shall be deemed to be an
Affiliate of McLeodUSA and of each other Subsidiary of McLeodUSA; provided,
further, that neither McLeodUSA nor any of its Restricted Subsidiaries shall be
deemed to be Affiliates of each other. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"under common control with" and "controlled by"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of Voting Stock, by agreement or otherwise.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease or
other disposition by such Person or any of its Restricted Subsidiaries
(including a consolidation or merger or other sale of any such Restricted
Subsidiary with, into or to another Person in a transaction in which such
Restricted Subsidiary ceases to be a Restricted Subsidiary of the specified
Person, but excluding a disposition by a Restricted Subsidiary of such Person
to such Person or a Wholly-Owned Restricted Subsidiary of such Person or by
such Person to a Wholly-Owned Restricted Subsidiary of such Person) of
(1) shares of Capital Stock or other ownership interests of a Restricted
Subsidiary of such Person (other than as permitted by the provisions of
the indenture described above under "--Covenants--Limitation on
Indebtedness and Preferred Stock of Restricted Subsidiaries")
(2) substantially all of the assets of such Person or any of its Restricted
Subsidiaries representing a division or line of business (other than as
part of a Permitted Investment), or
(3) other assets or rights of such Person or any of its Restricted
Subsidiaries outside of the ordinary course of business and, in each
case, that is not governed by the provisions of the indenture
applicable to consolidations, mergers, and transfers of all or
substantially all of the assets of the McLeodUSA;
provided that "Asset Sale" shall not include (A) sales or other dispositions of
inventory, receivables and other current assets in the ordinary course of
business, (B) simultaneous exchanges by McLeodUSA or any Restricted Subsidiary
of Telecommunications Assets for other Telecommunications Assets in the
ordinary course of business; provided that the applicable Telecommunications
Assets received by McLeodUSA or such Restricted Subsidiary have at least
substantially equal Fair Market Value to McLeodUSA or such Restricted
Subsidiary (as determined by the Board of Directors whose good faith
determination shall be conclusive and evidenced by a Board Resolution), and (C)
sales or other dispositions of assets with a Fair Market Value (as certified in
a Company Certificate) not in excess of $5 million.
"Attributable Indebtedness" means, with respect to any Sale and Leaseback
Transaction of any Person, as at the time of determination, the greater of
(1) the capitalized amount in respect of such transaction that would appear
on the balance sheet of such Person in accordance with GAAP, and
(2) the present value (discounted at a rate consistent with accounting
guidelines, as determined in good faith by the responsible accounting
officer of such Person) of the payments during the remaining term of
the lease (including any period for which such lease has been extended
or may, at the option of the lessor, be extended) or until the earliest
date on which the lessee may terminate such lease without penalty or
upon payment of a penalty (in which case the rental payments shall
include such penalty).
"Average Life" means, as of any date, with respect to any debt security or
Disqualified Stock, the quotient obtained by dividing
(1) the sum of the products of (x) the number of years from such date to
the dates of each scheduled principal payment or redemption payment
(including any sinking fund or mandatory redemption
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payment requirements) of such debt security or Disqualified Stock
multiplied in each case by (y) the amount of such principal or
redemption payment, by
(2) the sum of all such principal or redemption payments
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability
on the face of a balance sheet of such Person prepared in accordance with GAAP,
and the stated maturity thereof shall be the date of the last payment of rent
or any amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than Indebtedness convertible into an
equity interest), warrants or options to subscribe for or acquire an equity
interest in such Person.
"Change of Control" shall be deemed to occur if
(1) the sale, conveyance, transfer or lease of all or substantially all of
the assets of McLeodUSA to any "Person" or "group" (within the meaning
of Sections 13(d)(3) and 14(d)(2) of the Securities Exchange Act or any
successor provision to either of the foregoing, including any group
acting for the purpose of acquiring, holding or disposing of securities
within the meaning of Rule 13d-5(b)(i) under the Securities Exchange
Act), other than any Permitted Holder (as defined below) or any
Restricted Subsidiary of McLeodUSA, shall have occurred
(2) any "Person" or "group" (within the meaning of Sections 13(d)(3) and
14(d)(2) of the Securities Exchange Act or any successor provision to
either of the foregoing, including any group acting for the purpose of
acquiring, holding or disposing of securities within the meaning of
Rule 13d-5(b)(i) under the Securities Exchange Act), other than any
Permitted Holder, becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act) of more than 35% of the total
voting power of all classes of the Voting Stock of McLeodUSA (including
any warrants, options or rights to acquire such Voting Stock),
calculated on a fully diluted basis, and such voting power percentage
is greater than or equal to the total voting power percentage then
beneficially owned by the Permitted Holders in the aggregate, or
(3) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together
with any directors whose election or appointment by the Board of
Directors or whose nomination for election by the stockholders of
McLeodUSA was approved by a vote of a majority of the directors then
still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office
"Common Stock" means Capital Stock other than Preferred Stock.
"Consolidated Capital Ratio" of any Person as of any date means the ratio of
(A) the aggregate consolidated principal amount of Indebtedness of such Person
then outstanding to (B) the aggregate consolidated paid-in capital of such
Person as of such date.
"Consolidated Cash Flow Available for Fixed Charges" for any period means the
Consolidated Net Income of McLeodUSA and its Restricted Subsidiaries for such
period increased by the sum of
(1) Consolidated Interest Expense of McLeodUSA and its Restricted
Subsidiaries for such period, plus
(2) Consolidated Income Tax Expense of McLeodUSA and its Restricted
Subsidiaries for such period, plus
(3) the consolidated depreciation and amortization expense included in the
income statement of McLeodUSA and its Restricted Subsidiaries for such
period, plus
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(4) any non-cash expense related to the issuance to employees of McLeodUSA
or any Restricted Subsidiary of McLeodUSA of options to purchase
Capital Stock of McLeodUSA or such Restricted Subsidiary, plus
(5) any charge related to any premium or penalty paid in connection with
redeeming or retiring any Indebtedness prior to its stated maturity,
plus
(6) any non-cash expense related to a purchase accounting adjustment not
requiring an accrual or reserve and separately disclosed in the
Consolidated Income Statement of McLeodUSA,
and decreased by the amount of any non-cash item that increases such
Consolidated Net Income, all as determined on a consolidated basis in
accordance with GAAP; provided that there shall be excluded therefrom the
Consolidated Cash Flow Available for Fixed Charges (if positive) of any
Restricted Subsidiary of McLeodUSA (calculated separately for such Restricted
Subsidiary in the same manner as provided above for McLeodUSA) that is subject
to a restriction which prevents the payment of dividends or the making of
distributions to McLeodUSA or another Restricted Subsidiary of McLeodUSA to the
extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate amounts
of the provisions for income taxes of McLeodUSA and its Restricted Subsidiaries
for such period calculated on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of
McLeodUSA and its Restricted Subsidiaries for such period in accordance with
GAAP, including without limitation or duplication (or, to the extent not so
included, with the addition of),
(1) the amortization of Indebtedness discount
(2) any payments or fees with respect to letters of credit, bankers'
acceptances or similar facilities
(3) fees with respect to interest rate swap or similar agreements or
foreign currency hedge, exchange or similar agreements
(4) Preferred Stock dividends of McLeodUSA and its Restricted Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not
Disqualified Stock) declared and paid or payable
(5) accrued Disqualified Stock dividends of McLeodUSA and its Restricted
Subsidiaries, whether or not declared or paid
(6) interest on Indebtedness guaranteed by McLeodUSA and its Restricted
Subsidiaries, and
(7) the portion of any Capital Lease Obligation paid during such period
that is allocable to interest expense in accordance with GAAP
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for
such period on a consolidated basis determined in accordance with GAAP;
provided that there shall be excluded therefrom, without duplication
(1) all items classified as extraordinary
(2) any net income (or net loss) of any Person other than such Person and
its Restricted Subsidiaries, except to the extent of the amount of
dividends or other distributions actually paid to such Person or its
Restricted Subsidiaries by such other Person during such period
(3) the net income of any Person acquired by such Person or any of its
Restricted Subsidiaries in a pooling-of-interests transaction for any
period prior to the date of the related acquisition
(4) any gain or loss, net of taxes, realized on the termination of any
employee pension benefit plan
(5) net gains (or net losses) in respect of Asset Sales by such Person or
its Restricted Subsidiaries
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(6) the net income (or net loss) of any Restricted Subsidiary of such
Person to the extent that the payment of dividends or other
distributions to such Person is restricted by the terms of its charter
or any agreement, instrument, contract, judgment, order, decree,
statute, rule, governmental regulation or otherwise, except that such
Person's equity in the net income of any such Restricted Subsidiary for
such period may be included in such Consolidated Net Income up to the
aggregate amount of cash that could, after giving effect to the
operation of such restriction, have been distributed by such Restricted
Subsidiary during such period to such Person as a dividend
(7) with regard to a non-wholly owned Restricted Subsidiary, any aggregate
net income (or loss) in excess of such Person's or such Restricted
Subsidiary's pro rata share of such non-wholly owned Restricted
Subsidiary's net income (or loss), and
(8) the cumulative effect of changes in accounting principles
"Consolidated Net Worth" of any Person means, at any date of determination,
the consolidated stockholders' equity or partners' capital (excluding
Disqualified Stock) of such Person and its subsidiaries, as determined in
accordance with GAAP.
"Consolidated Tangible Assets" of any Person means the total amount of assets
(less applicable reserves and other properly deductible items) which under GAAP
would be included on a consolidated balance sheet of such Person and its
Subsidiaries after deducting therefrom all goodwill, trade names, trademarks,
patents, unamortized debt discount and expense and other like intangibles,
which in each case under GAAP would be included on such consolidated balance
sheet.
"Default" means any event, act or condition, the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Depository" means, with respect to the notes issuable or issued in whole or
in part in the form of one or more global securities, The Depository Trust
Company for so long as it shall be a clearing agency registered under the
Securities Exchange Act, or such successor as McLeodUSA shall designate from
time to time in an Officers' Certificate delivered to the trustee.
"Disqualified Stock" means any Capital Stock which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, or otherwise, matures or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the option of the holder thereof, or is exchangeable for
Indebtedness at any time, in whole or in part, on or prior to the Stated
Maturity of the notes.
"Eligible Cash Equivalents" means
(1) securities issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof,
provided that the full faith and credit of the United States of America
is pledged in support thereof
(2) time deposits and certificates of deposit of any commercial bank
organized in the United States having capital and surplus in excess of
$500 million with a maturity date not more than one year from the date
of acquisition
(3) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (1) above
entered into with any bank meeting the qualifications specified in
clause (2) above
(4) direct obligations issued by any state of the United States of America
or any political subdivision of any such state or any public
instrumentality thereof maturing, or subject to tender at the option of
the holder thereof within one year 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.
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(5) commercial paper issued by the parent corporation of any commercial
bank organized in the United States having capital and surplus in
excess of $500 million and commercial paper issued by others having one
of the two highest ratings obtainable from either Standard & Poor's
Corporation or Moody's Investors Service, Inc. and in each case
maturing within one year after the date of acquisition
(6) overnight bank deposits and bankers' acceptances at any commercial bank
organized in the United States having capital and surplus in excess of
$500 million
(7) deposits available for withdrawal on demand with a commercial bank
organized in the United States having capital and surplus in excess of
$500 million, and
(8) investments in money market funds substantially all of whose assets
comprise securities of the types described in clauses (1) through (6)
"Existing Indebtedness" means Indebtedness outstanding on the date of the
supplemental indenture (other than under any Senior Credit Facility).
"Fair Market Value" means, with respect to any asset or Property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer under no compulsion to buy, as determined in good faith by the Board of
Directors.
"Guarantee" means any direct or indirect obligation, contingent or otherwise,
of a Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any other Person in any manner (and "Guaranteed,"
"Guaranteeing" and "Guarantor" shall have meanings correlative to the
foregoing).
"holder" means the Person in whose name the note is registered in the
security register or, when used with respect to a bearer security or any
coupon, means the bearer thereof.
"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,
(1) any obligation of such Person for money borrowed
(2) any obligation of such Person evidenced by bonds, debentures, notes,
Guarantees or other similar instruments, including, without limitation,
any such obligations incurred in connection with the acquisition of
Property, assets or businesses, excluding trade accounts payable made in
the ordinary course of business
(3) any reimbursement obligation of such Person with respect to letters of
credit, bankers' acceptances or similar facilities issued for the
account of such Person
(4) any obligation of such Person issued or assumed as the deferred purchase
price of Property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of
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business, which in either case are not more than 60 days overdue or
which are being contested in good faith)
(5) any Capital Lease Obligation of such Person
(6) the maximum fixed redemption or repurchase price of Disqualified Stock
of such Person and, to the extent held by Persons other than such
Person or its Restricted Subsidiaries, the maximum fixed redemption or
repurchase price of Disqualified Stock of such Person's Restricted
Subsidiaries, at the time of determination
(7) every obligation under Interest Rate and Currency Protection Agreements
of such Person
(8) any Attributable Indebtedness with respect to any Sale and Leaseback
Transaction to which such Person is a party and
(9) any obligation of the type referred to in clauses (i) through (viii) of
this definition of another Person and all dividends and distributions
of another Person the payment of which, in either case, such Person has
Guaranteed or is responsible or liable, directly or indirectly, as
obligor, Guarantor or otherwise
For purposes of the preceding sentence, the maximum fixed repurchase price
of any Disqualified Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Stock as if such
Disqualified Stock were repurchased on any date on which Indebtedness shall be
required to be determined pursuant to the indenture; provided that, if such
Disqualified Stock is not then permitted to be repurchased, the repurchase
price shall be the book value of such Disqualified Stock. The amount of
Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and, with
respect to contingent obligations, the maximum liability upon the occurrence
of the contingency giving rise to the obligation; provided that the amount
outstanding at any time of any Indebtedness issued with original issue
discount (including, without limitation, our 10 1/2% senior discount notes) is
the face amount of such Indebtedness less the remaining unamortized portion of
the original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
"Interest Rate or Currency Protection Agreement"of any Person means any
forward contract, futures contract, swap, option, future option or other
financial agreement or arrangement (including, without limitation, caps,
floors, collars and similar agreements) relating to, or the value of which is
dependent upon, interest rates or currency exchange rates or indices.
"Investment" in any Person means any direct, indirect or contingent
(1) advance or loan to, Guarantee of any Indebtedness of, extension of
credit or capital contribution to such Person
(2) the acquisition of any shares of Capital Stock, bonds, notes,
debentures or other securities of such Person, or
(3) the acquisition, by purchase or otherwise, of all or substantially all
of the business, assets or stock or other evidence of beneficial
ownership of such Person
provided that Investments shall exclude commercially reasonable extensions of
trade credit. The amount of any Investment shall be the original cost of such
Investment, plus the cost of all additions thereto and minus the amount of any
portion of such Investment repaid to such Person in cash as a repayment of
principal or a return of capital, as the case may be, but without any other
adjustments for increases or decreases in value, or write-ups, write-downs or
write-offs with respect to such Investment. In determining the amount of any
Investment involving a transfer of any Property other than cash, such Property
or asset shall be valued at its Fair Market Value at the time of such
transfer.
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"Issue Date" means the date on which the notes are first authenticated and
delivered under the supplemental 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 note, the date on which the
principal of such note becomes due and payable as provided therein or in the
indenture, whether on the date specified in such note as the fixed date on
which the principal of such note is due and payable, on a Change of Control
Payment Date or an Asset Sale Payment Date, or by declaration of acceleration,
call for redemption or otherwise.
"Net Cash Proceeds" means, with respect to the sale of any Property or assets
by any Person or any of its Restricted Subsidiaries, cash or readily marketable
cash equivalents received net of
(1) all reasonable out-of-pocket expenses of such Person or such
Restricted Subsidiary incurred in connection with such sale,
including, without limitation, all legal, title and recording tax
expenses, commissions and other fees and expenses incurred (but
excluding any finder's fee or broker's fee payable to any Affiliate of
such Person) and all federal, state, foreign and local taxes arising
in connection with such sale that are paid or required to be accrued
as a liability under GAAP by such Person or its Restricted
Subsidiaries
(2) all payments made or required to be made by such Person or its
Restricted Subsidiaries on any Indebtedness which is secured by such
Properties or other assets in accordance with the terms of any Lien
upon or with respect to such Properties or other assets or which must,
by the terms of such Lien, or in order to obtain a necessary consent
to such transaction or by applicable law, be repaid in connection with
such sale
(3) all contractually required distributions and other payments made to
minority interest holders (but excluding distributions and payments to
Affiliates of such Person) in Restricted Subsidiaries of such Person
as a result of such transaction, and
(4) appropriate amounts to be provided by such Person or any Restricted
Subsidiary thereof, as the case may be, as a reserve in accordance
with GAAP against any liabilities associated with such assets and
retained by such Person or any Restricted Subsidiary thereof, as the
case may be, after such transaction, including, without limitation,
liabilities under any indemnification obligations and severance and
other employee termination costs associated with such transaction, in
each case as determined by the board of directors of such Person, in
its reasonable good faith judgment evidenced by a resolution of the
board of directors filed with the trustee
provided that, in the event that any consideration for a transaction (which
would otherwise constitute Net Cash Proceeds) is required to be held in escrow
pending determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow; and provided, further, that any non-cash consideration received in
connection with any transaction, which is subsequently converted to cash, shall
be deemed to be Net Cash Proceeds at such time, and shall thereafter be applied
in accordance with the indenture.
"Paying Agent" means any Person authorized by McLeodUSA to make payments of
principal, premium or interest with respect to the notes on behalf of
McLeodUSA.
"Permitted Holders" means 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.
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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
(1) Eligible Cash Equivalents
(2) Investments in Property used in the ordinary course of business
(3) Investments in any Person as a result of which such Person becomes a
Restricted Subsidiary in compliance with the indenture
(4) Investments pursuant to agreements or obligations of McLeodUSA or a
Restricted Subsidiary, in effect on the Issue Date, to make such
Investments
(5) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits
(6) Permitted Interest Rate or Currency Protection Agreements with respect
to any floating rate Indebtedness that is permitted by the terms of the
indenture to be outstanding
(7) bonds, notes, debentures or other debt securities received as a result
of Asset Sales permitted under the covenant described under "--Asset
Sales"
(8) Investments in existence at the Issue Date
(9) commission, payroll, travel and similar advances to employees in the
ordinary course of business to cover matters that are expected at the
time of such advances ultimately to be treated as expenses in accordance
with GAAP
(10) stock, obligations or securities received in satisfaction of judgments,
and
(11) Investments made pursuant to any deferred-compensation plan, including
any Investments made through a trust (including a grantor trust)
established in connection with any such plan, for the benefit of
employees of McLeodUSA or of any Restricted Subsidiary
"Permitted Liens" means
(1) Liens for taxes, assessments, governmental charges or claims which are
not yet delinquent or which are being contested in good faith by
appropriate proceedings, if a reserve or other appropriate provision,
if any, as shall be required in conformity with GAAP shall have been
made therefor
(2) other Liens incidental to the conduct of the business of McLeodUSA and
its Restricted Subsidiaries 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 the property or assets
of McLeodUSA and its Restricted Subsidiaries when taken as a whole, or
materially impair the use thereof in the operation of its business
(3) Liens with respect to assets of a Restricted Subsidiary granted by
such Restricted Subsidiary to McLeodUSA to secure Indebtedness owing
to McLeodUSA
(4) pledges and deposits made in the ordinary course of business in
connection with workers' compensation and unemployment insurance,
statutory Liens of landlords, carriers, warehousemen, mechanics,
materialmen, repairmen and other types of statutory obligations
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(5) deposits made to secure the performance of tenders, bids, leases, and
other obligations of like nature incurred in the ordinary course of
business (exclusive of obligations for the payment of borrowed money)
(6) zoning restrictions, servitudes, easements, rights-of-way,
restrictions and other similar charges or encumbrances incurred in the
ordinary course of business which, in the aggregate, do not materially
detract from the value of the property subject thereto or interfere
with the ordinary conduct of the business of McLeodUSA or its
Restricted Subsidiaries
(7) Liens arising out of judgments or awards against McLeodUSA or any
Restricted Subsidiary with respect to which McLeodUSA or such
Restricted Subsidiary is prosecuting an appeal or proceeding for
review and McLeodUSA or such Restricted Subsidiary is maintaining
adequate reserves in accordance with GAAP
(8) any interest or title of a lessor in the property subject to any lease
other than a Capital Lease
(9) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Issue Date; provided that
(A) such Lien is created solely for the purpose of securing
Indebtedness Incurred, in accordance with "--Covenants--Limitation on
Consolidated Indebtedness," (x) to finance the cost (including the
cost of improvement or construction) of the item of property or assets
subject thereto and such Lien is created prior to, at the time of or
within six months after the later of the acquisition, the completion
of construction or the commencement of full operation of such property
or (y) to refinance any Indebtedness previously so secured, (B) the
principal amount of the Indebtedness secured by such Lien does not
exceed 100% of such cost and (C) any such Lien shall not extend to or
cover any property or assets other than such item of property or
assets and any improvements on such item
(10) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of McLeodUSA and its Restricted
Subsidiaries
(11) Liens encumbering property or assets under construction arising from
progress or partial payments by a customer of McLeodUSA or its
Restricted Subsidiaries relating to such property or assets
(12) Liens arising from filing precautionary Uniform Commercial Code
financing statements regarding leases
(13) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes
a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of McLeodUSA or any
Restricted Subsidiary other than the property or assets acquired
(14) Liens in favor of McLeodUSA or any Restricted Subsidiary
(15) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof
(16) Liens in favor of customs and revenue authorities arising as a matter
of law to secure payment of customs duties in connection with the
importation of goods
(17) Liens encumbering customary initial deposits and margin deposits, and
other Liens that are either within the general parameters customary
in the industry and incurred in the ordinary course of business, in
each case, securing Indebtedness under Permitted Interest Rate
Agreements and Currency Agreements, and
(18) Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by
McLeodUSA or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of McLeodUSA
and its Restricted Subsidiaries prior to the Issue Date
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"Person" means any individual, corporation, limited liability company,
partnership, limited liability partnership, joint venture, association, joint
stock company, real estate investment trust, business trust, unincorporated
organization or government or any agency or political subdivision thereof.
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, excluding Capital Stock in any other Person.
"Purchase Money Indebtedness" means Indebtedness of McLeodUSA (including
Acquired Indebtedness and Capital Lease Obligations, mortgage financings and
purchase money obligations) incurred for the purpose of financing all or any
part of the cost of construction, acquisition, development or improvement by
McLeodUSA or any Restricted Subsidiary of any Telecommunications Assets of
McLeodUSA or any Restricted Subsidiary and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified or
restated from time to time.
"Qualified Receivable Facility" means Indebtedness of McLeodUSA or any
Subsidiary Incurred from time to time pursuant to either (A) credit facilities
secured by Receivables or (B) receivable purchase facilities, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified or restated from time to time.
"Qualified Receivable Subsidiary" means a Restricted Subsidiary formed solely
for the purpose of obtaining a Qualified Receivable Facility and substantially
all of the Property of which is Receivables.
"Qualified Stock" of any Person means a class of Capital Stock other than
Disqualified Stock.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money and
proceeds and products thereof in each case generated in the ordinary course of
business.
"Restricted Payment" means
(1) a dividend or other distribution declared or paid on the Capital Stock
of McLeodUSA or to stockholders of McLeodUSA (in their capacity as
such), or declared or paid to any Person other than McLeodUSA or a
Restricted Subsidiary of McLeodUSA on the Capital Stock of any
Restricted Subsidiary of McLeodUSA, in each case, other than dividends,
distributions or payments made solely in Qualified Stock of McLeodUSA
or such Restricted Subsidiary
(2) a payment made by McLeodUSA or any of its Restricted Subsidiaries
(other than to McLeodUSA or any Restricted Subsidiary) to purchase,
redeem, acquire or retire any Capital Stock of McLeodUSA or of a
Restricted Subsidiary
(3) a payment made by McLeodUSA or any of its Restricted Subsidiaries
(other than a payment made solely in Qualified Stock of McLeodUSA) to
redeem, repurchase, defease (including an in-substance or legal
defeasance) or otherwise acquire or retire for value (including
pursuant to mandatory repurchase covenants), prior to any scheduled
maturity, scheduled sinking fund or mandatory redemption payment,
Indebtedness of McLeodUSA or such Restricted Subsidiary which is
subordinate (whether pursuant to its terms or by operation of law) in
right of payment to the notes and which was scheduled to mature on or
after the maturity of the notes, or
(4) an Investment in any Person, including an Unrestricted Subsidiary or
the designation of a Subsidiary as an Unrestricted Subsidiary, other
than (a) a Permitted Investment, (b) an Investment by
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McLeodUSA in a Wholly-Owned Restricted Subsidiary or (c) an Investment
by a Restricted Subsidiary in McLeodUSA or a Wholly-Owned Restricted
Subsidiary of McLeodUSA
"Restricted Subsidiary" means any Subsidiary of McLeodUSA that has not been
designated as an "Unrestricted Subsidiary."
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or
transferred by such Person or a Restricted Subsidiary of such Person and is
thereafter leased back from the purchaser or transferee thereof by such Person
or one of its Restricted Subsidiaries.
"Senior Credit Facility" means Indebtedness of McLeodUSA and its Subsidiaries
Incurred from time to time pursuant to one or more credit agreements or similar
facilities made available from time to time to McLeodUSA and its Subsidiaries,
whether or not secured, and including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"Stated Maturity" means, with respect to any security or any installment of
principal thereof or interest thereon or any Additional Amounts with respect
thereto, the date specified in such security as the fixed date on which the
principal of such security or such installment of principal or interest is, or
such Additional Amounts are, 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).
"Strategic Equity Investment" means an equity investment made by a Strategic
Investor in McLeodUSA in an aggregate amount of not less than $25 million.
"Strategic Investor" means a Person (other than the Permitted Holders)
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the Voting Stock of which is owned by a Person that has, an equity market
capitalization at the time of its initial Investment in McLeodUSA in excess of
$2 billion.
"Subordinated Indebtedness" means Indebtedness of McLeodUSA as to which the
payment of principal of (and premium, if any) and interest and other payment
obligations in respect of such Indebtedness shall be subordinate to the prior
payment in full of the notes to at least the following extent:
(1) no payments of principal of (or premium, if any) or interest on or
amounts otherwise due in respect of such Indebtedness may be permitted
for so long as any default in the payment of principal (or premium, if
any) or interest on the notes exists
(2) in the event that any other default that with the passing of time or the
giving of notice, or both, would constitute an event of default exists
with respect to the notes, upon notice by 25% or more in principal
amount of the notes to the trustee, the trustee shall give notice to
McLeodUSA and the holders of such Indebtedness (or trustees or agents
therefor) of a payment blockage, and thereafter no payments of principal
of (or premium, if any) or interest on or otherwise due in respect of
such Indebtedness may be made for a period of 179 days from the date of
such notice, and
(3) such Indebtedness may not (x) provide for payments of principal of such
Indebtedness at the stated maturity thereof or by way of a sinking fund
applicable thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by McLeodUSA (including any redemption,
retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Indebtedness upon an event of default thereunder),
in each case prior to the final Stated Maturity of the notes or
(y) permit redemption or other retirement (including pursuant to an
offer to purchase made by McLeodUSA) of such other
S-62
<PAGE>
Indebtedness at the option of the holder thereof prior to the final
Stated Maturity of the notes, other than a redemption or other
retirement at the option of the holder of such Indebtedness (including
pursuant to an offer to purchase made by McLeodUSA) which is conditioned
upon a change of control of McLeodUSA pursuant to provisions
substantially similar to those described under "--Repurchase at the
Option of Holders upon a Change of Control" (and which shall provide
that such Indebtedness will not be repurchased pursuant to such
provisions prior to McLeodUSA's repurchase of the notes required to be
repurchased by McLeodUSA pursuant to the provisions described under "--
Repurchase at the Option of Holders upon a Change of Control").
"Subsidiary" means, with respect to any Person, (1) any corporation more
than 50% of the outstanding shares of Voting Stock of which is owned, directly
or indirectly, by such Person, or by one or more other Subsidiaries of such
Person, or by such Person and one or more other Subsidiaries of such Person,
(2) any general partnership, limited liability company, joint venture or
similar entity, more than 50% of the outstanding partnership, membership or
similar interests of which are owned, directly or indirectly, by such Person,
or by one or more other Subsidiaries of such Person, or by such Person and one
or more other Subsidiaries of such Person and (3) any limited partnership of
which such Person or any Subsidiary of such Person is a general partner.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended
for use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (1) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased wireline or wireless transmission facilities, (2)
creating, developing, constructing, installing, repairing, maintaining or
marketing communications-related systems, network equipment and facilities,
software and other products, (3) creating, developing, producing or marketing
audiotext or videotext, (4) publishing or distributing telephone (including
Internet) directories, whether in paper, electronic, audio or video format,
(5) marketing (including direct marketing and telemarketing), or (6)
evaluating, participating in or pursuing any other business that is primarily
related to those identified in the foregoing clauses (1), (2), (3), (4) or (5)
above (in the case of clauses (3), (4) and (5), however, in a manner
consistent with the manner of business of McLeodUSA 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 of McLeodUSA.
"Unrestricted Subsidiary" means any Subsidiary of McLeodUSA that McLeodUSA
has classified as an "Unrestricted Subsidiary" and that has not been
reclassified as a Restricted Subsidiary, pursuant to the terms of the
indenture.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or at the times that such class of Capital Stock has voting power
by reason of the happening of any contingency) to vote in the election of
members of the board of directors or comparable body of such Person.
"Wholly-Owned Restricted Subsidiary" of any Person means a Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests
(other than any director's qualifying shares) of which shall at the time be
owned by such Person or by one or more other Wholly-Owned Restricted
Subsidiaries of such Person or by such Person and one or more other Wholly-
Owned Restricted Subsidiaries of such Person.
S-63
<PAGE>
OTHER INDEBTEDNESS
We have outstanding seven issues of senior notes as well as certain other
indebtedness under Senior Secured Credit Facilities. Certain terms of our
material indebtedness, other than the notes offered hereby, are as follows:
10 1/2% Senior Discount Notes Due 2007
. offering of $500 million principal amount completed March 4, 1997
. priced at a discount, with net proceeds of approximately $288.9 million
. will accrete to aggregate principal amount of $500 million by March 1, 2002
. interest will accrue only after March 1, 2002, at a rate of 10 1/2% per
annum payable in cash, in arrears, March 1 and September 1 of each year
commencing September 1, 2002
. mature on March 1, 2007
9 1/4% Senior Notes Due 2007
. offering of $225 million principal amount completed July 21, 1997
. net proceeds of approximately $217.6 million
. accrue interest at 9 1/4% per annum, payable in cash, in arrears, on July
15 and January 15 of each year
. mature on July 15, 2007
8 3/8% Senior Notes Due 2008
. offering of $300 million principal amount completed March 16, 1998
. net proceeds of approximately $291.9 million
. accrue interest at 8 3/8% per annum, payable in cash, in arrears, on March
15 and September 15 of each year
. mature on March 15, 2008
9 1/2% Senior Notes Due 2008
. offering of $300 million principal amount completed October 30, 1998
. net proceeds of approximately $291.9 million
. accrue interest at 9 1/2% per annum, payable in cash, in arrears, on May 1
and November 1 of each year
. mature on November 1, 2008
8 1/8% Senior Notes Due 2009
. offering of $500 million principal amount completed February 22, 1999
. net proceeds of approximately $486.1 million
. accrue interest at 8 1/8% per annum, payable in cash, in arrears, on
August 15 and February 15 of each year
. mature on February 15, 2009
S-64
<PAGE>
12% Senior Notes Due 2008
. issued on December 14, 2000, $150 million in principal amount in exchange
for the cancellation of the notes of CapRock in connection with the
acquisition of CapRock
. accrue interest at 12% per annum, payable in cash, in arrears, on January
15 and July 15 of each year
. mature on July 15, 2008
11 1/2% Senior Notes Due 2009
. issued on December 14, 2000, $210 million in principal amount in exchange
for the cancellation of the notes of CapRock in connection with the
acquisition of CapRock
. accrue interest at 11 1/2% per annum, payable in cash, in arrears, on May
1 and November 1 of each year
. mature on May 1, 2009
All of the senior notes listed above rank pari passu in right of payment with
each other and with the notes offered hereby.
Senior Secured Credit Facilities
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 (the "Tranche A Term Facility"), and (3) an eight-year single-
draw senior secured term loan with an aggregate principal amount of $575
million (the "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 the end of which period 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.
Restrictive Covenants
The indentures governing our senior notes and the Senior Secured Credit
Facilities impose operating and financial restrictions on us and our
subsidiaries that are generally substantially the same as the restrictions
governing the notes. These restrictions affect, and in some cases
significantly limit or prohibit, among other things, our ability and the
ability of our subsidiaries to incur additional indebtedness, pay dividends or
make distributions in respect of our or such subsidiaries' capital stock, make
other restricted payments, enter into sale and leaseback transactions, create
liens upon assets, enter into transactions with affiliates or related persons,
sell assets, or consolidate, merge or sell all or substantially 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.
S-65
<PAGE>
UNDERWRITING
Salomon Smith Barney Inc. and Goldman, Sachs & Co. are acting as joint book-
running managers of the offering, and, together with J.P. Morgan & Co. (a
division of Chase Securities Inc.), are acting as representatives of the
underwriters named below.
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus supplement, each underwriter named below has
agreed to purchase from us and we have agreed to sell to that underwriter, the
principal amount of notes set forth opposite the underwriter's name.
<TABLE>
<CAPTION>
Principal
Amount of
Underwriters Notes
------------ ---------
<S> <C>
Salomon Smith Barney Inc. ...................................... $
Goldman, Sachs & Co. ...........................................
Chase Securities Inc. ..........................................
-------
Total ........................................................ $
=======
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase the notes included in this offering are subject to approval of
legal matters by counsel and to other conditions. The underwriters are
obligated to purchase all of the notes if they purchase any of the notes.
The underwriters propose to offer the notes directly to the public at the
public offering price set forth on the cover page of this prospectus
supplement, and some of the notes to dealers at the public offering price less
a concession not to exceed % of the principal amount of the notes. The
underwriters may allow, and dealers may reallow a concession not to exceed %
of the principal amount of the notes on sales to other dealers. After the
initial offering of the notes to the public, the representatives may change the
public offering price and concessions.
The following table shows the underwriting discounts and commissions that we
are to pay to the underwriters in connection with this offering (expressed as a
percentage of the principal amount of the notes).
<TABLE>
<CAPTION>
Paid by
McLeodUSA
---------
<S> <C>
Per Note........................................................ %
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell the notes in the open market. These
transactions may include over-allotment, syndicate covering transactions and
stabilizing transactions. Over-allotment involves syndicate sales of notes in
excess of the principal amount of notes to be purchased by the underwriters in
the offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the notes in the open market after the
distribution has been completed in order to cover syndicate short positions.
Stabilizing transactions consist of certain bids or purchases of notes made for
the purpose of preventing or retarding a decline in the market price of the
notes while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney, in covering syndicate short positions or making
stabilizing purchases, repurchase notes originally sold by that syndicate
member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the notes. They may also cause the price of the
notes to be higher than the price that otherwise would exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the over-the-counter market or otherwise. If the underwriters
commence any of these transactions, they may discontinue them at any time. We
estimate that our total expenses for this offering will be $ .
S-66
<PAGE>
Salomon Smith Barney Inc., Goldman, Sachs & Co. and Chase Securities Inc. and
their affiliates have performed investment banking, commercial banking and
advisory services for us from time to time for which they have received
customary fees and expenses. The underwriters and their affiliates may, from
time to time, engage in transactions with and perform services for us in the
ordinary course of their business. Chase Securities Inc. is an affiliate of The
Chase Manhattan Bank which is the agent for, and a lender under, our Senior
Secured Credit Facilities. Salomon Smith Barney Inc. is an affiliate of
Citicorp USA, Inc., which is a lender under our Senior Secured Credit
Facilities. Goldman, Sachs & Co. is an affiliate of Goldman Sachs Credit
Partners L.P., which is a lender under our Senior Secured Credit Facilities.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
underwriters may be required to make in respect of such liabilities.
We have agreed with the underwriters not to offer, sell or contract to sell,
or otherwise dispose of, directly or indirectly, or announce the offering of,
any debt securities issued or guaranteed by us for a period of 90 days from the
date of this prospectus supplement without the prior written consent of Salomon
Smith Barney Inc.
S-67
<PAGE>
LEGAL MATTERS
The legality of the notes offered hereby is being passed upon for us by Hogan
& Hartson L.L.P., Washington, D.C., our special counsel. Certain legal matters
relating to this offering are being passed upon for the underwriters by Mayer,
Brown & Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, incorporated by reference in this
prospectus supplement and accompanying prospectus 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, incorporated by reference in this registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus supplement
forms a part. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about us and the notes
offered hereby. The rules and regulations of the SEC allow us to omit some of
the information included in the registration statement from this prospectus
supplement.
In addition, we have filed reports, proxy statements and other information
with the SEC under the Securities Exchange Act. You may read and copy any of
this information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-
2511
You may obtain information on the operation of the SEC's Public Reference
Room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC file
number for our documents filed under the Securities Exchange Act is 0-20763.
The SEC also maintains an Internet web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information into this
prospectus supplement and accompanying prospectus. This means we can disclose
important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is
considered to be a part of this prospectus supplement, except for any such
information that is superseded by information included directly in this
document.
S-68
<PAGE>
This prospectus supplement incorporates by reference the documents listed
below that we have previously filed or will file with the SEC. They contain
important information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1999, filed on March 30, 2000
. Our Quarterly Reports on Form 10-Q for our quarterly periods ended March
31, 2000, June 30, 2000, and September 30, 2000, filed on May 15, 2000,
August 14, 2000, and November 13, 2000, respectively
. Our Current Reports on Form 8-K filed on April 14, 2000, June 1, 2000,
October 13, 2000, October 27, 2000, November 9, 2000, and December 12,
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 supplement and before the offering is terminated, are
considered to be a part of this prospectus, effective the date such
documents are filed
. The consolidated financial statements of Splitrock Services, Inc. and
subsidiary appearing on pages F-1 through F-18 of the Registration
Statement on Form S-4 (Registration No. 333-48248) filed on October 19,
2000
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 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.
S-69
<PAGE>
P R O S P E C T U S [McLEODUSA LOGO]
$1,750,000,000
McLeodUSA Incorporated
Class A Common Stock, Preferred Stock, Depositary Shares, Debt Securities,
Warrants, Subscription Rights, Stock Purchase Contracts and Stock Purchase
Units
We may offer, from time to time, in one or more series or classes the
following securities:
. Class A common stock
. preferred stock
. preferred stock represented by depositary shares
. debt securities
. warrants to purchase debt securities, Class A common stock, preferred
stock or depositary shares
. subscription rights to purchase any of the above securities
. stock purchase contracts and stock purchase units
The aggregate initial offering price of these securities will not exceed
$1,750,000,000.
We will provide you with specific terms of the applicable offered securities
in supplements to this prospectus. The terms of the securities will include the
initial offering price, aggregate amount of the offering, listing on any
securities exchange or market, risk factors and the agents, dealers or
underwriters, if any, to be used in connection with the sale of these
securities.
You should read this prospectus and any prospectus supplement carefully
before you decide to invest. This prospectus may not be used to consummate
sales of the offered securities unless it is accompanied by a prospectus
supplement describing the method and terms of the offering of those offered
securities.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these offered securities or
determined if this prospectus is truthful or complete. It is illegal for
any person to tell you otherwise.
The date of this Prospectus is August 5, 1999.
<PAGE>
You should rely only on the information provided or incorporated by reference
in this prospectus or any applicable prospectus supplement. We have not
authorized anyone to provide you with different or inconsistent information.
You should assume that the information in this prospectus or any applicable
prospectus supplement is accurate only as of the date on the front cover of
such documents. Our business, financial information, results of operations and
prospects may have changed since those dates.
If it is against the law in any state to make an offer to sell these
securities (or to solicit an offer from someone to buy these securities), then
this offer does not apply to any person in that state, and no offer or
solicitation is made by this prospectus to any such person.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
About This Prospectus....................................................... 1
Where You Can Find More Information......................................... 1
Cautionary Note Regarding Forward-Looking Statements........................ 2
About McLeodUSA............................................................. 3
Coverage Ratios............................................................. 4
Use of Proceeds............................................................. 4
Description of Common Stock................................................. 5
Description of Preferred Stock.............................................. 10
Description of Depositary Shares............................................ 13
Description of Debt Securities.............................................. 16
Description of Warrants..................................................... 27
Description of Stock Purchase Contracts and Stock Purchase Units............ 29
Description of Subscription Rights.......................................... 30
Plan of Distribution........................................................ 31
Legal Matters............................................................... 32
Experts..................................................................... 32
</TABLE>
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
the shelf process, we may sell any combination of the securities described in
this prospectus in one or more offerings up to a total dollar amount of
$1,750,000,000. This prospectus provides you with a general description of the
securities we may offer. Each time we sell securities, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement also may add, update or change
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement, together with the additional information
described below under the heading "Where You Can Find More Information."
As used in this prospectus, "McLeodUSA," "the company," "we," "us," and "our"
refer to McLeodUSA Incorporated, a Delaware corporation, and its subsidiaries.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement of which this prospectus forms a part.
The registration statement, including the attached exhibits and schedules,
contains additional relevant information about us and the securities offered by
this prospectus. The rules and regulations of the SEC allow us to omit some of
the information included in the registration statement from this prospectus and
any applicable prospectus supplement.
We file reports, proxy statements and other information with the SEC under
the Securities Exchange Act of 1934. You may read and copy any of this
information at the following locations of the SEC:
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
You may obtain information on the operation of the SEC's Public Reference
Room in Washington, D.C. by calling the SEC at 1-800-SEC-0330. The SEC file
number for our documents filed under the Securities Exchange Act is 0-20763.
The SEC also maintains an Internet Web site that contains reports, proxy
statements and other information regarding issuers, like McLeodUSA, that file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows us to "incorporate by reference" information into this
prospectus. This means we can disclose important information to you by
referring you to another document filed separately with the SEC. The
information incorporated by reference is considered to be a part of this
prospectus, except for any such information that is superseded by information
included directly in this document or any prospectus supplement.
This prospectus incorporates by reference the documents listed below that we
have previously filed or will file with the SEC. They contain important
information about us and our financial condition.
. Our Annual Report on Form 10-K for our fiscal year ended December 31,
1998, filed on March 24, 1999, as amended by Form 10-K/A filed on April
22, 1999
. Our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1999, filed on May 17, 1999
. Our Current Reports on Form 8-K filed on April 15, 1999, April 16, 1999,
June 17, 1999 and July 2, 1999 and August 4, 1999
1
<PAGE>
. All documents filed subsequent to the date of this prospectus pursuant
to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
until all of the securities offered by this prospectus are sold,
effective the date such documents are filed
. The description of our Class A common stock set forth in our
registration statement filed under Section 12 of the Securities Exchange
Act on Form 8-A on May 24, 1996, including any amendment or report filed
with the SEC for the purpose of updating such description
. The consolidated financial statements of Ovation Communications, Inc.
and subsidiaries appearing on pages F-1 through F-17 of our definitive
prospectus dated March 24, 1999 and filed with the SEC on March 26, 1999
pursuant to Rule 424(b) under the Securities Act of 1933 as part of our
Registration Statement on Form S-4 (Registration No. 333-71811)
In the event of conflicting information in these documents, the information
in the latest filed document should be considered correct.
You can obtain any of the documents listed above from the SEC, through the
SEC's Web site at the address described above, or directly from us, by
requesting them in writing or by telephone at the following address:
McLeodUSA Incorporated
McLeodUSA Technology Park
6400 C Street SW, P.O. Box 3177
Cedar Rapids, IA 52406-3177
Attn: General Counsel
Telephone (319) 364-0000
We will provide a copy of any of these documents without charge, excluding
any exhibits unless the exhibit is specifically listed as an exhibit to the
registration statement of which this prospectus forms a part. If you request
any documents from us, we will mail them to you by first class mail, or another
equally prompt means, within two business days after we receive your request.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the information incorporated by reference in it include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act. We intend the
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in these sections. All statements regarding our
expected financial position and operating results, our business strategy, our
financing plans, our future capital requirements, forecasted demographic and
economic trends relating to our industry, our ability to complete acquisitions,
to realize anticipated cost savings and other benefits from acquisitions and to
recover acquisition-related costs, and similar matters are forward-looking
statements. These statements are subject to known and unknown risks,
uncertainties and other factors that could cause our actual results to differ
materially from the statements. The forward-looking information is based on
various factors and was derived using numerous assumptions. In some cases, you
can identify these statements by our use of forward-looking words such as
"may," "will," "should," "anticipate," "estimate," "expect," "plan," "believe,"
"predict," "potential" or "intend." You should be aware that these statements
only reflect our predictions. Actual events or results may differ
substantially. Important factors that could cause our actual results to be
materially different from our expectations include those discussed in the
applicable prospectus supplement under the caption "Risk Factors." We undertake
no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
2
<PAGE>
ABOUT McLEODUSA
The following summary highlights selected information regarding McLeodUSA. It
does not contain all of the information that is important to you. You should
carefully read this entire prospectus and any prospectus supplement, together
with the other documents to which this prospectus and any prospectus supplement
refers you. In addition, you should carefully consider the factors set forth
under the caption "Risk Factors" in the applicable prospectus supplement.
Unless otherwise indicated, dollar amounts over $1 million have been rounded to
one decimal place and dollar amounts less than $1 million have been rounded to
the nearest thousand.
Our Company
We provide communications services to business and residential customers in
the Midwestern and Rocky Mountain regions of the United States. We offer local,
long distance, Internet access, data, voice mail and paging services, from a
single company on a single bill. We believe we are the first company in many of
our markets to offer one-stop shopping for communications services tailored to
customers' specific needs.
Our approach makes it easier for both our business and our residential
customers to satisfy their communications needs. It also allows businesses to
receive customized services, such as competitive long distance pricing and
enhanced calling features, that might not otherwise be directly available on a
cost-effective basis.
In addition to our core business of providing competitive local, long
distance and related communications services, we also derive revenue from:
. sale of advertising space in telephone directories
. traditional local telephone company services in east central Illinois and
southeast South Dakota
. special access, private line and data services
. communications network maintenance services
. telephone equipment sales, leasing, service and installation
. video services
. telemarketing services
. computer networking services
. other communications services, including cellular, operator, payphone,
mobile radio, paging services and Web site development and hosting
In most of our markets, we compete with the existing local phone company by
leasing its lines and switches. In other markets, primarily in east central
Illinois and southeast South Dakota, we operate our own lines and switches. We
provide long distance services by using our own communications network
facilities and leasing capacity from long distance and local communications
providers. We are constructing fiber optic communications networks in Iowa,
Illinois, Wisconsin, Indiana, Missouri, Michigan, Minnesota, South Dakota,
North Dakota, Colorado and Wyoming to carry additional communications traffic
on our own network.
----------------
Our principal executive offices are located at McLeodUSA Technology Park,
6400 C Street SW, P.O. Box 3177, Cedar Rapids, Iowa 52406-3177, and our phone
number is (319) 364-0000.
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COVERAGE RATIOS
For each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998,
earnings were insufficient to cover fixed charges by $11.4 million, $11.4
million, $22.6 million, $84.4 million and $135.5 million, respectively. For the
three months ended March 31, 1998 and 1999, earnings were insufficient to cover
fixed charges by $32.0 million and $51.7 million, respectively. For the purpose
of calculating the ratio of earnings to fixed charges, earnings consist of net
loss before income taxes plus fixed charges (excluding capitalized interest).
Fixed charges consist of interest on all debt (including capitalized interest),
amortization of debt discount and deferred loan costs and the portion of rental
expense that is representative of the interest component of rental expense
(deemed to be one-third of rental expense which management believes is a
reasonable approximation of the interest component). Because we did not have
any preferred stock outstanding during any of these periods, the ratio of
earnings to fixed charges and preferred stock dividends is the same as the
ratio of earnings to fixed charges.
USE OF PROCEEDS
Unless we specify otherwise in the applicable prospectus supplement, we will
use the net proceeds from the sale of the offered securities for general
corporate purposes, including working capital, the repayment or refinancing of
our indebtedness, future acquisitions and/or capital expenditures. Until we
apply the net proceeds for specific purposes, we may invest such net proceeds
in short-term or marketable securities.
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DESCRIPTION OF COMMON STOCK
The following summary description of our capital stock is based on the
provisions of our certificate of incorporation and bylaws and the applicable
provisions of the Delaware General Corporation Law. For information on how to
obtain copies of our certificate of incorporation and bylaws, see "Where You
Can Find More Information."
General
Under our certificate of incorporation, we have authority to issue
274,000,000 shares of capital stock, consisting of 250,000,000 shares of Class
A common stock, 22,000,000 shares of Class B common stock and 2,000,000 shares
of preferred stock. We have declared a two-for-one stock split to be effected
in the form of a stock dividend for our Class A common stock. The record date
for the stock split was July 12, 1999 and distribution of the additional shares
took place on July 26, 1999. Giving effect to this stock split, we had issued
and outstanding as of July 1, 1999, 150,417,738 shares of our Class A common
stock, no shares of our Class B common stock and no shares of our preferred
stock.
The rights of the holders of our Class A common stock and our Class B common
stock discussed below are subject to such rights as our board of directors may
from time to time confer on holders of our preferred stock that may be issued
in the future. Such rights may adversely affect the rights of holders of our
Class A common stock or our Class B common stock, or both.
Class A Common Stock
Voting Rights. Each holder of our Class A common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of all other classes of stock entitled to vote at such meetings, to
vote upon any matter, including, without limitation, the election of directors.
Holders of our Class A common stock are entitled to one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class A
common stock, the holders of our Class B common stock and the holders of any
class or series of stock entitled to participate with our Class A and Class B
common stock, will become entitled to participate in the distribution of any of
our assets remaining after we have paid, or provided for payment of, all of our
debts and liabilities and after we have paid, or set aside for payment, to the
holders of any class of stock having preference over our Class A common stock
in the event of dissolution, liquidation or winding up, the full preferential
amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on our Class A common stock, our Class B
common stock and on any class or series of stock entitled to participate with
our Class A and Class B common stock when and as declared by our board of
directors. We have never paid, however, any cash dividends and the indentures
governing our outstanding debt securities prohibit us from paying cash
dividends.
No Preemptive or Conversion Rights. The holders of our Class A common stock
have no preemptive or subscription rights to purchase additional securities
issued by us nor any rights to convert their Class A common stock into other of
our securities or to have their shares redeemed by us.
Class B Common Stock
Voting Rights. Each holder of our Class B common stock is entitled to attend
all special and annual meetings of our stockholders and, together with the
holders of all other classes of stock entitled to vote at such meetings, to
vote upon any matter or thing, including, without limitation, the election of
directors. Holders of our Class B common stock are entitled to .40 vote per
share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of McLeodUSA, whether voluntary or involuntary, the holders of our Class B
common stock, the holders of our Class A common stock
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and the holders of any class or series of stock entitled to participate with
our Class B and Class A common stock, will become entitled to participate in
the distribution of any of our assets remaining after we have paid, or provided
for payment of, all of our debts and liabilities and after we have paid, or set
aside for payment, to the holders of any class of stock having preference over
our Class B common stock in the event of dissolution, liquidation or winding up
the full preferential amounts, if any, to which they are entitled.
Dividends. Dividends may be paid on our Class B common stock, our Class A
common stock and on any class or series of stock entitled to participate with
our Class B and Class A common stock when and as declared by our board of
directors.
Conversion into Our Class A Common Stock; No Other Preemptive or Conversion
Rights. The shares of our Class B common stock may be converted at any time at
the option of the holder into fully paid and nonassessable shares of our Class
A common stock at the rate of one share of our Class A common stock for each
share of Class B common stock, as adjusted for any stock split. Except for this
conversion right, the holders of our Class B common stock have no preemptive or
subscription rights to purchase additional securities issued by us nor any
rights to convert their Class B common stock into other of our securities or to
have their shares redeemed by us.
Certain Charter and Statutory Provisions
Classified Board. Our certificate of incorporation provides for the division
of our board of directors into three classes of directors, serving staggered
three-year terms. Our certificate of incorporation further provides that the
approval of the holders of at least two-thirds of the shares entitled to vote
thereon and the approval of a majority of our entire board of directors are
necessary for the alteration, amendment or repeal of certain sections of our
certificate of incorporation relating to the election and classification of our
board of directors, limitation of director liability, indemnification and the
vote requirements for such amendments to our certificate of incorporation.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of our company.
Certain Statutory Provisions. We are subject to the provisions of Section 203
of the Delaware General Corporation Law. In general, this statute prohibits a
publicly held Delaware corporation like us from engaging in a business
combination with an interested stockholder for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless
. before such date, the corporation's board of directors approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder,
. upon consummation of the transaction that resulted in such person
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, shares owned by certain directors or
certain employee stock plans, or
. on or after the date the stockholder became an interested stockholder,
the business combination is approved by the corporation's board of
directors and authorized by the affirmative vote, and not by written
consent, of at least two-thirds of the outstanding voting stock of the
corporation excluding that stock owned by the interested stockholder.
A "business combination" includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An "interested
stockholder" is a person, other than the corporation and any direct or indirect
wholly owned subsidiary of the corporation, who together with affiliates and
associates, owns or, as an affiliate or associate, within three years prior,
did own 15% or more of the corporation's outstanding voting stock.
Section 203 expressly exempts from the requirements described above any
business combination by a corporation with an interested stockholder who became
an interested stockholder at a time when the section did not apply to the
corporation. As permitted by the Delaware General Corporation Law, our original
certificate of incorporation provided that it would not be governed by Section
203. Several of our stockholders, including
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Clark E. and Mary E. McLeod and Interstate Energy Corporation became interested
stockholders within the meaning of Section 203 while that certificate of
incorporation was in effect. Accordingly, future transactions between us and
any of these stockholders will not be subject to the requirements of Section
203.
Our certificate of incorporation empowers our board of directors to redeem
any of our outstanding capital stock at a price determined by our board of
directors, which price will be at least equal to the lesser of
. fair market value, as determined in accordance with our certificate of
incorporation, or
. in the case of a "Disqualified Holder," such holder's purchase price, if
the stock was purchased within one year of such redemption,
to the extent necessary to prevent the loss or secure the reinstatement of any
license, operating authority or franchise from any governmental agency. A
"Disqualified Holder" is any holder of shares of our capital stock whose
holding of such stock may result in the loss of, or failure to secure the
reinstatement of, any license or franchise from any governmental agency held by
us or any of our subsidiaries to conduct any portion of our business or the
business of any of our subsidiaries. Under the Telecommunications Act of 1996,
non-U.S. citizens or their representatives, foreign governments or their
representatives, or corporations organized under the laws of a foreign country
may not own, in the aggregate, more than 20% of a common carrier licensee or
more than 25% of the parent of a common carrier licensee if the Federal
Communications Commission, or FCC, determines that the public interest would be
served by prohibiting such ownership. Additionally, the FCC's rules may under
some conditions limit the size of investments by foreign telecommunications
carriers in U.S. international carriers.
Limitation of Liability and Indemnification
Limitations of Director Liability. Section 102(b)(7) of the Delaware General
Corporation Law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. Although Section
102(b)(7) does not change directors' duty of care, it enables corporations to
limit available relief to equitable remedies such as injunction or rescission.
Our certificate of incorporation limits the liability of our directors to us or
our stockholders to the full extent permitted by Section 102(b)(7).
Specifically, our directors are not personally liable for monetary damages to
us or our stockholders for breach of the director's fiduciary duty as a
director, except for liability for:
. any breach of the director's duty of loyalty to us or our stockholders
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law
. any transaction from which the director derived an improper personal
benefit
Indemnification. To the maximum extent permitted by law, our bylaws provide
for mandatory indemnification of our directors and officers against any
expense, liability or loss to which they may become subject, or which they may
incur as a result of being or having been a director or officer of McLeodUSA.
In addition, we must advance or reimburse directors and officers for expenses
incurred by them in connection with indemnifiable claims. We also maintain
directors' and officers' liability insurance.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock is Norwest Bank
Minnesota, N.A.
Stockholders' Agreements
On November 18, 1998, we entered into a stockholders' agreement (the
"Stockholders' Agreement") with several of our significant stockholders
consisting of IES Investments Inc. (a subsidiary of Interstate Energy), Clark
E. and Mary E. McLeod, and Richard A. and Gail G. Lumpkin and several other
parties related to the Lumpkins.
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The Stockholders' Agreement provides, among other things, that:
. until December 31, 2001, the parties will not sell any of our equity
securities without receiving the prior written consent of our board of
directors, except for transfers specifically permitted by the
Stockholders' Agreement
. our board of directors will determine on a quarterly basis starting with
the quarter ending December 31, 1998 and ending on December 31, 2001, the
aggregate number, if any, of shares of our Class A common stock, not to
exceed in the aggregate 150,000 shares per quarter, that the parties may
sell during designated trading periods following the release of our
quarterly or annual financial results
. to the extent our board of directors grants registration rights to a
party to the agreement in connection with a sale of our securities by
such party, it will grant similar registration rights to the other
parties
. our board of directors will determine on an annual basis commencing with
the year ending December 31, 1999 and ending on December 31, 2001 (each
such year, an "Annual Period"), the aggregate number, if any, of shares
of our Class A common stock, not to exceed in the aggregate on an annual
basis a number of shares equal to 15% of the total number of shares of
Class A common stock beneficially owned by the parties as of December 31,
1998 (the "Registrable Amount"), to be registered by us under the
Securities Act for sale by the parties
. in any underwritten offering of shares of Class A common stock by us,
other than an offering on a registration statement on Form S-4 or Form S-
8 or any other form which would not permit the inclusion of shares of our
Class A common stock owned by the parties, we will undertake to register
the shares of our Class A common stock of such parties up to the
Registrable Amount, if any, as determined by our board of directors
. we may subsequently determine not to register any shares of the parties
under the Securities Act and may either not file a registration statement
or otherwise withdraw or abandon a registration statement previously
filed
The Stockholders' Agreement terminates on December 31, 2001. If during any
Annual Period we have not provided a party a reasonable opportunity to sell an
aggregate number of shares of Class A common stock equal to not less than 15%
of the total number of shares of Class A common stock beneficially owned by
such party as of December 31, 1998, then such party may terminate the
Stockholders' Agreement as it applies to such party.
Under the Stockholders' Agreement, each party also agreed, until such party
owns less than 4 million shares of Class A common stock or until December 31,
2001, whichever occurs first, to vote such party's shares and take all action
within its power to:
. establish the size of our board of directors at up to 11 directors
. cause to be elected to our board of directors one director designated by
Interstate Energy for so long as IES Investments owns at least 4 million
shares of Class A common stock
. cause to be elected to our board of directors three directors who are
executive officers of McLeodUSA designated by Clark McLeod for so long as
Clark and Mary McLeod collectively own at least 4 million shares of Class
A common stock
. cause Richard Lumpkin to be elected to our board of directors for so long
as the former stockholders of Consolidated Communications, Inc. who are a
party to the agreement collectively own at least 4 million shares of
Class A common stock
. cause to be elected to our board of directors up to six non-employee
directors nominated by our board
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On January 7, 1999, in connection with the Ovation acquisition, M/C Investors
L.L.C. and Media/Communications Partners III Limited Partnership (collectively,
"M/C") entered into a separate stockholders' agreement (the "Ovation
Stockholders' Agreement") with the parties to the Stockholders' Agreement.
The Ovation Stockholders' Agreement provides that, until December 31, 2001,
M/C will not sell any of our equity securities without receiving the prior
written consent of our board of directors. The Ovation Stockholders' Agreement
also contains various provisions intended to insure that M/C is treated on a
basis similar to the parties to the Stockholders' Agreement in connection with
permitted sales of our securities under the Stockholders' Agreement generally
starting December 31, 1999. In addition, for so long as M/C owns at least 2.5
million shares of our Class A common stock, M/C has agreed to vote its shares
in accordance with the voting agreement contained in the Stockholders'
Agreement and the other partries have agreed to vote their shares to cause to
be elected to our board of directors one director designated by M/C.
The Ovation Stockholders' Agreement terminates on December 31, 2001. In
addition, if (1) during each of the years ending December 31, 2000 and December
31, 2001, we have not provided M/C a reasonable opportunity to register under
the Securities Act for sale an aggregate number of shares of our Class A common
stock equal to not less than 15% of the total number of shares of Class A
common stock beneficially owned by M/C as of March 31, 1999, or (2) after
January 1, 2000, the Stockholders' Agreement has been terminated by all parties
to such agreement, then M/C may terminate the Ovation Stockholders' Agreement.
The Ovation Stockholders' Agreement will be terminated with respect to all
parties other than M/C and us at such time as the Stockholders' Agreement is
terminated.
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DESCRIPTION OF PREFERRED STOCK
The following description is a general summary of the terms of the preferred
stock which we may issue. The description below and in any prospectus
supplement does not purport to be complete and is subject to and qualified in
its entirety by reference to our certificate of incorporation, the applicable
certificate of designations to our certificate of incorporation which will
determine the terms of the related series of preferred stock and our bylaws,
each of which will be made available upon request.
General
Our certificate of incorporation authorizes our board of directors, from time
to time and without further stockholder action, to provide for the issuance of
up to 2,000,000 shares of preferred stock, par value $.01 per share, in one or
more series, and to fix the relative rights and preferences of the shares,
including voting powers, dividend rights, liquidation preferences, redemption
rights and conversion privileges. As of the date of this prospectus, no shares
of preferred stock are outstanding. As a result of its broad discretion with
respect to the creation and issuance of preferred stock without stockholder
approval, the board of directors could adversely affect the voting power of the
holders of our Class A common stock and Class B common stock and, by issuing
shares of preferred stock with certain voting, conversion and/or redemption
rights, may discourage any attempt to obtain control of us.
The rights, preferences, privileges and restrictions of the preferred stock
of each series will be fixed by the certificate of designations relating to
such issues. You should refer to the prospectus supplement relating to the
class or series of preferred stock being offered for the specific terms of that
class or series, including:
(1) the title and stated value of the preferred stock being offered
(2) the number of shares of preferred stock being offered, their
liquidation preference per share, if any, and their purchase price
(3) the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculating the payment date(s) applicable to the preferred stock
being offered
(4) whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on the preferred stock being
offered shall accumulate
(5) the procedures for any auction and remarketing, if any, for the
preferred stock being offered
(6) the provisions for a sinking fund, if any, for the preferred stock
being offered
(7) the provisions for redemption, if applicable, of the preferred stock
being offered
(8) any listing of the preferred stock being offered on any securities
exchange or market
(9) the terms and conditions, if applicable, upon which the preferred
stock being offered will be convertible into, or exchangeable for, our
Class A common stock or debt securities, including the conversion or
exchange price, or the manner of calculating the price, and the
conversion or exchange period
(10) voting rights, if any, of the preferred stock being offered
(11) whether interests in the preferred stock being offered will be
represented by depositary shares
(12) a discussion of any material and/or special United States federal
income tax considerations applicable to the preferred stock being
offered
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(13) the relative ranking and preferences of the preferred stock being
offered as to dividend rights and rights upon liquidation,
dissolution or winding up of our affairs
(14) any limitations on the issuance of any class or series of preferred
stock ranking senior to or on a parity with the series of preferred
stock being offered as to dividend rights and rights upon
liquidation, dissolution or winding up of our affairs
(15) any other specific terms, preferences, rights, limitations or
restrictions of the preferred stock being offered
Rank
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of McLeodUSA, rank:
(1) senior to all of our classes or series of common stock and to all
equity securities the terms of which specifically provide that such
equity securities rank junior to the preferred stock being offered
(2) on a parity with all equity securities we have issued, other than
those referred to in clauses (1) and (3) of this subheading
(3) junior to all equity securities we have issued, the terms of which
specifically provide that such equity securities rank senior to the
preferred stock being offered
For purposes of this description, the term "equity securities" does not include
convertible debt securities.
Distributions
Holders of the preferred stock of each series will be entitled to receive,
when, as and if declared by our board of directors, out of our assets legally
available for payment to stockholders, cash distributions, or distributions in
kind or in other property if expressly permitted and described in the
applicable prospectus supplement, at such rates and on such dates as will be
set forth in the applicable prospectus supplement. Each such distribution shall
be payable to holders of record as they appear on our stock transfer books on
such record dates as shall be fixed by our board of directors. Distributions on
any series of preferred stock, if cumulative, will be cumulative from and after
the date set forth in the applicable prospectus supplement.
Redemption
The terms and conditions, if any, upon which the preferred stock will be
subject to mandatory redemption or redemption at our option, either in whole or
in part, will be described in the applicable prospectus supplement.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of
our affairs, then, before any distribution or payment shall be made to the
holders of any Class A common stock or Class B common stock or any other class
or series of shares of our capital stock ranking junior to the preferred stock
in the distribution of assets upon any liquidation, dissolution or winding up
of our company, the holders of each series of preferred stock shall be entitled
to receive out of our assets legally available for distribution to stockholders
liquidating distributions in the amount of the liquidation preference set forth
in the applicable prospectus supplement, plus an amount equal to all
accumulated and unpaid distributions. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of shares of
preferred stock will have no right or claim to any of our remaining assets. If,
upon any such voluntary or involuntary liquidation, dissolution or winding up,
our available assets are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of preferred stock and the
corresponding amounts payable on all shares of other classes or series of our
shares of capital stock ranking on a parity with the preferred stock in the
distribution of assets, then the holders of the preferred stock and all other
such classes or series of shares of capital stock shall share ratably in any
such distribution of assets in proportion to the full liquidating distributions
to which they would otherwise be respectively entitled.
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If liquidating distributions shall have been made in full to all holders of
preferred stock, our remaining assets shall be distributed among the holders of
any other classes or series of shares of capital stock ranking junior to the
preferred stock upon liquidation, dissolution or winding up, according to their
respective rights and preferences and in each case according to their
respective number of shares. For such purposes, our consolidation or merger
with or into any other corporation, trust or entity, or the sale, lease or
conveyance of all or substantially all of our property or business, shall not
be deemed to constitute a liquidation, dissolution or winding up of our
company.
Voting Rights
Holders of preferred stock will have the voting rights as indicated in the
applicable prospectus supplement.
Conversion Rights
The terms and conditions, if any, upon which any series of preferred stock is
convertible into Class A common stock will be set forth in the applicable
prospectus supplement relating thereto. Such terms will include the number of
shares of Class A common stock into which the shares of preferred stock are
convertible, the conversion price or the manner of calculating the conversion
price, the conversion date(s) or period(s), provisions as to whether conversion
will be at the option of the holders of the preferred stock or at our option,
the events requiring an adjustment of the conversion price and provisions
affecting conversion in the event of the redemption of such series of preferred
stock.
Transfer Agent and Registrar
The transfer agent and registrar for the preferred stock will be set forth in
the applicable prospectus supplement.
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DESCRIPTION OF DEPOSITARY SHARES
The following description is a general summary of the terms of the depositary
shares which we may issue. This summary does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, all of the
provisions of the applicable Deposit Agreement and related depositary receipts.
General
We may issue depositary receipts for depositary shares, each of which will
represent a fractional interest of a share of a particular series of preferred
stock, as specified in the applicable prospectus supplement. Shares of
preferred stock of each series represented by depositary shares will be
deposited under a separate Deposit Agreement between the "depositary" named in
the Deposit Agreement and us. Subject to the terms of the Deposit Agreement,
each owner of a depositary receipt will be entitled, in proportion to the
fractional interest of a share of a particular series of preferred stock
represented by the depositary shares evidenced by that depositary receipt, to
all the rights and preferences of the preferred stock represented by those
depositary shares, including dividend, voting, conversion, redemption and
liquidation rights.
The depositary shares will be evidenced by depositary receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of our preferred stock to the depositary, we will cause
the depositary to issue, on our behalf, the depositary receipts. Copies of the
applicable form of Deposit Agreement and depositary receipt may be obtained
from us upon request, and the statements made in this summary relating to the
Deposit Agreement and the depositary receipts to be issued under the Deposit
Agreement are summaries of provisions of the Deposit Agreement and the related
depositary receipts.
Dividends and Other Distributions
The depositary will distribute all cash dividends or other cash distributions
received in respect of the preferred stock to the record holders of depositary
receipts evidencing the related depositary shares in proportion to the number
of such depositary receipts owned by such holders, subject to the obligations
of holders to file proofs, certificates and other information and to pay some
charges and expenses to the depositary.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
entitled to that property, subject to the obligations of holders to file
proofs, certificates and other information and to pay some charges and expenses
to the depositary, unless the depositary determines that it is not feasible to
make the distribution, in which case the depositary may, with our approval,
sell the property and distribute the net proceeds from the sale to the holders.
No distribution will be made in respect of any depositary share to the extent
that it represents any preferred stock converted into other securities.
Withdrawal of Preferred Stock
Upon surrender of the depositary receipts at the corporate trust office of
the depositary, unless the related depositary shares have previously been
called for redemption or converted into other securities, the holders of those
depositary receipts will be entitled to delivery at the corporate trust office,
to or upon the holder's order, of the number of whole or fractional shares of
the preferred stock and any money or other property represented by the
depositary shares evidenced by the depositary receipts. Holders of depositary
receipts will be entitled to receive whole or fractional shares of the related
preferred stock on the basis of the proportion of preferred stock represented
by the depositary share as specified in the applicable prospectus supplement,
but holders of the shares of preferred stock will not thereafter be entitled to
receive depositary shares therefor. If the depositary receipts delivered by the
holder evidence a number of depositary shares in excess of the number of
depositary shares representing the number of shares of preferred stock to be
withdrawn, the depositary will deliver to the holder at the same time a new
depositary receipt evidencing the excess number of depositary shares.
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Redemption of Depositary Shares
Whenever we redeem shares of preferred stock held by the depositary, the
depositary will redeem, as of the same redemption date, the number of
depositary shares representing shares of the preferred stock so redeemed,
provided we have paid in full to the depositary the redemption price of the
preferred stock to be redeemed plus an amount equal to any accrued and unpaid
dividends thereon to the date fixed for redemption. The redemption price per
depositary share will be equal to the corresponding proportion of the
redemption price and any other amounts per share payable with respect to the
preferred stock. If fewer than all the depositary shares are to be redeemed,
the depositary shares to be redeemed will be selected pro rata, as nearly as
may be practicable without creating fractional depositary shares, or by another
equitable method.
From and after the date fixed for redemption, all dividends in respect of the
shares of preferred stock called for redemption will cease to accrue, the
depositary shares called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the depositary receipts evidencing
the depositary shares called for redemption will cease, except the right to
receive any moneys payable upon the redemption and any money or other property
to which the holders of the depositary receipts were entitled upon the
redemption and surrender thereof to the depositary.
Voting of the Preferred Stock
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in the notice of meeting to the record holders of the depositary receipts
evidencing the depositary shares which represent such preferred stock. Each
record holder of depositary receipts evidencing depositary shares on the record
date, which will be the same date as the record date for the preferred stock,
will be entitled to instruct the depositary as to the exercise of the voting
rights pertaining to the amount of preferred stock represented by the holder's
depositary shares. The depositary will vote the amount of preferred stock
represented by the depositary shares in accordance with the instructions, and
we will agree to take all reasonable action which may be deemed necessary by
the depositary in order to enable the depositary to do so. The depositary will
abstain from voting the amount of preferred stock represented by the depositary
shares to the extent it does not receive specific instructions from the holders
of depositary receipts evidencing the depositary shares. The depositary shall
not be responsible for any failure to carry out any instruction to vote, or for
the manner or effect of any such vote made, as long as such action or non-
action is in good faith and does not result from negligence or willful
misconduct of the depositary.
Liquidation Preference
In the event of our liquidation, dissolution or winding up, whether voluntary
or involuntary, the holders of each depositary receipt will be entitled to the
fraction of the liquidation preference accorded each share of preferred stock
represented by the depositary shares evidenced by such depositary receipt, as
set forth in the applicable prospectus supplement.
Conversion of Preferred Stock
The depositary shares, as such, are not convertible into our common stock or
any of our other securities or property. Nevertheless, if specified in the
applicable prospectus supplement relating to an offering of depositary shares,
the depositary receipts may be surrendered by their holders to the depositary
with written instructions to the depositary to instruct us to cause conversion
of the preferred stock represented by the depositary shares evidenced by the
depositary receipts into whole shares of our Class A common stock, other shares
of our preferred stock or other of our equity or debt securities, and we have
agreed that upon receipt of those instructions and any amounts payable in
respect thereof, we will cause the conversion thereof utilizing the same
procedures as those provided for delivery of preferred stock to effect such
conversion. If the depositary shares evidenced by a depositary receipt are to
be converted in part only, a new depositary receipt or receipts will be issued
for any depositary shares not to be converted. No fractional shares of Class A
common stock will be issued upon conversion, and if such conversion would
result in a fractional share being issued, we will pay an amount in cash equal
to the value of the fractional interest based upon the average of the closing
prices of the Class A common stock for a specified period of time prior to the
conversion.
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Amendment and Termination of the Deposit Agreement
The form of depositary receipt evidencing the depositary shares which
represent the preferred stock and any provision of the Deposit Agreement may
at any time be amended by agreement between the depositary and us. However,
any amendment that materially and adversely alters the rights of the holders
of depositary receipts or that would be materially and adversely inconsistent
with the rights granted to the holders of the related preferred stock will not
be effective unless such amendment has been approved by the existing holders
of at least a majority of the depositary shares evidenced by the depositary
receipts then outstanding. No amendment shall impair the right, subject to
certain exceptions in the Deposit Agreement, of any holder of depositary
receipts to surrender any depositary receipt with instructions to deliver to
the holder the related preferred stock and all money and other property, if
any, represented thereby, except in order to comply with law. Every holder of
an outstanding depositary receipt at the time any such amendment becomes
effective shall be deemed, by continuing to hold such receipt, to consent and
agree to such amendment and to be bound by the Deposit Agreement as amended
thereby.
Unless specified otherwise in the applicable prospectus supplement, we may
terminate the Deposit Agreement upon not less than 30 days prior written
notice to the depositary if a majority of each class of depositary shares
affected by such termination consents, whereupon the depositary shall deliver
or make available to each holder of depositary receipts, upon surrender of the
depositary receipts held by such holder, such number of whole or fractional
shares of preferred stock as are represented by the depositary shares
evidenced by such depositary receipts together with any other property held by
the depositary with respect to such depositary receipt. In addition, the
Deposit Agreement will automatically terminate if:
(1) all outstanding depositary shares shall have been redeemed
(2) there shall have been a final distribution in respect of the related
preferred stock in connection with any liquidation, dissolution or
winding up of our company and such distribution shall have been
distributed to the holders of depositary receipts evidencing the
depositary shares representing such preferred stock
(3) each share of the related preferred stock shall have been converted
into our securities not represented by depositary shares
Charges of Preferred Stock Depositary
We will pay all transfer and other taxes and governmental charges arising
solely from the existence of the Deposit Agreement. In addition, we will pay
the fees and expenses of the depositary in connection with the performance of
its duties under the Deposit Agreement. However, holders of depositary
receipts will pay the fees and expenses of the depositary for any duties
requested by such holders to be performed which are outside of those expressly
provided for in the Deposit Agreement.
Miscellaneous
The depositary will forward to holders of depositary receipts any reports
and communications from us which are received by the depositary with respect
to the related preferred stock.
Unless specified otherwise in the applicable prospectus supplement, neither
we nor the depositary will be liable if either of us is prevented from or
delayed in, by law or any circumstances beyond its control, performing its
obligations under the Deposit Agreement. The obligations of the depositary and
our company under the Deposit Agreement will be limited to performing their
duties thereunder in good faith and without negligence, in the case of any
action or inaction in the voting of preferred stock represented by the
depositary shares, gross negligence or willful misconduct, and we and the
depositary will not be obligated to prosecute or defend any legal proceeding
in respect of any depositary receipts, depositary shares or shares of
preferred stock represented thereby unless satisfactory indemnity is
furnished. We and the depositary may rely on written advice of counsel or
accountants, or information provided by persons presenting shares of preferred
stock represented thereby for deposit, holders of depositary receipts or other
persons believed in good faith to be competent to give such information, and
on documents believed in good faith to be genuine and signed by a proper
party.
In the event the depositary shall receive conflicting claims, requests or
instructions from any holders of depositary receipts, on the one hand, and us,
on the other hand, the depositary shall be entitled to act on such claims,
requests or instructions received from us.
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DESCRIPTION OF DEBT SECURITIES
The following discussion describes certain general provisions of the debt
securities to which this prospectus and any applicable prospectus supplement
may relate. The particular terms of the debt securities being offered and the
extent to which these general provisions may apply will be set forth in the
indenture or supplemental indenture under which the particular debt securities
are issued, and will be described in a prospectus supplement relating to such
debt securities. A form of the senior indenture and a form of the subordinated
indenture under which the debt securities may be issued have been filed as
exhibits to the registration statement of which this prospectus is a part. All
section references appearing in this prospectus are to sections of each
indenture unless otherwise indicated, and capitalized terms used but not
defined below shall have the respective meanings set forth in each Indenture.
General
Our debt securities will be unsecured general obligations and may be either
senior debt securities, which we refer to as Senior Securities, or subordinated
debt securities, which we refer to as Subordinated Securities. The debt
securities will be issued pursuant to a written agreement, known as an
Indenture, to be entered into by us and an independent third party, known as a
Trustee, who will be legally obligated to carry out the terms of the Indenture.
Senior Securities and Subordinated Securities will be issued under separate
indentures referred to as a Senior Indenture and a Subordinated Indenture,
respectively, or together referred to as the Indentures. The statements made
under this heading relating to the debt securities and the Indentures are
summaries of their anticipated provisions, do not purport to be complete and
are qualified in their entirety by reference to the Indentures and the debt
securities themselves.
The indebtedness represented by Subordinated Securities will be subordinated
in right of payment to the prior payment in full of our Senior Indebtedness
(which term includes our Senior Securities), as described below under "--
Ranking."
All of our operations are conducted through subsidiaries. Our subsidiaries
are separate and distinct legal entities and have no obligation, contingent or
otherwise, to pay any amounts due pursuant to the debt securities or to make
any funds available therefor, whether by dividends, loans or other payments,
other than as expressly provided in a guarantee. The payment of dividends or
the making of loans and advances to us by our subsidiaries may be subject to
contractual, statutory or regulatory restrictions, which, if material, would be
disclosed in the applicable prospectus supplement. Moreover, such payments,
loans and advances would be contingent upon the earnings of the subsidiaries.
Any right we may have to receive assets of any of our subsidiaries upon
liquidation or recapitalization of the subsidiaries (and the consequent right
of the holders of debt securities to participate in those assets) will be
subject to the claims of the subsidiaries' creditors. In the event that we are
recognized as a creditor of a subsidiary, our claims would still be subject to
any security interest in the assets of such subsidiary and any indebtedness of
such subsidiary senior to that of the debt securities, and would be dependent
primarily upon the receipt of funds from our subsidiaries.
Except as set forth in the applicable Indenture or in one or more
supplemental indentures and described in an applicable prospectus supplement,
the debt securities may be issued without limit as to aggregate principal
amount, in one or more series, in each case as established from time to time in
or under authority granted by a resolution of our board of directors or as
established in the applicable Indenture or in one or more supplemental
indentures. All debt securities of one series need not be issued at the same
time and, unless otherwise provided, a series may be reopened, without the
consent of the holders of the debt securities of such series, for issuances of
additional debt securities of such series.
It is expected that each Indenture will provide that there may be more than
one Trustee thereunder, each with respect to one or more series of debt
securities. Any Trustee under an Indenture may resign or be removed with
respect to one or more series of debt securities, and a successor Trustee may
be appointed to act with
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respect to such series. In the event that two or more persons are acting as
Trustee with respect to different series of debt securities, each such Trustee
will be a trustee of a trust under the applicable Indenture separate and apart
from the trust administered by any other Trustee, and, except as otherwise
provided in the Indenture or supplemental indenture, any action permitted to be
taken by each Trustee may be taken by each such Trustee with respect to, and
only with respect to, the one or more series of debt securities for which it is
Trustee under the applicable Indenture.
The applicable prospectus supplement will describe the specific terms of any
series of debt securities being offered, including:
(1) The title of such debt securities and whether such debt securities are
Senior Securities or Subordinated Securities
(2) The aggregate principal amount of such debt securities and any limit
on such aggregate principal amount
(3) The percentage of the principal amount at which such debt securities
will be issued and, if other than the full principal amount thereof,
the portion of the principal amount payable upon declaration of
acceleration of the maturity thereof
(4) The date or dates, or the method for determining such date or dates,
on which the principal of such debt securities will be payable and the
amount of principal payable thereon
(5) The rate or rates (which may be fixed or variable), or the method by
which such rate or rates will be determined, at which such debt
securities will bear interest, if any
(6) The date or dates, or the method for determining such date or dates,
from which any such interest will accrue, the dates on which any such
interest will be payable, the regular record dates for such interest
payment dates, or the method by which record dates may be determined,
the persons to whom such interest will be payable, and the basis upon
which interest is to be calculated if other than a 360-day year of
twelve 30-day months
(7) The place or places where the principal of (and premium, if any) and
interest, if any, on such debt securities will be payable, where such
debt securities may be surrendered for registration of transfer or
exchange and where notices or demands to or upon us in respect of such
debt securities and the applicable Indenture may be served
(8) The period or periods within which, the price or prices at which, and
the other terms and conditions upon which, such debt securities may be
redeemed, in whole or in part, at our option if we have such an option
(9) Our obligation, if any, to redeem, repay or purchase such debt
securities pursuant to any sinking fund or analogous provision or at
the option of a holder thereof, and the period or periods within
which, the date and dates on which, the price or prices at which, and
the other terms and conditions upon which, such debt securities will
be redeemed, repaid or purchased, in whole or in part, pursuant to
such obligation
(10) If other than U.S. dollars, the currency or currencies in which such
debt securities are denominated or in which the principal of (and
premium, if any) or interest or Additional Amounts (as defined below),
if any, on the debt securities is payable, which may be a foreign
currency or units of two or more foreign currencies or a composite
currency or currencies, and the terms and conditions relating thereto
(11) Whether the amount of payments of principal of (and premium, if any)
or interest or Additional Amounts, if any, on such debt securities
may be determined with reference to an index, formula or other method
(which index, formula or method may, but need not be, based on a
currency, currencies, currency unit or units or composite currency or
currencies) and the manner in which such amounts are to be determined
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(12) Whether the principal of (and premium, if any) or interest or
Additional Amounts, if any, on the debt securities are to be payable,
at our election or at the election of a holder thereof, in a currency
or currencies, currency unit or units or composite currency or
currencies other than that in which such debt securities are
denominated or stated to be payable, the period or periods within
which (including the election date), and the terms and conditions
upon which, such election may be made, and the time and manner of,
and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies,
currency unit or units or composite currency or currencies in which
such debt securities are denominated or stated to be payable and the
currency or currencies, currency unit or units or composite currency
or currencies in which such debt securities are to be so payable
(13) Any additions to, modifications of or deletions from the terms of
such debt securities with respect to events of default, amendments,
merger, consolidation and sale of assets or covenants set forth in
the applicable Indenture
(14) Whether such debt securities will be issued in certificate or book-
entry form
(15) Whether such debt securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than
$1,000 and any integral multiple thereof and, if in bearer form, the
denominations thereof if other than $5,000, and terms and conditions
relating thereto
(16) The applicability, if any, of the defeasance and covenant defeasance
provisions of the Indenture and any additional or different terms on
which such series of debt securities may be defeased
(17) Whether and under what circumstances we will pay any additional
amounts (which we refer to as Additional Amounts) on such debt
securities to a holder that is not a United States person in respect
of any tax, assessment or governmental charge and, if so, whether we
will have the option to redeem such debt securities in lieu of making
such payment
(18) Whether and the extent to which the payment of principal of, and
premium, if any and interest on such debt securities are guaranteed
by one or more of our Subsidiaries or by other persons
(19) Whether and under what circumstances the debt securities are
convertible into our Class A common stock, our preferred stock or
other debt securities
(20) If the debt securities are to be issued upon the exercise of debt
warrants, the time, manner and place for such debt securities to be
authenticated and delivered
(21) Any other terms of such debt securities not inconsistent with the
provisions of the applicable Indenture (Section 301)
The debt securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance is
below market rates, which we refer to as Original Issue Discount Securities.
Special U.S. federal income tax, accounting and other considerations applicable
to Original Issue Discount Securities will be described in the applicable
prospectus supplement.
Except as set forth in the applicable Indenture or in one or more
supplemental indentures, the applicable Indenture will not contain any
provisions that would limit our ability to incur indebtedness or that would
afford you protection in the event of a highly leveraged or similar transaction
involving us or in the event of a change of control. You should refer to the
applicable prospectus supplement for information with respect to any deletions
from, modifications of or additions to the Events of Default or our covenants
that are described below, including any addition of a covenant or other
provision providing event risk or similar protection.
For the purposes of certain Events of Default described below and any
additional covenants or other provisions that may be set forth in one or more
supplemental indentures, we may designate certain of our Subsidiaries as
"Unrestricted Subsidiaries." All Subsidiaries that are not designated as
Unrestricted Subsidiaries will be "Restricted Subsidiaries." The terms and
conditions, if any, under which a Subsidiary may be designated as an
Unrestricted Subsidiary will be set forth in the applicable supplemental
indenture and described in the applicable prospectus supplement.
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We refer to a corporation, partnership, limited liability company, joint
venture or similar entity in which we or one or more of our other Subsidiaries
own or control, directly or indirectly, a majority of the outstanding voting
stock, partnership interests, membership interests or similar interests, as the
case may be, as a "Subsidiary." For the purposes of this definition, "voting
stock" means stock or other equity interests having voting power for the
election of directors, or comparable governing body, as the case may be,
whether at all times or only so long as no senior class of stock has such
voting power by reason of any contingency.
Denomination, Interest, Registration and Transfer
Unless otherwise described in the applicable prospectus supplement, dollar-
denominated debt securities that are in registered form will be issuable in
denominations of $1,000 and any integral multiple thereof (except for
registered debt securities issued in global form, which may be of any
denomination), and dollar-denominated debt securities that are in bearer form
will be issuable in denominations of $5,000 (except for bearer debt securities
issued in global form, which may be of any denomination) (Section 302).
Unless otherwise specified in the applicable prospectus supplement, the
principal of (and applicable premium, if any) and interest (and Additional
Amounts, if any) on any series of debt securities that are in registered form
will be payable at the corporate trust office of the Trustee, the address of
which will be stated in the applicable prospectus supplement. At our option,
payment of interest on debt securities that are in registered form may be made
by check mailed to the address of the person entitled thereto as it appears in
the applicable register for such debt securities or by wire transfer of funds
to such person at an account maintained within the United States. Unless
otherwise specified in the applicable prospectus supplement, payment of the
principal of (and applicable premium, if any) and interest (and Additional
Amounts, if any) on any debt securities that are in bearer form will be made
only at an office or agency of ours located outside the United States (Sections
301, 305, 306, 307 and 1002).
Any interest not punctually paid or duly provided for on any interest payment
date with respect to a debt security, which we refer to as Defaulted Interest,
will forthwith cease to be payable to the holder on the applicable regular
record date and may either be paid to the person in whose name such debt
security is registered at the close of business on a special record date, which
we refer to as the Special Record Date, for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof is to be given to the
holder of such debt security not less than ten days before such Special Record
Date, or may be paid at any time in any other lawful manner, all as more
completely described in the applicable Indenture or supplemental indenture
(Section 307).
Subject to certain limitations imposed upon debt securities issued in book-
entry form, the debt securities of any series will be exchangeable for other
debt securities of the same series and of a like aggregate principal amount and
tenor of different authorized denominations upon surrender of such debt
securities at the corporate trust office of the applicable Trustee. In
addition, subject to certain limitations imposed upon debt securities issued in
book-entry form, the debt securities of any series may be surrendered for
registration of transfer or exchange thereof at the corporate trust office of
the applicable Trustee. Every debt security surrendered for registration of
transfer or exchange must be duly endorsed or accompanied by a written
instrument of transfer. No service charge will be made for any registration of
transfer or exchange of any debt securities, but we may require payment of a
sum sufficient to cover any tax or other governmental charge payable in
connection therewith (Section 305). If the applicable prospectus supplement
refers to any transfer agent (in addition to the applicable Trustee) initially
designated by us with respect to any series of debt securities, we may at any
time rescind the designation of such transfer agent or approve a change in the
location through which any such transfer agent acts, except that we will be
required to maintain a transfer agent in each place of payment for such series.
We may at any time designate additional transfer agents with respect to any
series of debt securities (Section 1002).
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Neither we nor any Trustee will be required to:
(1) issue, register the transfer of or exchange debt securities of any
series during a period beginning at the opening of business 15 days
before any selection of debt securities of that series to be redeemed
and ending at the close of business on the day of mailing of the
relevant notice of redemption
(2) register the transfer of or exchange any debt security, or portion
thereof, called for redemption, except the unredeemed portion of any
debt security being redeemed in part, or
(3) issue, register the transfer of or exchange any debt security that has
been surrendered for repayment at the option of the holder, except the
portion, if any, of such debt security not to be repaid (Section 305)
Merger, Consolidation or Sale of Assets
We will be permitted to consolidate with, or sell, lease or convey all or
substantially all of our assets to, or merge with or into, any other entity,
provided that:
(1) either we are the continuing entity, or the successor entity (if other
than us) formed by or resulting from any such consolidation or merger
or which has received the transfer of such assets is an entity
organized or existing under the laws of the United States, any state
thereof or the District of Columbia and expressly assumes payment of
the principal of (and premium, if any), interest on, and all other
amounts payable in connection with, all of the outstanding debt
securities and the due and punctual performance and observance of all
of the covenants and conditions contained in each Indenture
(2) immediately after giving effect to such transaction and treating any
indebtedness that becomes an obligation of us or any Subsidiary as a
result thereof as having been incurred by us or such Subsidiary at the
time of such transaction, no Event of Default under the Indentures or
supplemental indentures, and no event which, after notice or the lapse
of time, or both, would become such an Event of Default, will have
occurred and be continuing, and
(3) an officer's certificate and legal opinion covering such conditions
are delivered to each Trustee (Sections 801 and 803)
Certain Covenants
Existence. Except as described above under "Merger, Consolidation or Sale of
Assets," we will be required to do or cause to be done all things necessary to
preserve and keep in full force and effect our existence, rights (by
certificate of incorporation, by-laws and statute) and franchises, and those of
our Restricted Subsidiaries, but we and any such Restricted Subsidiary will not
be required to preserve the existence of a Restricted Subsidiary or any such
right or franchise if we determine that the preservation of such existence,
right or franchise is no longer desirable in the conduct of our business and
that the loss of such right or franchise is not disadvantageous in any material
respect to the holders of the debt securities. Furthermore, any Restricted
Subsidiary may consolidate with, merge into, or sell, convey, lease or
otherwise dispose of all of its property and assets to us or any wholly owned
Restricted Subsidiary (Section 1004).
Maintenance of Properties. We will be required to cause all of our properties
used or useful in the conduct of our business or the business of any Restricted
Subsidiary and material to us and our Restricted Subsidiaries taken as a whole
to be maintained and kept in good condition, repair and working order and
supplied with all necessary equipment and to cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as
in our judgment may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times, but we and
our Restricted Subsidiaries will not be prevented from discontinuing the
operation or maintenance of any of such property if such discontinuance is in
our judgment, desirable on the conduct of our business or the business of any
of our Restricted Subsidiaries (Section 1005).
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Payment of Taxes and Other Claims. We will be required to pay or discharge or
cause to be paid or discharged, before the same become delinquent:
(1) all material taxes, assessments and governmental charges levied or
imposed upon us or any Restricted Subsidiary or upon our income,
profits or property or that of any Restricted Subsidiary and
(2) all material lawful claims for labor, materials and supplies that, if
unpaid, might by law become a lien upon our property or that of any
Restricted Subsidiary; but we will not be required to pay or discharge
or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in
good faith in appropriate proceedings upon stay of execution or the
enforcement thereof and for which adequate reserves in accordance with
GAAP or other appropriate provision has been made. (Section 1007).
Additional Covenants and/or Modifications to the Covenants Described Above
Any additional covenants and/or modifications to the covenants described
above with respect to any series of our debt securities, including any
covenants relating to limitations on incurrence of indebtedness or other
financial covenants, will be set forth in the applicable Indenture or
supplemental indenture and described in the related prospectus supplement.
Events of Default, Notice and Waiver
Each Indenture may provide that some or all of the following events are
"Events of Default" with respect to any series of debt securities issued
thereunder, subject to any modifications, additions or deletions provided in
any supplemental indenture with respect to any series of debt securities:
(1) default for 30 days in the payment of any installment of interest on
or any Additional Amounts payable in respect of any debt security of
such series
(2) default in the payment of principal of (or premium, if any, on) any
debt security of such series when such amount becomes due and payable,
whether upon its maturity, declaration of acceleration, call for
redemption or otherwise
(3) default in making any sinking fund payment as required for any debt
security of such series
(4) default in the performance, or breach, of any of our other covenants
or warranties contained in the applicable Indenture (other than any
covenant or warranty otherwise provided for in the provisions relating
to Events of Default), continued for 60 days after written notice as
provided in the applicable Indenture
(5) certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of us or any
Restricted Subsidiary or either of their property
(6) any other Event of Default provided with respect to a particular
series of debt securities (Section 501)
If an Event of Default under an Indenture (other than an Event of Default
described in clause 5 above) with respect to debt securities of any series at
the time outstanding occurs and is continuing, then in every such case, unless
the principal amount of all of the outstanding debt securities of such series
has already become due and payable, the applicable Trustee or, generally, the
holders of not less than 25% of the principal amount of the outstanding debt
securities of that series will have the right to declare the principal amount
(or, if the debt securities of that series are Original Issue Discount
Securities or indexed securities, such portion of the principal amount as may
be specified in the terms thereof) of all the debt securities of that series,
and any accrued and unpaid interest thereon, to be due and payable immediately
by written notice thereof to us (and to the applicable Trustee if given by the
holders) and upon any such declaration such principal or specified portion
thereof and any accrued and unpaid interest thereon shall become immediately
due and payable. If an Event of Default described in clause 5 above occurs with
respect to the debt securities of any series, then the principal amount of all
debt securities of that series and any accrued and unpaid interest thereon
shall become immediately due and payable without any act on the part of the
Trustee or any holder of such debt securities. At any time after such a
declaration of acceleration with respect to debt securities of such series (or
of all debt securities then outstanding under any Indenture, as the case may
be)
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has been made, but before a judgment or decree for payment of the money due has
been obtained by the applicable Trustee, however, the holders of not less than
a majority in principal amount of the outstanding debt securities of such
series (or of all debt securities then outstanding under the applicable
Indenture, as the case may be) may rescind and annul such declaration and its
consequences if:
(1) we have deposited with the applicable Trustee all required payments of
the principal of (and premium, if any) and interest and Additional
Amounts, if any, on the debt securities of such series (or of all debt
securities then outstanding under the applicable Indenture, as the
case may be), plus certain fees, expenses, disbursements and advances
of the applicable Trustee, and
(2) all Events of Default, other than the non-payment of accelerated
principal (or specified portion thereof), with respect to debt
securities of such series (or of all debt securities then outstanding
under the applicable Indenture, as the case may be) have been cured or
waived as provided in such Indenture (Section 502)
Each Indenture also will provide that the holders of not less than a majority
in principal amount of the outstanding debt securities of any series (or of all
debt securities then outstanding under the applicable Indenture, as the case
may be) may waive any past default with respect to such series and its
consequences, except a default:
(1) in the payment of the principal of (or premium, if any) or interest or
Additional Amounts, if any, on any debt security of such series, or
(2) in respect of a covenant or provision contained in the applicable
Indenture that cannot be modified or amended without the consent of
the holder of each outstanding debt security affected thereby (Section
513)
Each Trustee will be required to give notice to the holders of the applicable
debt securities within 90 days of a default under the applicable Indenture
unless such default has been cured or waived; but the Trustee may withhold
notice of any default (except a default in the payment of the principal of (or
premium, if any) or interest or Additional Amounts, if any, on such debt
securities or in the payment of any sinking fund installment in respect of such
debt securities) if specified responsible officers of such Trustee consider
such withholding to be in the interest of such holders (Section 601).
Each Indenture will provide that no holders of debt securities of any series
may institute any proceedings, judicial or otherwise, with respect to such
Indenture or for any remedy thereunder, except in the cases of failure of the
applicable Trustee, for 60 days, to act after it has received a written request
to institute proceedings in respect of an Event of Default from the holders of
not less than 25% in principal amount of the outstanding debt securities of
such series, as well as an offer of indemnity reasonably satisfactory to it
(Section 507). This provision will not prevent any holder of debt securities
from instituting suit for the enforcement of payment of the principal of (and
premium, if any) and interest and Additional Amounts, if any, on such debt
securities at the respective due dates thereof (Section 508).
Subject to provisions in each Indenture relating to its duties in case of
default, no Trustee will be under any obligation to exercise any of its rights
or powers under an Indenture at the request or direction of any holders of any
series of debt securities then outstanding under such Indenture, unless such
holders offer to the Trustee reasonable security or indemnity (Section 602).
The holders of not less than a majority in principal amount of the outstanding
debt securities of any series (or of all debt securities then outstanding under
an Indenture, as the case may be) will have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
applicable Trustee, or of exercising any trust or power conferred upon such
Trustee. A Trustee may refuse, however, to follow any direction that is in
conflict with any law or with the applicable Indenture or that may involve such
Trustee in personal liability or may be unduly prejudicial to the holders of
debt securities of such series not joining therein (Section 512).
Within 120 days after the close of each fiscal year, we will be required to
deliver to each Trustee a certificate, signed by one of several specified
officers, stating whether or not such officer has knowledge of any default
under the applicable Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1008).
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Modification of the Indentures
Modifications and amendments of an Indenture will be permitted to be made
only with the consent of the holders of not less than a majority in principal
amount of all outstanding debt securities issued under such Indenture that are
affected by such modification or amendment; but no such modification or
amendment may, without the consent of the holder of each such debt security
affected thereby:
(1) change the stated maturity of the principal of (or the premium, if
any), or any installment of interest (or Additional Amounts, if any)
on, any such debt security
(2) reduce the principal amount of, or the rate or amount of interest on,
or any premium payable on redemption of, or any Additional Amounts
payable with respect to, any such debt security, or reduce the amount
of principal of an Original Issue Discount Security that would be due
and payable upon declaration of acceleration of the maturity thereof
or would be provable in bankruptcy, or adversely affect any right of
repayment of the holder of any such debt security
(3) change the place of payment, or the coin or currency for payment, of
principal (or premium, if any) or interest or Additional Amounts, if
any, on any such debt security
(4) impair the right to institute suit for the enforcement of any payment
on or with respect to any such debt security
(5) release any guarantors from their guarantees of any such debt
securities, or, except as contemplated in any supplemental indenture,
make any change in a guarantee of such debt securities that would
adversely affect the interests of the holders thereof
(6) reduce the percentage in principal amount of outstanding debt
securities of any series necessary to modify or amend the Indenture, to
wave compliance with certain provisions thereof or certain defaults or
consequences thereunder or to reduce the quorum or voting requirements
in the Indenture, or
(7) modify the ranking or priority of such debt securities (Section 902)
The holders of not less than a majority in principal amount of the
outstanding debt securities of each series affected thereby will have the right
to waive compliance by us with certain covenants in such Indenture (Section
1010).
Modifications and amendments of an Indenture will be permitted to be made by
us and the Trustee thereunder without the consent of any holder of debt
securities for any of the following purposes:
(1) to evidence the succession of another person to us as obligor under
such Indenture
(2) to add to our covenants for the benefit of the holders of all or any
series of debt securities or to surrender any right or power conferred
upon us in the Indenture
(3) to add Events of Default for the benefit of the holders of all or any
series of debt securities
(4) to add or change any provisions of an Indenture to facilitate the
issuance of, or to liberalize certain terms of, debt securities in
bearer form, or to permit or facilitate the issuance of debt
securities in uncertificated form, provided that such action shall not
adversely affect the interests of the holders of the debt securities
of any series in any material respect
(5) to change or eliminate any provisions of an Indenture, if such change
or elimination becomes effective only when there are no debt
securities outstanding of any series created prior thereto that are
entitled to the benefit of such provision
(6) to secure the debt securities
(7) to establish the form or terms of debt securities of any series
(8) to provide for the acceptance of appointment by a successor Trustee or
facilitate the administration of the trusts under an Indenture by more
than one Trustee
(9) to cure any ambiguity, defect or inconsistency in an Indenture,
provided that such modifications shall not adversely affect the
interests of the holders of debt securities of any series
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(10) to supplement any of the provisions of an Indenture to the extent
necessary to permit or facilitate defeasance and discharge of any
series of such debt securities, if such action does not adversely
affect the interests of the holders of the debt securities of any
series in any material respect
(11) to make any change that does not adversely affect the legal rights
under an Indenture of any holder of debt securities of any series
issued thereunder
(12) to add a guarantor of the securities of any series, or
(13) to comply with the requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture
Act (Section 901)
Ranking
The Senior Securities will constitute part of our Senior Indebtedness (as
defined below) and will rank pari passu with all of our outstanding senior
debt. Except as set forth in the applicable prospectus supplement, the
Subordinated Securities will be subordinated, in right of payment, to the prior
payment in full of the Senior Indebtedness, including the Senior Securities.
However, our obligation to pay the principal of (and premium, if any) and
interest and Additional Amounts (if any) on such Subordinated Securities will
not otherwise be impaired (Section 1603 of the Subordinated Indenture).
In the event of any distribution of our assets in connection with any
dissolution, winding up, liquidation or reorganization of us, whether in a
bankruptcy, insolvency, reorganization or receivership proceeding or upon an
assignment for the benefit of creditors or any other marshalling of our assets
and liabilities or otherwise, except a distribution in connection with a
merger, consolidation or sale of assets that complies with the requirements
described above under "Merger, Consolidation or Sale of Assets," the holders of
all Senior Indebtedness will first be entitled to receive payment of the full
amount due thereon before the holders of any of the Subordinated Securities
will be entitled to receive any payment in respect of the Subordinated
Securities. If a payment default occurs and is continuing with respect to any
amount payable in respect of any Senior Indebtedness, or if any event occurs
that would permit the holders of any Senior Indebtedness to accelerate the
maturity thereof, the holders of all Senior Indebtedness will first be entitled
to receive payment of the full amount due thereon before the holders of any of
the Subordinated Securities will be entitled to receive any payment in respect
of the Subordinated Securities. If the principal amount of the Subordinated
Securities of any series is declared due and payable pursuant to the
Subordinated Indenture and such declaration has not been rescinded and
annulled, the holders of all Senior Indebtedness outstanding at the time of
such declaration will first be entitled to receive payment of the full amount
due thereon before the holders of any of the Subordinated Securities will be
entitled to receive any payment in respect of the Subordinated Securities
(Section 1601 of the Subordinated Indenture).
After all Senior Indebtedness is paid in full and until the Subordinated
Securities are paid in full, holders of Subordinated Securities will be
subrogated to the right of holders of Senior Indebtedness to the extent that
distributions otherwise payable to holders of Subordinated Securities have been
applied to the payment of Senior Indebtedness (Section 1602 of the Subordinated
Indenture). By reason of such subordination, in the event of a distribution of
assets upon insolvency, certain of our general creditors may recover more,
ratably, than holders of Subordinated Securities.
Senior Indebtedness will be defined in the Subordinated Indenture as the
principal of (and premium, if any) and interest and Additional Amounts, if any,
on, or substantially similar payments to be made by us in respect of, the
following, whether outstanding at the date of execution of the applicable
Indenture or thereafter incurred, created, guaranteed or assumed, and whether
or not contingent:
(1) any obligation for money borrowed
(2) any obligation evidenced by bonds, debentures, notes, guarantees or
other similar instruments, including, without limitation, any such
obligations incurred in connection with the acquisition of property,
assets or businesses, excluding trade accounts payable made in the
ordinary course of business
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(3) any reimbursement obligation with respect to letters of credit,
bankers' acceptances or similar facilities
(4) any obligation issued or assumed as the deferred purchase price of
property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business, which in either
case are not more than 60 days overdue or which are being contested in
good faith)
(5) any capital lease obligation
(6) the maximum fixed redemption or repurchase price of capital stock
which, by its terms, matures, is mandatorily redeemable or redeemable
at the option of the holder thereof, or is exchangeable for
indebtedness at any time, and, to the extent held by persons other than
us or our Restricted Subsidiaries, the maximum fixed redemption or
repurchase price of any such stock of our Restricted Subsidiaries, at
the time of determination
(7) every obligation under interest rate and currency protection agreements
(8) any attributable indebtedness with respect to any sale and leaseback
transaction and
(9) any obligation of the type referred to in clauses (1) through (8) of
another person and all dividends and distributions of another person
the payment of which, in either case, we have guaranteed or are
responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise
in each case other than (i) any such indebtedness, obligation or liability
referred to in clauses (1) through (9) above as to which, in the instrument
creating or evidencing the same pursuant to which the same is outstanding, it
is provided that such indebtedness, obligation or liability is not superior in
right of payment to the Subordinated Securities or ranks equally with the
Subordinated Securities, (ii) any such indebtedness, obligation or liability
which is subordinated to our indebtedness to substantially the same extent as
or to a greater extent than the Subordinated Securities are subordinated, and
(iii) the Subordinated Securities.
Satisfaction and Discharge of the Indentures
We may terminate our obligations under either Indenture with respect to debt
securities of any series when:
(1) either (A) all outstanding debt securities of such series have been
delivered to the Trustee for cancellation or (B) all debt securities of
such series not theretofore delivered to the Trustee for cancellation
have become due and payable, will become due and payable at their
Stated Maturity within one year or, if redeemable at our option, are to
be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by
the Trustee in our name and at our expense, and we have irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire indebtedness on such debt
securities not theretofore delivered to the Trustee for cancellation,
for the principal of (and premium, if any,) and interest and Additional
Amounts, if any, to the date of deposit or Stated Maturity or date of
redemption,
(2) we have paid or caused to be paid all sums payable by us under such
Indenture, and
(3) we have delivered a Company Certificate and an Opinion of Counsel
relating to compliance with the conditions set forth in such Indenture
(Section 401).
Defeasance and Covenant Defeasance
Each Indenture will provide that, if the provisions relating to defeasance or
covenant defeasance or both are made applicable to the debt securities of or
within any series, we may elect either:
(1) to defease and be deemed to have paid and be discharged from any and
all obligations with respect to such debt securities, which we refer to
as defeasance (except for the obligation to pay additional amounts, if
any, upon the occurrence of certain events of tax, assessment or
governmental charge
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with respect to payments on such debt securities, and the obligations to
register the transfer or exchange of such debt securities, to replace
temporary or mutilated, destroyed, lost or stolen debt securities, to
maintain an office or agency in respect of such debt securities and to
hold moneys for payment in trust) (Section 1402), or
(2) to be released from our obligations with respect to such debt
securities under certain specified covenants contained in Article Ten
of such Indenture and, if so specified in any supplemental indenture
relating to a series of debt securities, from any obligations arising
under additional covenants applicable to such series of debt
securities, all as described in the applicable prospectus supplement,
and any omission to comply with such obligations shall not constitute
an Event of Default with respect to such debt securities, which we
refer to as covenant defeasance (Section 1403)
in either case upon the irrevocable deposit by us with the applicable Trustee,
in trust, of an amount, in such currency or currencies, currency unit or units
or composite currency or currencies in which such debt securities are payable
at stated maturity, or government obligations, or both, applicable to such debt
securities which through the scheduled payment of principal and interest in
accordance with their terms will provide money in an amount sufficient without
reinvestment to pay the principal of (and premium, if any) and interest and
Additional Amounts, if any, on such debt securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor.
Such a trust will only be permitted to be established if, among other things,
we have delivered to the applicable Trustee an opinion of counsel (as specified
in the applicable Indenture) to the effect that the holders of such debt
securities will not recognize income, gain or loss for federal income tax
purposes as a result of such defeasance or covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such defeasance or covenant
defeasance had not occurred, and such opinion of counsel, in the case of
defeasance, will be required to refer to and be based upon a ruling of the
Internal Revenue Service or a change in applicable U.S. federal income tax law
occurring after the date of the Indenture (Section 1404).
The applicable prospectus supplement may further describe the provisions, if
any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the debt
securities of or within a particular series.
Conversion and Exchange
The terms, if any, on which debt securities of any series are convertible
into or exchangeable for Class A common stock, preferred stock, or other debt
securities, including the initial conversion price or conversion rate, any
adjustments to such conversion price or conversion rate and the conversion
period, and the conditions upon which such conversion will be effected, will be
set forth in the applicable prospectus supplement. Such terms may include
provisions for conversion or exchange to be either mandatory or at the option
of the holders or ourselves.
Redemption and Repurchase
The debt securities may be redeemable at our option, may be subject to
mandatory redemption pursuant to a sinking fund or otherwise, or may be subject
to repurchase by us at the option of the holders, in each case upon the terms,
at the times and at the prices set forth in the applicable prospectus
supplement.
Global Securities
The debt securities of a series may be issued in whole or in part in the form
of one or more global securities, which we refer to as the Global Securities,
to be deposited with, or on behalf of, a depository identified in the
applicable prospectus supplement relating to such series. Global Securities may
be issued in either registered or bearer form and in either temporary or
permanent form. The specific terms of the depository arrangement with respect
to a series of debt securities will be described in the applicable prospectus
supplement relating to such series.
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DESCRIPTION OF WARRANTS
General
We may issue, together with other securities or separately, warrants to
purchase our debt securities, Class A common stock, Class B common stock,
preferred stock or depositary shares. We will issue the warrants under Warrant
Agreements to be entered into between us and a bank or trust company, as
warrant agent, all as shall be set forth in the applicable prospectus
supplement. The warrant agent will act solely as our agent in connection with
the warrants of the series being offered and will not assume any obligation or
relationship of agency or trust for or with any holders or beneficial owners
of warrants.
The applicable prospectus supplement will describe the following terms,
where applicable, of warrants in respect of which this prospectus is being
delivered:
(1) the title of the warrants
(2) the designation, amount and terms of the securities for which the
warrants are exercisable and the procedures and conditions relating to
the exercise of such warrants
(3) the designation and terms of the other securities, if any, with which
the warrants are to be issued and the number of warrants issued with
each such security
(4) the price or prices at which the warrants will be issued
(5) the aggregate number of warrants
(6) any provisions for adjustment of the number or amount of securities
receivable upon exercise of the warrants or the exercise price of the
warrants
(7) the price or prices at which the securities purchasable upon exercise
of the warrants may be purchased
(8) if applicable, the date on and after which the warrants and the
securities purchasable upon exercise of the warrants will be
separately transferable
(9) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of the warrants
(10) any other terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants
(11) the date on which the right to exercise the warrants shall commence,
and the date on which the right shall expire
(12) the maximum or minimum number of warrants which may be exercised at
any time
(13) information with respect to book-entry procedures, if any
Exercise of Warrants
Each warrant will entitle the holder thereof to purchase for cash the amount
of debt securities, shares of preferred stock, shares of Class A common stock,
shares of Class B common stock or depositary shares at the exercise price as
shall in each case be set forth in, or be determinable as set forth in, the
applicable prospectus supplement. Warrants may be exercised at any time up to
the close of business on the expiration date set forth in the applicable
prospectus supplement. After the close of business on the expiration date,
unexercised warrants will become void.
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Warrants may be exercised as set forth in the applicable prospectus
supplement relating to the warrants offered thereby. Upon receipt of payment
and the warrant certificate properly completed and duly executed at the
corporate trust office of the warrant agent or any other office indicated in
the applicable prospectus supplement, we will, as soon as practicable, forward
the purchased securities. If less than all of the warrants represented by the
warrant certificate are exercised, a new warrant certificate will be issued for
the remaining warrants.
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DESCRIPTION OF STOCK PURCHASE CONTRACTS AND STOCK PURCHASE UNITS
We may issue stock purchase contracts, including contracts obligating holders
to purchase from us, and obligating us to sell to the holders, a specified
number of shares of Class A common stock, Class B common stock or preferred
stock at a future date or dates. The price per share of Class A common stock,
Class B common stock or preferred stock may be fixed at the time the stock
purchase contracts are issued or may be determined by a specific reference to a
formula set forth in the stock purchase contracts. The stock purchase contracts
may be issued separately or as part of stock purchase units consisting of (1) a
stock purchase contract and (2) debt securities, preferred securities or debt
obligations of third parties, including U.S. Treasury securities, securing the
holders' obligations to purchase the Class A common stock, Class B common stock
or the preferred stock under the stock purchase contracts. The stock purchase
contracts may require us to make periodic payments to the holders of the stock
purchase units or vice versa, and such payments may be unsecured or prefunded
on some basis. The stock purchase contracts may require holders to secure their
obligations thereunder in a specified manner.
Unless otherwise specified in the applicable prospectus supplement, the
securities related to the stock purchase contracts will be pledged to a
collateral agent, for our benefit, pursuant to a pledge agreement. The pledged
securities will secure the obligations of holders of stock purchase contracts
to purchase Class A common stock, Class B common stock or preferred stock under
the related stock purchase contracts. The rights of holders of stock purchase
contracts to the related pledged securities will be subject to our security
interest in those pledged securities. That security interest will be created by
the pledge agreement. No holder of stock purchase contracts will be permitted
to withdraw the pledged securities related to such stock purchase contracts
from the pledge arrangement except upon the termination or early settlement of
the related stock purchase contracts. Subject to that security interest and the
terms of the purchase contract agreement and the pledge agreement, each holder
of a stock purchase contract will retain full beneficial ownership of the
related pledged securities.
Except as described in the applicable prospectus supplement, the collateral
agent will, upon receipt of distributions on the pledged securities, distribute
such payments to us or a purchase contract agent, as provided in the pledge
agreement. The purchase contract agent will in turn distribute payments it
receives as provided in the stock purchase contract. The applicable prospectus
supplement will describe the terms of any stock purchase contracts or stock
purchase units.
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DESCRIPTION OF SUBSCRIPTION RIGHTS
General
We may issue subscription rights to purchase our debt securities, Class A
common stock, Class B common stock, preferred stock, depositary shares or
warrants to purchase debt securities, preferred stock, Class A common stock or
Class B common stock. We may issue subscription rights independently or
together with any other offered security. The subscription rights may or may
not be transferable by the purchaser receiving the subscription rights. In
connection with any subscription rights offering to our stockholders, we may
enter into a standby underwriting arrangement with one or more underwriters
pursuant to which the underwriter(s) will purchase any offered securities
remaining unsubscribed for after the subscription rights offering. In
connection with a subscription rights offering to our stockholders,
certificates evidencing the subscription rights and a prospectus supplement
will be distributed to our stockholders on the record date for receiving
subscription rights in the subscription rights offering set by us.
The applicable prospectus supplement will describe the following terms of
subscription rights in respect of which this prospectus is being delivered:
(1) the title of the subscription rights
(2) the securities for which the subscription rights are exercisable
(3) the exercise price for the subscription rights
(4) the number of subscription rights issued to each stockholder
(5) the extent to which the subscription rights are transferable
(6) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of
the subscription rights
(7) any other terms of the subscription rights, including terms,
procedures and limitations relating to the exchange and exercise of
the subscription rights
(8) the date on which the right to exercise the subscription rights shall
commence, and the date on which the right shall expire
(9) the extent to which the subscription rights include an over-
subscription privilege with respect to unsubscribed securities
(10) if applicable, the material terms of any standby underwriting
arrangement entered into by us in connection with the subscription
rights offering
Exercise Of Subscription Rights
Each subscription right will entitle the holder of subscription rights to
purchase for cash the principal amount of debt securities, shares of preferred
stock, depositary shares, Class A common stock, Class B common stock, warrants
or any combination thereof, at the exercise price as shall in each case be set
forth in, or be determinable as set forth in, the applicable prospectus
supplement. Subscription rights may be exercised at any time up to the close of
business on the expiration date for such subscription rights set forth in the
applicable prospectus supplement. After the close of business on the expiration
date, all unexercised subscription rights will become void.
Subscription rights may be exercised as set forth in the applicable
prospectus supplement. Upon receipt of payment and the subscription rights
certificate properly completed and duly executed at the corporate trust office
of the subscription rights agent or any other office indicated in the
prospectus supplement, we will, as soon as practicable, forward the debt
securities, shares of preferred stock, Class A common stock or Class B common
stock, depositary shares or warrants purchasable upon such exercise. In the
event that not all of the subscription rights issued in any offering are
exercised, we may determine to offer any unsubscribed offered securities
directly to persons other than stockholders, to or through agents, underwriters
or dealers or through a combination of such methods, including pursuant to
standby underwriting arrangements, as set forth in the applicable prospectus
supplement.
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PLAN OF DISTRIBUTION
The following summary of our plan for distributing the securities offered
under this prospectus will be supplemented by a description of our specific
plan for each offering in the applicable prospectus supplement relating to
such offering. Such description will include, among other things, the terms of
the underwriting arrangements applicable to such offering.
We may sell the securities in any of the following ways, or in any
combination thereof, as follows:
. through underwriters or dealers
. directly to one or more purchasers
. through agents
A prospectus supplement will set forth the terms of the offering of the
securities offered thereby, including:
. the name or names of any underwriters and the respective amounts of such
securities underwritten or purchased by each of them
. the purchase price of such securities and the proceeds to us
. any discounts, commissions or concessions allowed or paid to dealers
constituting underwriters' compensation, to the purchase price
. any securities exchanges or markets on which such securities may be listed or
quoted
If underwriters are used in the sale of any securities, such securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions,
at a fixed public offering price or at varying prices determined at the time
of sale. Such securities may be either offered to the public through
underwriting syndicates represented by one or more managing underwriters, or
directly by one or more underwriters. Only underwriters named in such
prospectus supplement are deemed to be underwriters in connection with the
securities offered thereby. Unless otherwise set forth in the applicable
prospectus supplement, the obligations of the underwriters to purchase such
securities will be subject to certain conditions precedent and the
underwriters will be obligated to purchase all of such securities if any are
purchased. Any purchase price and any discounts or concessions allowed or paid
to dealers may be changed from time to time.
The securities may be sold directly by us or through agents designated by us
from time to time. Any agent involved in the offer or sale of the securities
in respect of which a prospectus supplement is delivered will be named, and
any commissions payable by us to such agent will be set forth, in the
prospectus supplement. Unless otherwise indicated in the prospectus
supplement, any such agent will be acting on a best efforts basis for the
period of its appointment.
If so indicated in the applicable prospectus supplement, we will authorize
underwriters, dealers or agents to solicit offers by institutional investors
to purchase the securities from us at the public offering price set forth in
the prospectus supplement pursuant to delayed delivery contracts providing for
payment and delivery on a specified date in the future. There may be
limitations on the minimum amount which may be purchased by any such
institutional investor or on the portion of the aggregate principal amount of
the particular securities which may be sold pursuant to such arrangements.
Institutional investors to which such offers may be made, when authorized,
include commercial and savings banks, insurance companies, pension funds,
investment companies, educational and charitable institutions, and such other
institutions as may be approved by us. The obligations of any such purchasers
pursuant to such delayed delivery and payment arrangements will be subject
only to those
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conditions set forth in the prospectus supplement, and the prospectus
supplement will set forth the commission payable for solicitation of such
contracts. Underwriters, dealers or agents will not have any responsibility in
respect of the validity of such arrangements or the performance of McLeodUSA or
such institutional investors thereunder.
Securities offered other than Class A common stock may be a new issue of
securities with no established trading market. Unless otherwise indicated in
the applicable prospectus supplement, we do not intend to list any offered
securities other than our Class A common stock on any securities exchange or
other market. Any underwriters to whom such securities are sold by us for
public offering and sale may make a market in such securities, but such
underwriters will not be obligated to do so and may discontinue any market
making at any time without notice. No assurance can be given as to the
liquidity of or the trading markets for any such securities.
Agents and underwriters may be entitled under agreements entered into with us
to indemnification by us against certain civil liabilities, including
liabilities under the Securities Act of 1933, or to contribution with respect
to payments which the agents, dealers or underwriters may be required to make
in respect thereof. Agents, dealers and underwriters may be customers of,
engage in transactions with, or perform services for us in the ordinary course
of business.
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for
McLeodUSA by Hogan & Hartson L.L.P., Washington, D.C., special counsel for
McLeodUSA.
EXPERTS
The consolidated financial statements and schedule of McLeodUSA and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, incorporated by reference in this
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
The consolidated financial statements of Ovation Communications, Inc. as of
December 31, 1998 and 1997 and for the period from March 27, 1997 (inception)
to December 31, 1997 and the year ended December 31, 1998 incorporated by
reference in this registration statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report, and are incorporated
by reference herein in reliance upon such report given upon the authority of
said firm as experts in accounting and auditing.
32
<PAGE>
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$450,000,000
McLeodUSA Incorporated
% Senior Notes Due 2009
[LOGO OF McLEODUSA APPEARS HERE]
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P R O S P E C T U S S U P P L E M E N T
January , 2001
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Salomon Smith Barney
Goldman, Sachs & Co.
JP Morgan
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